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Title IV of HEA authorized several student aid programs including the Federal Family Education Loan (FFEL) and the William D. Ford Direct Loan (Direct Loan) programs, the Federal Pell Grant program, and campus-based aid programs. The FFEL and Direct Loan programs are the largest source of aid for students. The FFEL program provides loans to eligible students and parents through participating private lenders that receive a federal guarantee of repayment if the borrower defaults. Under the Direct Loan program, eligible students and parents borrow funds directly from the federal government through participating schools. As of October 2002, about 6,400 schools participated in one or more of the title IV student aid programs. To be eligible to participate in the FFEL and Direct Loan programs, schools must manage their loan portfolios to keep the default rate for their loans below established limits. The national student loan default rate, also known as the national cohort default rate (CDR), is defined as the percentage of borrowers who enter repayment status in a certain fiscal year and default before the end of the next fiscal year on Federal Stafford Loans and, under certain circumstances, Federal SLS loans, and Direct Stafford Loans. For example, the fiscal year 2000 CDR of 5.9 percent represents the percentage of borrowers whose first loan repayments came due between October 1, 1999, and September 30, 2000, and who, as of September 30, 2001, had defaulted. The national CDR is an aggregate of all postsecondary institutional default rates. The CDR for schools with 30 or more borrowers in repayment is calculated based on the percentage of borrowers entering repayment on loans in a fiscal year and defaulting during that fiscal year or the following fiscal year. FSA issues draft CDRs and supporting data to schools in January or February of each year for review. A school may challenge the draft default rate information if it identifies inaccuracies in data. In addition, a school with CDRs of 25 percent or more for 3 consecutive years can appeal the draft rate if it can show that the number of students who obtained loans did not exceed approximately 3.8 percent of the total number of students at the school, while schools with CDRs over 40 percent in 1 year can appeal the draft rate if it can show that the number of students who obtained loans did not exceed approximately 6 percent of the total number of students at the school. FSA makes revisions as needed, and releases the final CDR to the schools and the public no later than September 30 of each year. Unless a school has 30 or fewer borrowers who entered repayment for the 3 most recent fiscal years, it could lose its eligibility to participate in some title IV student aid programs if its final CDR exceeds established thresholds. For example, under HEA, if schools have CDRs of 25 percent or more for 3 consecutive years, they face loss of eligibility to participate in the FFEL and Direct Loan programs. A regulation imposes the same restriction on eligibility if schools have CDRs exceeding 40 percent in a given year. Additionally, schools that are ineligible to receive FFEL and Direct Loans due to CDRs of 25 percent or more for 3 consecutive years are also generally prohibited by statute from receiving Pell Grants. These schools are subject to suspension from title IV programs for the remainder of the fiscal year in which FSA notifies them of termination and the following 2 fiscal years. However, schools have appeal rights and retain program eligibility while their appeals are pending. Schools may apply to be reinstated to participate in title IV loan and/or Federal Pell Grant programs after the later of the expiration of their suspension or 18 months after the effective date of their termination. Over the last decade, approximately 1,200 schools have been subject to suspension due to default rates above the 25 percent threshold for fiscal years 1998 through 2000. From fiscal year 1990 to fiscal year 1999, the national student loan default rate declined from 22.4 percent to 5.6 percent. In fiscal year 2000, the rate climbed slightly to 5.9 percent. Figure 1 shows the trend in national cohort default rates from fiscal years 1990 through 2000. Despite the overall progress made in reducing the national default rate, the cumulative student loan funds in default had doubled to almost $22 billion by fiscal year 2001 from their fiscal year 1990 level of nearly $11 billion. During this same time period, the total student loan portfolio grew by more than 400 percent from $54.1 billion to $233.2 billion and the defaults, as a percent of the total loan portfolio, declined from 20.1 percent to 9.4 percent. Table 1 shows the outstanding portfolio and defaulted loan balances for FFEL and Direct Loans as well as the total defaulted loans as a percentage of the total outstanding loan portfolio for fiscal years 1990 through 2001. FSA manages and administers the federal student financial assistance programs and is responsible for default management. Since 1990, because of concerns about Education’s vulnerabilities to losses due to fraud, waste, abuse, and mismanagement, we have included student financial aid programs on our high-risk list. To address longstanding management weaknesses, the Congress amended HEA in 1998, establishing FSA as a performance-based organization (PBO) to improve Education’s delivery of student financial aid services. As a PBO, FSA has increased flexibilities, subject to the direction of the Secretary of Education, in certain government operations, such as hiring and procurement, provided that it establish and operate according to a 5-year performance plan with measurable goals and specific annual performance targets. HEA also requires that FSA annually prepare and submit, through the Secretary of Education, a 5-year plan that is available to the public, and annual performance reports to the Congress. Furthermore, HEA requires FSA’s Chief Operating Officer (COO) to ask its stakeholders about the degree of satisfaction with the delivery system and to seek suggestions on improvements. FSA identified 39 default management goals for fiscal years 2000 through 2002, which were mainly to prevent defaults, increase collections, or verify student eligibility. However, FSA did not prepare annual 5-year performance plans required by HEA. Such plans would have helped set the overall direction for FSA and guided its default management and other agency goals. FSA goals aimed at preventing student loan defaults included such efforts as increasing students’ awareness of their repayment obligations through various publications, using voluntary flexible agreements with four guaranty agencies to prevent defaults, and pursuing default management strategies such as using software to assist schools in identifying delinquent Direct Loan borrowers at risk of default. FSA’s goals to increase collections focused on facilitating repayment for borrowers in good standing as well as aggressively pursuing those in default. For example, they planned to use tools such as Internet billing and on-line correspondence to facilitate repayment for borrowers in good standing and used administrative wage garnishments and federal tax refund recoveries to pursue borrowers in default. These collection goals included fostering competitive behavior among its private collection agencies to increase collections on defaulted loans, matching student loan records with federal databases such as the Health and Human Services (HHS) National Directory of New Hires database to locate defaulted borrowers, and using other available default recovery methods. The FSA goals to improve student eligibility included verifying students’ or their families’ income through a data match with Internal Revenue Service (IRS) records and apprising foreign postsecondary institutions about the rules and regulations for title IV assistance and the need to limit financial aid awards to eligible students only. Of FSA’s 39 default management goals during fiscal years 2000 through 2002, 5 were continued throughout the period and 6 more were continued for 2 of the 3 years. Specifically, the goals that continued for all 3 years were to maintain the cohort default rate, implement and monitor voluntary flexible agreements with a limited number of guaranty agencies, reduce default rates over the life of the loan, increase the recovery rate for defaulted loans, and increase the number of student aid applications filed electronically. As for those that continued for 2 years, they addressed (1) reports to the Congress on the progress and performance of VFAs, (2) student awareness publications, (3) use of the new hires database, (4) NSLDS data quality, (5) program monitoring and assistance to schools, and (6) eliminating fraudulent death and disability cases. Further, most of these goals began in 2001 and were continued in 2002. However, 28 of the 39 goals were single year goals—6 were implemented in fiscal year 2000, another 6 were implemented in fiscal year 2001, and 16 more were implemented in fiscal year 2002. Such significant changes may reflect the fact that FSA did not have a long-term plan to direct its default management goals. Although agency officials stated that many of the goals were reached and did not need to be continued in the next year, some were discontinued for various other reasons. For example, agency officials indicated that a 2001 goal to implement a pilot program to track student enrollment at foreign schools in an effort to reduce the potential of loans being obtained through fraudulent means was completed. However, available documents show that the pilot program was discontinued because a key institution complained that the program requirements were too burdensome and withdrew from the pilot. Furthermore, it is not clear from available documentation whether this program will be revisited or continued in subsequent years, even though foreign schools collectively administer more than $225 million in federal student financial assistance. Recently, GAO reported that the agency certified a fictitious foreign school to participate in the FFEL program and approved loans for three fictitious students. As such, there continues to be a need for the agency to have a goal to reduce the potential for students at foreign schools to obtain loans through fraudulent means. Appendix II lists FSA’s default management goals for fiscal years 2000, 2001, and 2002. Although FSA prepared several internal planning documents that identified its default management goals for each year, as we reported previously, Education failed to prepare annual 5-year performance plans as required by HEA to guide its default management and other agency goals. FSA prepared a performance plan for the 2000--2004 fiscal years, but the goals in that plan were only for fiscal year 2000. Additionally, FSA did not prepare performance plans for the periods covering fiscal years 2001 to 2005 or fiscal years 2002 to 2006. FSA officials stated that their interpretation of the law allowed them to release a plan every 5 years and operate with annual internal plans. FSA prepared internal documents that identified its default management goals for fiscal years 2001 and 2002. These documents listed the goals for each year separately, identified the responsible managers or units, specified the time frames involved, and sometimes described specific steps for implementation and expected outcomes. However, they did not explain the basis for changing the goals or relate them to longer-term agency goals. According to our analysis of FSA’s internal documents, we determined that the agency met or exceeded performance targets for 36 of its 39 default management goals during fiscal years 2000 through 2002. However, as previously reported, Education did not prepare timely reports on FSA’s performance for fiscal years 2000, as required by HEA. FSA also did not issue a timely report for fiscal year 2001. FSA’s performance report for fiscal year 2002 was not due at the time of this review. FSA met or exceeded nearly all of the performance targets related to its 39 default management goals during fiscal years 2000 through 2002. For example, FSA met its goal to ensure that default recoveries exceeded new defaulted dollars in fiscal year 2002 by recovering $4.87 billion compared to the $2.7 billion that went into default. Also, FSA met its target to support the administration’s efforts to improve its data matching capabilities with the IRS by proposing changes to legislation that would authorize expanded use of tax data. Additionally, FSA met its fiscal year 2000 goal to expand its capabilities that allow students to edit and save changes to federal student aid applications on the Web. FSA exceeded most of its performance targets for defaulted loan collection goals. For example, FSA exceeded its 2002 goal to increase the combined recovery rate for guaranty agencies to 15 percent by 1.76 percentage points. The agency also exceeded its 2002 goal to collect $200 million in defaulted loans by $60 million through expanded use of the Department of Health and Human Services National Directory of New Hires database. FSA did not achieve three of its default management goals during the 3-year period. These goals were to (1) prepare a report to the Congress by the end of fiscal year 2002 on the voluntary flexible agreements, (2) implement a multiyear program in each of the three fiscal years to further reduce defaults over the life of the loan, and (3) analyze NSLDS to identify improvements that could be made in fiscal year 2002. While each of these goals was listed for at least 2 of the 3 fiscal years, FSA did not always provide information on why they were not achieved. Appendix III lists the default management goals and indicates whether the goals were met. FSA did not prepare performance reports that conform to the requirements in HEA for fiscal years 2000 and 2001. HEA requires FSA to issue a performance report for each year that includes an evaluation of the extent to which the goals established in the prior year’s plan were met. In December 2002, FSA issued a performance report that included its accomplishments for both fiscal year 2000 and fiscal year 2001. Furthermore, although the report lists several accomplishments, it does not provide related performance goals. Therefore, the report does not clearly indicate the extent to which goals were or were not met. For example, the report points out that the collections on defaulted student loans increased from $191 million in fiscal year 1999 to $228 million in fiscal year 2000 to $230 million in fiscal year 2001. Although the increases are noteworthy, there is no information on the related goal, or whether or not the goals were actually met. Additionally, the report includes information on accomplishments that did not occur during fiscal years 2000 and 2001. For example, the report states that in early 2002 the Department delivered a report to the Congress on the VFAs, distributed a foreign schools handbook in May 2002, and piloted electronic billing and payment in the Direct Loan program in January 2002 and went into full production in March 2002. Education did not include the related fiscal year 2002 performance goals. Although nearly a third of the school officials that participated in our survey made suggestions about ways that FSA could better assist them, none of the suggestions indicated that FSA needed additional default management goals. FSA provided similar assistance to all schools by sharing default management strategies and information through symposiums, workshops, and other media, and provided individual assistance to some schools through on-site visits and telephone calls. Although officials from 16 of the 23 schools reported that they were pleased with one or more services provided by FSA, 7 of the 23 officials suggested ways that FSA could better assist them. Their suggestions included improving the usefulness and access to loan information in NSLDS, providing opportunities for more localized default management training, and making it easier to identify and contact the right FSA program officials to address technical concerns. However, these suggestions did not indicate a need for additional default management goals because they either related to existing goals or addressed operational issues. FSA provided general assistance to all schools, including those with high default rates and those with a high volume of dollars in default, and provided individual assistance to some schools to assist with their default management efforts. According to FSA officials, one of its primary methods of assisting schools is through its National Default Prevention Day symposium, a 1-day event to share default management best practices. In 2001 and 2002, FSA sponsored this event in 12 cities nationwide and invited officials from numerous entities, including schools participating in federal loan programs, lenders, and guaranty agencies. FSA also provided schools with default management information at various conferences and through its Information for Financial Aid Professionals (IFAP) Web site. For example, at a November 2002 FSA Electronic Access Conference, FSA officials provided information on the late-stage delinquency assistance initiative intended to help schools identify delinquent Direct Loan borrowers at risk of default. FSA also provided technical publications, regulations, and policy guidance on the administration of the federal student aid programs to schools through the IFAP Web site. FSA officials also said they provided individual assistance to some schools through on- site visits and telephone calls. FSA officials said during a typical on-site visit to a school, they presented information to school officials on the various aspects of default prevention and the advantages of forming a default management team comprised of representatives from various offices. They also helped schools establish individual default management plans, if the school did not want to use the standard one developed by FSA, and they helped assess the schools’ default management and prevention practices. A total of 16 of the 23 school officials reported that they were generally pleased with one or more services provided by FSA, with most commenting that the assistance was useful in helping them to keep their default rates and/or dollars in default low. The 11 suggestions made by officials at 7 of the 23 schools responding to our survey did not indicate the need for additional goals because either FSA already had goals related to them or the suggestions related to operational matters. Nonetheless, the suggestions could help FSA to better assist schools with their default management efforts. FSA had goals that addressed, to some extent, five of the suggestions. Officials made 4 suggestions to improve the usefulness of loan data and access to the loan information in NSLDS. One school official suggested that FSA could improve the usefulness of NSLDS data by allowing users to distinguish the principal amount borrowed, the accrued interest, and service charges. A second school official suggested that the data be updated more frequently to remove students that are no longer in default to help prevent schools from making unnecessary calls. Another school official suggested that FSA provide historical data detailing the breakout of dollars going into default. Besides these suggestions, a fourth school official suggested that FSA provide easier access to the system for guarantors and allow them to view school specific information on delinquent and defaulted borrowers. FSA had goals to improve the NSLDS in 2000 and 2002. FSA’s fiscal year 2000 NSLDS goal was to continue to work with guaranty agencies and lenders to maintain the quality of data in NSLDS and its fiscal year 2002 NSLDS goals were to analyze NSLDS data to identify students ineligible for federal aid. An official from a large public university with a high volume of dollars in default suggested that FSA provide a profile of the various demographic groups that make up the school’s CDR. In support of its continuing goal to keep the default rates low, FSA provides schools—at their request—with default rate analysis tools to assist them in identifying the defaulted student population. FSA typically shares information about default management tools at its National Default Prevention Day symposiums. This official attended the national default prevention day in 2001 but was still unaware of the analysis tool. This suggestion indicates that there may be a need for additional ways to disseminate information about default analysis tools. The remaining 6 suggestions addressed operational issues—where training is held, who to contact with questions, and when information is shared. Three school officials suggested that FSA hold default management training sessions in locations near them because they lacked funding to travel to FSA’s National Default Prevention Day symposiums and/or conferences held in larger cities, such as Washington, D.C., and San Francisco. Two of the officials were from small proprietary schools and the other was a large public university. Additionally, two officials suggested that FSA provide better ways to identify and contact appropriate program officials to address their default management concerns. One official said that he and others have had difficulty getting FSA staff to return their telephone calls and finding the right FSA program official to address their concerns. This school official suggested that FSA develop a guide to identify appropriate program officials. The other school official expressed frustration that FSA staff was not always knowledgeable about the loan data for her school. This school official suggested that FSA make certain staff members responsible for knowing about information related to particular schools. Finally, one school suggested that FSA provide schools with updates on changes in federal student aid information at the beginning of the calendar year instead of during the fall enrollment season, which typically begins in August or September. While these suggestions do not indicate the need for additional goals, they indicate areas where school officials would like changes made. FSA has identified many default management goals and its internal documents and reports indicate that it achieved most of its default management goals for fiscal years 2000 through 2002. Furthermore, school officials who responded to our survey did not offer suggestions that indicated FSA should have additional goals. However, neither the Congress nor the public can determine whether FSA’s default management or other program goals are in support of long-term program objectives or whether goals have been met because FSA has not prepared annual plans and issued performance reports as required by HEA. The legislation authorizing FSA as a PBO requires the agency to operate within the framework of a clear plan and to be accountable by reporting annually on its progress. Without the required plans and timely and clear performance reports, neither the Congress nor the public can determine whether FSA, as a PBO, is operating within the spirit of the law and making progress toward achieving its goals. To ensure the public that FSA has established and sustained default management and other program goals that support long term objectives, we recommend that the Secretary of Education and FSA’s Chief Operating Officer (COO) produce a 5-year performance plan annually as required by HEA. To provide essential information to the Congress about its progress toward achieving default management and other agency goals during a given year, we recommend, as we did in 2002, that the Secretary of Education and FSA’s COO prepare and issue reports to the Congress on FSA’s performance that are timely and clearly identify whether performance goals were met. We received written comments on a draft report from FSA. These comments are reprinted in appendix IV. FSA said that it would take actions to address our recommendations. FSA recognized the requirement to annually produce a 5-year plan and said it would revise the plan this spring. FSA also said that it would meet the deadline to finalize the fiscal year 2002 annual report. Additionally, FSA suggested that we include information on the total loan portfolio to provide a more balanced presentation of the dollar increase in the defaulted loan portfolio, which we have done. However, FSA disagreed with our assessment that its internal plans were not appropriate to guide its default management efforts. FSA stated that its results clearly demonstrate that its internal plans, coupled with Education’s strategic and annual plans, were appropriate to guide its efforts. As we have noted in this report, HEA requires FSA to prepare annual 5-year plans in consultation with the Congress, institutions of higher education, and other stakeholders. This planning process helps to increase accountability and ensure that the goals are relevant to stakeholders. Furthermore, Education’s annual and strategic plans only discuss default management goals in broad terms that are not specific enough to guide FSA’s default management efforts. Additionally, FSA questioned our assessment that its internal planning documents did not explain the basis for establishing, continuing, or ending goals from year to year. FSA stated that the fiscal year 2002 documentation was reasonable for explaining the basis for establishing, continuing, or ending projects. While the fiscal year 2002 documentation provided more detail than the documents for fiscal years 2000 and 2001, it did not explain why goals were established, continued, or ended from one year to the next. Further, FSA stated that we improperly indicated that the National Student Loan Data System (NSLDS) data quality effort was a goal for only two years. We reported this as a “2-year” goal based on the documentation FSA provided. The documentation listed NSLDS as a goal for fiscal years 2000 and 2002, but not for fiscal year 2001. We are sending copies of this report to the Secretary of Education, the Chief Operating Officer of Education’s Office of Federal Student Aid, the Director of the Office of Management and Budget and appropriate congressional committees. Copies will also be made available to other interested parties upon request. Additional copies can be obtained at no cost from our Web site at www.gao.gov. If you or your staff should have any questions, please call me at (202) 512- 8403. The key contributors to this report are listed in appendix V. Overall, we obtained and reviewed several key documents, interviewed responsible officials, and surveyed officials from selected institutions of higher education. We reviewed HEA to identify FSA’s overall responsibilities and reporting requirements as a performance-based organization and to obtain background on the various types of student aid programs it authorizes. We also reviewed our prior reports and other documents to obtain background information and perspective on operational challenges faced by FSA. In addition, we obtained and analyzed fiscal year 1990 to 2001 trend data on the number of borrowers, default rates, and dollars in default for the guaranteed and Direct Loan programs. To determine what FSA’s default management goals were for fiscal years 2000 through 2002, we reviewed various FSA internal planning documents, including program plans for fiscal years 2000, 2001, and 2002. These documents listed the goals for all FSA programs, including the default management goals. Additionally, we reviewed FSA’s High-Risk Plan for fiscal year 2002, which summarized the major actions the agency planned to take with regard to default management and other issues in order to remove its student financial assistance programs from our high-risk list. We also interviewed FSA officials responsible for managing and administering student financial assistance programs in order to clarify which goals were related to default management. On the basis of these documents and information obtained from the interviews, we developed a summary of the default management goals for fiscal years 2000 through 2002. To determine whether FSA had achieved the performance targets for its default management goals, the second objective, we obtained and analyzed available data and reports related to the performance for fiscal years 2000, 2001, and 2002 goals. We discussed both the performance targets achieved and the performance targets missed during interviews with FSA officials. We determined whether a goal was met or not by reviewing the agency’s collective efforts over a 3-year period, where applicable. To determine whether school officials from schools with high default rates or high dollars in default had suggestions that indicated the need for additional default management goals, our third objective, we reviewed title IV school eligibility regulations, interviewed FSA officials, analyzed default data, and surveyed officials from selected schools. We identified and reviewed title IV eligibility criteria for program participation, including the cohort default rate (CDR), which is used to determine a school’s continued eligibility to participate in FFEL, Direct Loan, and Federal Pell Grant programs and procedures for reinstatement after schools are removed from the program. We interviewed FSA officials responsible for assisting schools with their default management efforts to determine the types of assistance provided to all schools, ascertain whether FSA provided additional assistance to schools at risk of losing their eligibility to continue participating in the student loan programs due to high default rates, and determine whether any additional assistance was provided to schools with high amounts of dollars in default. We participated in the 2002 National Default Prevention Day held in August 2002 in Washington, D.C., because this was one of the primary methods FSA officials use to provide default management information to schools. Additionally, we reviewed regional listings of school visits made by FSA during fiscal years 2000, 2001, and 2002. We obtained data on default rates for fiscal years 1999 and 2000 (about 6,000 schools) and dollars in default for fiscal year 2000 (about 5,000 schools) for all schools that participated in the Title IV programs. We analyzed fiscal year 1999 default rate data to identify those with default rates above the regulatory thresholds – default rates at or above 25 percent for 3 consecutive years or above 40 percent in one year. We determined that a total of 55 schools had default rates that exceeded regulatory thresholds, 46 of these were excluded from our review due to exceptional mitigating circumstances, such as having 30 or fewer borrowers in repayment on loans, and the remaining 9 schools were candidates for removal from the loan programs. FSA officials verified our analysis. We also obtained and analyzed data on default rates and dollars in default for fiscal year 2000 to identify schools with default rates between 20 and 24 percent for 3 consecutive years or with default rates between 30 and 39 percent in 1 year—those at risk of removal from the program. We identified 26 of these schools. In addition, we obtained data from FSA officials on all schools with defaulted loans (about 4,000) and the amount of dollars in default for each school. We analyzed the data and identified 47 schools with at least $1 million in defaulted loans as of fiscal year 2000. We developed a survey designed to determine the extent that officials from schools with high default rates and schools with high volumes of dollars in default were knowledgeable about the methods used by FSA to assist them, had participated in any of the FSA conferences or used any of the tools provided by FSA. Additionally, the survey asked the officials about their views of the assistance provided by FSA and if they had suggestions about ways that FSA could better assist them. We focused on schools with high default rates because historically they were a significant factor contributing to high national cohort default rates, and schools with high dollars in default because they represent most of the total dollars in default. We selected and attempted to contact officials at 31 postsecondary schools, which included 4-year institutions, 2-year institutions, and non- degree institutions. Although the 31 schools are not statistically representative of the universe of postsecondary schools that receive title IV funds, we selected them to provide a cross-section of schools with high default rates and high dollars in default. Our sample included all 9 schools with default rates above regulatory thresholds based on fiscal year 1999 CDRs, the latest data available at the time we drew the sample. We also randomly selected 12 schools with default rates near regulatory thresholds based on fiscal year 2000 CDRs, and 10 randomly selected schools with $1 million or more in defaulted loans as of fiscal year 2000. We limited the number of schools in the randomly selected groups in order to have the three groups of nearly equal size. In total, directors or financial aid administrators from 23 schools participated in our survey. The 23 schools consisted of 7 of the 9 schools with CDRs above regulatory thresholds, 6 of the 12 schools with CDRs near the regulatory thresholds, and all 10 of the schools with a high volume of dollars in default. Table 2 summarizes the postsecondary schools that participated in our survey. Continue use of performance-based default collections contracts. 2002: Support the administration’s efforts to improve the data match with the IRS. 2001: Analyze the results of IRS statistical study regarding electronic data match. Demonstrate value of National Student Loan Data System (NSLDS) default match. 2002: Prepare annual NSLDS analysis of students who receive loans although they appear to be in default and identify improvements that can be made 2000: Continue to work with guaranty agencies and lenders to maintain the quality of data in NSLDS. 2002: Increase the number of Free Applications for Federal Student Aid (FAFSAs) filed electronically from 5 million last year to 5.5 million with 55 percent via the Web product. 2001: Increase the number of FAFSAs filed electronically from 4 million to 5 million with 50 percent via the Web product. 2000: Increase the number of FAFSAs filed electronically from 3 million to 4 million. Use the Common Origination Disbursement System to institute an eligibility check for valid Individual Student Information Record on file for all Direct Loan recipients. 2002: Develop metrics to demonstrate that there is an appropriate balance between providing technical assistance to schools and program monitoring. 2001: Increase program reviews by 20 percent. Increase the total number of borrowers repaying their Direct Loans through electronic debiting to a minimum of 400,000 borrowers. Provide Spanish language deferment and forbearance requests at DL Servicing Web site. Educate the foreign school community about FSA program requirements to reduce noncompliance. Implement a pilot program at foreign schools that would prevent false enrollments. Make a determination on the initial cohort of recertification applications for all foreign non- medical schools eligible to participate in the Federal Family Education Loan Program. 2001: Augment the continuing campaign to eliminate false death and disability. 2000: Reduce fraudulent death and disability cases below 1998 baseline. Conduct and complete investigative analysis on the remaining 1,300 discharges of death and disability cases identified from the Inspector General audit. Expand FAFSA correction on the Web capabilities. Partner with National Student Loan Clearinghouse to eliminate mismatches in enrollment information. Try at least five new ways to make debt collection more effective, less costly, and more customer-service oriented. Increase by five, the number of guaranty agency partnerships with FSA designed to improve portfolio management. Expand current initiatives to help noncompliant schools and schools on reimbursement prepare action plans to improve their management of title IV programs. Increase the default recovery rate for loans in default held by guaranty agencies. Appendix III: FSA’s Default Management Goals and Outcomes for Fiscal Years 2000- 2002 Actions Identify three risk elements that impact a borrower’s ability to pay. Also, link risk review efforts across channels into activities by Student Credit Management. Increase by 25 percent the number of visitors to the Direct Loan (DL) Servicing Web site. Increase visitors through continued enhancement of web functionality, marketing, and making announcements by phone messaging and mail correspondence. Implement improved DL servicing infrastructure to better support financial management reporting and customer service. Negotiate phase-out of contractor. Modernization partner to assume accounting functions under a share-in- savings arrangement. Integrate the Debt Management Collection System (DMCS) into the common borrower system. Look at the imaging services provided by three current partners to identify commonalities that could be consolidated. Outcomes Identified the top three reasons contributing to delinquency in a sample of the direct loan portfolio: (1) 85 percent of borrowers did not have the advantage of a full 6-month grace period, (2) 76 percent had withdrawn from school, and (3) 57 percent had not been contacted. Also implemented several pilot initiatives to focus on the reasons identified for delinquency including increased borrower contact and other proactive activity. Increased visitors by 186 percent. The DL Servicing Web site provides account information for borrowers, online account management and counseling for over 5.7 million active student loan borrowers with a total portfolio of $73 billion. Expected benefits of retiring old financial reporting system: projected net savings by fiscal year 2005 of $8-11 million and ongoing projected savings after fiscal year 2005 of $4 million per year; improved customer service by providing a single source of financial data; and, increased data integrity and employee satisfaction by reducing training requirements for new or transferred employees. Better system in place for enhanced customer service. Also, data mining activities and data integrity are strengthened. Goal/Strategy Description 2000: Keep the cohort default rate under 10 percent. 2001: Keep the cohort default rate under 8 percent. 2002: Keep the loan program’s cohort default rate (CDR) under 8 percent. Actions Provide training and technical assistance, tools for interpreting student loan data, and default management plans. Goal met? Host Student Loan Repayment symposium, National default Prevention Day and a number of forums. Outcomes The national CDR for 1998 was 6.9 percent, reported in 2000; the national CDR for 1999 was 5.6 percent, reported in 2001; and the national CDR for 2000 was 5.9 percent, reported in 2002. A total of 1,500 schools participated in National Default Prevention Day, which familiarized schools with FSA promoted default management software such as Late Stage Delinquency Assistance Program. 2000: Enter into no more than six voluntary flexible agreements (VFAs). 2001: Implement and monitor at least four VFAs no later than March 2001. 2002: Monitor the existing four VFAs and provide oversight. Provide loan data to schools to aid in counseling. Accept proposals from guaranty agencies. Establish VFAs for guaranty agencies or provide greater operating flexibility. Use performance measures developed in conjunction with guaranty community to monitor compliance and performance. FSA received eight VFA proposals. One proposal was approved and awaited public comment. Three others were pending. Agreements signed with guaranty agencies in Wisconsin, Texas, Massachusetts, and California. Common general indicators used to evaluate performance of four VFAs in comparison to other guaranty agencies. Interim report released because of insufficient time to draw final conclusions on effectiveness of VFAs. As of January 10, 2003, FSA’s draft had not received clearance for release by the secretary.. Common general indicators created to evaluate the performance of each VFA performance and with guaranty agencies not participating in the agreements. The measures include: analyzing the dollar ratio of lender held loans, utilizing a trigger rate, and determining effectiveness at collection recoveries Strategies from symposium used in repayment publication. Created reports identifying “buckets” of delinquency, identifying basic characteristics of delinquent borrower. Implemented a pilot using credit 2001: Submit a report to the Congress on the viability of expanding the VFA pilot. 2002: Publish and release VFA Report to the Congress Work with the guaranty agency community to establish common performance metrics primarily in the areas of delinquency, default aversion and collections. Provide a report to the Congress consistent with 1998 authorizing legislation on the current status of the VFAs. Use data from indicators, input from guaranty agency community as well as departmental offices to draft report. Develop performance measures with community workgroup, including VFAs and other guaranty agencies to gain consensus. Regional staff will perform validation with program reviews. 2000: Reduce the lifetime default rate. 2001: Establish a program and multi-year goals, to reduce the cohort and lifetime default rates. Goal/Strategy Description 2002: Implement a multi- year program to further reduce cohort and lifetime default rates. Utilize the Financial Partners Data Mart as a basis to establish risk management assessment ability of lenders, servicers, and guarantee agencies. Identify institutions abusing FSA programs through data mining using student information. Actions templates for improvements. Develop tools to better predict default rates and risk analysis. Outcomes modeling to prioritize due diligence efforts. Not provided. Goal met? Utilize a modified version of the system development life cycle methodology used to construct the data mart. Use the existing product designed to augment extracts to the system and link to current operating systems. Improvements made include: access for guaranty users, creation of an initial risk scorecard to assess partner performance and elimination of contractor dependent reports. Run interim update on Common Origination and Disbursement (COD). Use data mining to target noncompliant schools. Information from Social Security Administration death match, proper interest rates in the DL servicing system, early identification of noncompliant schools, improvements to COD to ensure that upfront matches are in effect for DL originations. Publications produced on finding free scholarships, obtaining loan forgiveness programs for teachers, and avoiding student scams. Student aid information in different languages, formats aimed at targets audiences including 11 “one-pagers,” a default management brochure for NDPD, a financial aid poster for Native American college- bound youth, aid information in Spanish, publications in Braille/audio media. Information to be distributed via high school counselors and others in contact with targeted audience as well as published in newsletters and magazines. Direct Loan model for Electronic Bill Presentment and Payment (EBPP): implemented 3/22/02. Web self-service (online correspondence: implemented 5/10/02). Aggregator Model for EBPP: implemented 7/29/02. An extensive communications and adoption strategy plan is being implemented to let borrowers know services are available. 2001: Create new product delivery approach that will increase student aid information to students and parents. 2002: Publish and disseminate five new student aid awareness publications. Use print and electronic media to provide greater access to student aid information. Obtain input from specified groups. Translate materials. Solicit information from individuals and organizations to determine the appropriate content for targeted audience, the clarity of materials and the best tool for information dissemination. Implement Internet billing and online mailing for Direct Loan Servicing. Initiate at least one paper to electronic service conversion process. Electronic servicing will provide borrowers a state of the art tool for making payments, receiving bills and obtaining other correspondence. Goal/Strategy Description Pilot data mining and analysis projects in Direct Loan Servicing Center aimed at improving regular collections. Actions Develop and implement Credit Management Data Mart (CMDM) to conduct data mining and portfolio analysis. Utilize Late Stage Delinquency Assistance. Refine due diligence tactics. Study the correlation between credit score and delinquency. Goal met? Increase effectiveness of available collection tools: private collection agencies, treasury offsets, combined regular collections and loan rehabilitations. Utilize new tools where possible. Increase the number of lenders using electronic funds transfer (EFT) for Direct Consolidation by 100 percent from 13 to 26. Educate lenders about the time and cost savings benefits of EFT. Technical assistance is provided to lenders in the enrollment and other phases of the process. 2000: Keep the default recovery rate at 10 percent or higher. 2001: Keep the default recovery rate at 10 percent or higher. 2002: Increase the default recovery rate to 15 percent. Outcomes The CMDM currently contains demographic and financial data for all direct loan borrowers and will include borrowers in default for all loan obligations held by the Department. Increased borrower contact efforts with higher balance loans. A study underway to determine if a correlation exists between a borrower’s credit score and delinquency relationship. Estimated default claims: $2.7 billion. Estimated default recoveries: $4.87 billion. Default recovery rate 7.6 percent without consolidation. Default recovery rate 16.8 percent with consolidations. 76 lenders participating (292 percent enrollment); 3 additional lenders in process of enrolling. Allows FSA to renegotiate the loan consolidation contract for a potential savings of $10 million in fiscal year 2002. Total collections: $3.22 billion. Recovery rate 11.7 percent. Combined recoveries were $5.102 billion. Exceeded goal by 1.5 percentage points, total collected $4.87 billion. Shorten procurement process for private collection agencies. Use available collections tools such as Treasury offsets, administrative wage garnishments to pursue recover defaulted loans. Utilize available collection methods. Refer eligible accounts to private collection agencies for collection. Focus on existing collection methods to improve on past results. Provide excellent customer service to make collections process user-friendly. Focus on existing collection methods to improve on past results. Improve default recovery rate to new goal of $914 million. 2001: Implement the National Directory of New Hires database-matching program. 2002: Expand use of the National Directory of New Hires (NDNH) database to recover $200 million in defaulted loans. Establish procedures and a mechanism to match collections records again Health and Human Services database. At close of quarter, transmit two files (containing FSA and GA defaulted loan data) to Health and Human Services for comparison with NDNH files. Collections totaled $150 million. New information obtained for over 690,000 accounts. FSA collections through August: $269 million. GA/FSA combined collections exceeded $500 million. Actions Track and rank order performance based on collection totals. 2001: Analyze the results of IRS statistical study regarding electronic data match. 2002: Support the administration’s efforts to improve the data match with the IRS. Compare income data that students and parents report on 2000-2001 FAFSAs with income reported to the IRS for 1999 calendar year. Work with Treasury to draft legislative language that allows Education to implement an effective income verification match with the IRS. FSA will work with IRS to test a “Consent for the IRS to Disclose Taxpayer Information” Web site. Perform analysis of students that have been identified erroneously as ineligible for funds. 2000: Continue to work with guaranty agencies and lenders to maintain the quality of data in NSLDS. 2002: Prepare annual NSLDS analysis of students who receive loans although they appear to be in default and identify improvements that can be made. Analyze loan and repayment data within NSLDS. Identify improvements that can be made to NSLDS. Outcomes By driving private collection agencies (PCAs) to perform competitively, agency was able to increase recoveries and reduce costs. Data helped FAFSA to identify error-prone applicants and minimize the amount of federal student aid dollars that are erroneously awarded to students each year. Legislative language sent to Joint Committee on Taxation and House and Senate leadership. FSA and IRS launched website on October 7, 2002. Eight postsecondary institutions participating in pilot. IRS agreement to permit 600 students and parents access to website for verification of 2001 tax data. Latest computations of NSLDS default and other matches indicate that FSA has averted an amount equivalent to $300 million a year in potential improper payments. Reporting burden of guaranty agencies reduced. Not on track due to other priorities. Outcomes A little over 4 million FAFSAs filed electronically. 5,364,223 applications filed electronically. Over 61 percent of all electronic submissions used Web. 7.27 million filed electronically, 5.37 million filed via the web. Enhanced and increased the types of FAFSA on the Web Toolkit materials that financial aid administrators, counselors and other who work directly with students and their families. Goal met? Launched the COD system as part of FSA Integration Plan, integrating the Pell and Direct Loan processes. Schools no longer have to ensure valid ISIR data is on file for direct loan recipients. 163 program reviews completed, seven institutions referred to IG for noncompliance. Preliminary measures developed. First calculations will take place in fiscal year 2003. EDA reduced mailing costs (by $1,196,414) and provided borrower with an efficient method of payment. Goal/Strategy Description 2000: Increase the number of Free Application for Federal Student Aid (FAFSAs) filed electronically from 3 million to 4 million. 2001: Increase the number of FAFSAs filed electronically to 5 million with 50 percent via Web product. 2002:Increase the number of FAFSAs filed electronically 5.5 million with 55 percent via Web product. Use the Common Origination Disbursement (COD) system to institute eligibility check for valid Individual Student Information Record (ISIR) for Direct Loan recipients. 2001: Increase program reviews by 20 percent. 2002: Develop metrics to demonstrate that there is an appropriate balance between providing technical assistance to schools and program monitoring. Increase the total numbers of borrowers repaying their Direct Loans through electronic debiting to a minimum of 400,000 borrowers. Provide Spanish language deferment and forbearance requests at DL Servicing Web site. Educate the foreign school community about FSA program requirements to reduce noncompliance. Actions Increase user-friendliness of website. Introduce features such as incremental save to allow users to retain data input if unable to complete all at once. Make improvements to Web site. Increase visibility of Web product. Redesign web products and increase publicity. FSA staff to work closely with TRIO personnel and others who work with low-income students. Implement eligibility check that is modeled on an existing check performed by the Pell system for eligible applicants. Conduct 163 on-site reviews at institutions. Hold discussions between the Schools Channel and the Management Improvement Team. Development for FY 2003 Performance Plan. Increase the presence of electronic debit accounts (EDA) via mailers and allowing convenient enrollment at Web site. Develop Spanish website utilizing a translator from American Translators Association. Spanish speaking borrowers are able to access and download deferment and forbearance forms in Spanish. Training provided in first quarter to schools in the United Kingdom and Canada. A focus group was formed and developed a foreign schools handbook. Also, conducted several demonstrations on electronic application to participate in title IV programs. Goal/Strategy Description Implement a pilot program at foreign schools that would prevent false enrollments. Actions Implement pilot program that enables foreign schools to enter enrollment data on the Web and guaranty agencies to verify data before loan funds are disbursed. Outcomes FSA has submitted recommendations for legislative and regulatory changes that would require lenders to verify student enrollment prior to disbursements. Eligibility determinations for all low-volume foreign schools completed in February 2001, high volume foreign institutions recertified by May 31, 2001. Make a determination on initial cohort of recertification applications for all foreign non-medical schools eligible to participate in the FFEL Program. 2000: Reduce fraudulent death and disability cases below 1998 baseline. 2001:Augment continuing false death and disability campaign. Recertify the initial cohort of foreign schools. Revise forms currently in use. Pilot centralized processing of disability claims for four guaranty agencies. Conduct periodic audits of NSLDS and credit bureau information. Follow-up on Inspector General (IG) estimates. Implement pilot that will serve as test run for regulations that go into effect in 2002. Validate outcomes and disposition of the remaining 1,300 claims identified as “discharged.” Implemented three actions to strengthen initial screening process: (1) revise forms, (2) one-year pilot centralized processing with four guaranty agencies, and (3) conduct periodic audits using both NSLDS and credit bureau data. Further analysis conducted on 20,817 files with income within first year of discharge. Pilot successfully implemented in September 2001. Comprehensive report on outcomes of 1,300 discharges issued in April 2001 and forwarded to Inspector General. None provided. Conduct and complete investigative analysis on remaining 1300 discharges identified from Inspector General audit. Expand FAFSA Correction on the Web capabilities. Partner with the National Student Loan Clearinghouse (NSLC) to eliminate mismatches in enrollment information. Popularity of this new function resulted in FSA having to increase its server capacity. Clearinghouse school student enrollment data received by Direct Loan Servicer up to 90 days earlier. Significant reduction (25 percent) in the percentage of in-school deferment forms required for completion by students. Implemented standard procedures at all service centers, automated data transfer process, improved call rate to 95 percent, among other activities. Enter into a partnership with NSLC based on successful implementation of data exchange. Try at least five new ways to make debt collection more efficient, less costly, and more customer service oriented. Implement a process that will allow social security number discrepancies to be easily resolved. Automate data transfer with Justice. Shorten timeframe of wage garnishment hearings. Improve answer call rate for Debt Collection Service. Streamline the ability-to-benefit discharge review process. Goal/Strategy Description Increase by five, the number of guaranty agencies partnered with FSA. Goal met? Expand current initiatives to help noncompliant and reimbursement schools prepare action plans to improve their management of title IV programs. Increase the default recovery rate for loans in default held by guaranty agencies. Develop a welcome package for new title IV eligible schools. Establish baseline for new schools that will be analyzed at end of first year to provide feedback. Outcomes Partnerships formed with USA Group, Texas Guaranteed Student Loan Corporation, Nebraska Student Loan Program, Oklahoma Student Loan Program, and South Dakota EAC. Agency rankings published for first time since fiscal year 1996, statistical data published through year, increased presence of department at industry association meetings and development of joint initiatives. Reduced the percentage of school on reimbursement and/or cash monitoring by 30 percent. Increase emphasis placed in on guaranty initiatives. Overall recovery rate: 18.13 percent, up from 15.52 percent in previous year. Our determination of whether or not a goal was met was based on our analysis of FSA’s internal documents and considered the agency’s collective efforts during the period in which the goals were in effect. Lisa Lim and Carla Craddock made significant contributions to this report. In addition, James Rebbe provided legal support, Carolyn Boyce provided assistance in selecting schools for our survey, and Susan Bernstein and Barbara W. Alsip provided writing assistance. | During fiscal year 2002, an estimated 5.8 million people borrowed about $38 billion in federal student loans. Despite a dramatic reduction in annual default rates on those loans since fiscal year 1990 (from 22.4 to 5.9 percent), the total volume of dollars in default doubled to nearly $22 billion by fiscal year 2001 from about $11 billion in fiscal year 1990. During that same period, the total student loans outstanding grew from $54.1 billion to $233.2 billion. The Department of Education's Office of Federal Student Aid (FSA) manages the nation's student financial assistance programs authorized under title IV of the Higher Education Act (HEA). In 1998, Congress amended the HEA and established FSA as a performance-based organization. Among other requirements, the HEA called for FSA to annually develop 5-year plans, issue annual reports, and consult with stakeholders regarding their delivery system. GAO initiated a review to assess FSA's default management efforts and results. FSA's default management goals were mostly to prevent defaults, increase collections, and verify student eligibility, but the agency lacked a plan to guide its efforts. FSA had 39 default management goals for fiscal years 2000 through 2002. However, the goals changed significantly during this period and FSA did not annually prepare 5-year performance plans as required by the HEA. FSA met or exceeded most goals, but did not prepare timely performance reports. According to our analysis, FSA met or exceeded performance targets for 36 of its 39 default management goals during fiscal years 2000 through 2002. However, FSA did not issue performance reports for fiscal years 2000 and 2001, as required by the HEA. Instead, in December 2002, FSA issued one report for both fiscal years that lists accomplishments, but does not clearly indicate the extent to which goals were or were not met. Suggestions from survey respondents did not indicate the need for additional goals. While about one-third of the 23 school officials who responded to our survey made suggestions about ways that FSA could better assist them, none of the suggestions indicated the need for additional default management goals. FSA assisted all schools by sharing default management information through symposiums and other media, and provided individual assistance to some schools through visits and telephone calls. Most of the responding officials were generally pleased with FSA's assistance. The suggestions that officials made did not indicate a need for additional goals because they either related to existing goals or addressed operational issues. |
Coast Guard is the federal agency responsible for oversight of U.S. merchant marine credentialing and licensing. As part of these responsibilities, Coast Guard develops credentialing regulations based on statutory requirements and international treaties developed under the auspices of the IMO, to which the United States is a party. Coast Guard also drafts policies to clarify implementation of its regulations for training providers and mariners. Coast Guard issues guidance for complying with its regulations, including STCW requirements, through the publication of NVICs. Coast Guard implements the requirements for the issuance of merchant mariner credentials. Finally, Coast Guard also is to coordinate with its maritime training stakeholders to monitor U.S. efforts to implement the STCW convention. The United States, through Coast Guard, implements provisions of the STCW convention through regulations. A timeline of IMO’s major amendments to the STCW requirements since 1978 and Coast Guard’s actions to implement the changes are presented in figure 1. As of March 2016, approximately 167 training providers were approved by Coast Guard to administer courses related to implementation of the revised STCW requirements. Out of the 81 percent of survey respondents (136 responses), 10 indicated they were not teaching STCW courses resulting in a survey sample of 126 STCW training providers. Not every survey respondent answered every question. As a result, response rate varied by question. Figure 2 shows the number of respondents and the types of organizations that participated in our survey. Training requirements for U.S. mariners vary depending on circumstances—such as the mariner’s role on the vessel, the area of operation, and the size of the vessel—but mariners are primarily subject to three types of training requirements: training required for commercial operations in both oceangoing and domestic waterways (see figure 3 for a map of these waterways); military-specific training required of civilian mariners who sail aboard government-owned vessels or vessels on charter to the Department of Defense; and maritime company-specific training requirements. Mariners may be certified for service in domestic waters only, but a STCW certification is required for international or oceangoing service. Under Coast Guard’s regulations, mariners can meet the training requirements for certification through a combination of experience, training with evaluation through professional examination, or a practical demonstration of skills. Figure 3 identifies the areas of operation for domestic and international certification. The STCW certification process is intended to ensure that the training a mariner receives, and the assessment of a mariner’s skills after the training is completed, supports the goal of placing qualified mariners on- board merchant vessels. The Coast Guard’s National Maritime Center (NMC) approves all training providers that offer mariner training courses and programs, including programs at the federal and state maritime academies. NMC is also responsible for oversight of Coast Guard approved maritime training programs to ensure that maritime training providers offering Coast Guard approved training are performing their duties in a manner that meets all regulatory and policy standards. Figure 4 provides an overview of Coast Guard’s maritime training course approval request process—application to issuance. Coast Guard approves maritime training courses and is to audit training provider compliance with STCW requirements every 5 years. Coast Guard also requires providers to conduct an internal audit in the interim every 2 and a half years. According to Coast Guard officials, in 2013, the federal and state maritime academies received approval of their training programs for compliance with the 2010 STCW amendments. The officials added that Coast Guard is currently in the process of the first audit cycle subsequent to those approvals—the federal and five state maritime academies had been audited by Coast Guard as of November 2016. Coast Guard has provided guidance to training providers to implement the revised STCW requirements generally in two ways. First, Coast Guard conducted various outreach activities, including: Publishing online resources such as webinars and a frequently asked questions page. For example, prior to issuing the STCW final rule, Coast Guard convened an STCW Policy Advisory Council to solicit questions from the maritime industry regarding the revised STCW requirements, and Coast Guard used this feedback to develop the frequently asked questions page. Managing a call center that is available to training providers and mariners to answer questions about the revised STCW requirements, among other things. Holding advisory committee and maritime stakeholder meetings. For example, the Merchant Marine Personnel Advisory Committee (MERPAC) consists of about 19 members with expertise across the maritime industry and advises the Secretary of Homeland Security regarding merchant mariner credentialing issues, among other things. MERPAC is required to hold public meetings at least twice per year, and Coast Guard has used MERPAC meetings as a forum for discussing the revised STCW requirements. The Maritime Academy Council (MAC) consists of senior administrators from state maritime academies, and Coast Guard has used MAC meetings to discuss the revised STCW requirements, among other things. Coast Guard officials said that MERPAC and MAC are collaborative mechanisms used to provide stakeholders with an opportunity to provide recommendations to Coast Guard. The officials also reported that Coast Guard invited all of the STCW training providers to two public meetings in 2011 to provide details and answer questions on the revised STCW requirements. Second, Coast Guard has issued guidance documents intended to aid training providers as they implement the revised STCW requirements. Guidance documents include material on how to prepare for Coast Guard audits, a bridging plan for maritime academies to update their curriculum based on the revised STCW requirements, and 24 NVICs that provide clarification on the compliance with and enforcement of regulations. Coast Guard also provided guidance on qualifying for specific training- related STCW endorsements. For example, one NVIC provides guidance for the approval of training courses and programs. According to Coast Guard officials, the NVICs were generally prepared in consultation with the maritime stakeholders through MERPAC. Most training providers who responded to our survey reported that they were satisfied with Coast Guard’s coordination and guidance efforts overall (91 of 114 respondents or 80 percent). For example, 21 of the 26 survey respondents that reported participating in Coast Guard’s webinars were satisfied (81 percent). 57 of the 65 survey respondents that reported contacting Coast Guard’s call center to obtain information or clarification of the revised STCW requirements were satisfied (88 percent). 29 of the 32 survey respondents that reported attending MERPAC or other advisory committee meetings to obtain information on the revised STCW requirements were satisfied (91 percent). In addition, most survey respondents reported that the Coast Guard’s 24 NVICs pertaining to the revised STCW requirements provided sufficient guidance and were issued in a timely manner. However, three of the six state maritime academy cadet programs (50 percent) reported being “not at all satisfied” with Coast Guard’s coordination on the implementation of the revised STCW requirements. Officials from the three state maritime academies generally attributed their dissatisfaction to the unique challenges they face as 4-year degree granting institutions, and reported that they would benefit from additional guidance regarding approval of their 4-year curriculum. Coast Guard officials stated that coordination with maritime academies has been extensive and that they have consulted with and sought input from both the maritime academies and industry, including during the negotiation of the 2010 amendments to the STCW Convention and through MERPAC meetings. In addition, Coast Guard officials said they met with the training institutions, including the maritime academies, to help implement the revised requirements and that they continue to provide assistance to all training institutions. Coast Guard officials also reported plans to issue additional guidance to state maritime academies. For more details regarding survey respondents’ perspectives on the sufficiency of guidance and timeliness of the NVICs issued, see appendixes II and III. Although most survey respondents reported that they were satisfied with Coast Guard’s coordination efforts overall, most training providers also reported that they would have benefited from a more timely update of guidance on developing the required Quality Standards System (QSS). For example, most of the training providers who responded to our survey (58 percent) reported that their ability to implement the revised STCW requirements was affected by a lack of timely guidance from Coast Guard on developing the QSS. The STCW final rule requires organizations offering training required by the STCW to be monitored by a QSS. In 2014, Coast Guard reported plans to issue or update 26 NVICs pertaining to the revised STCW requirements. These plans included a QSS NVIC to clarify and guide training providers on how to appropriately develop a QSS. However, since Coast Guard has not developed its QSS guidance, the agency has directed training providers to the STCW final rule, which lists essential elements to be included in a comprehensive QSS. Because Coast Guard has not developed QSS guidance, training providers reported delays in updating their training programs to meet the revised STCW requirements. For example, training providers submitted comments to Coast Guard during the proposed rulemaking noting concerns that the QSS requirements were vague and duplicated other quality assurance practices that training providers currently had in place. One training provider who responded to our survey reported that additional guidance was needed to ensure compliance with significant changes to QSS record keeping requirements. Other training providers reported that they would have benefited from seeing an example of a completed QSS, as well as clarification of specific aspects of the QSS requirements. Coast Guard audits also indicate a need for additional QSS guidance. As of November 2016, four of the five audit reports for federal and state maritime academies, conducted from March 2015 to April 2016, contained recommendations or deficiencies related to QSS implementation—further highlighting the need for guidance to help training providers develop and implement a QSS. Coast Guard also acknowledged in these audit reports that it needed to issue updated QSS guidance as soon as possible to ensure that training providers can implement their QSS by the deadline. However, in November 2016, Coast Guard officials said that the situation may have changed since the time of our June 2016 survey, as the Coast Guard learned during the September MERPAC meeting that many training providers have successfully implemented QSS or expect to do so by the January 1, 2017 deadline. As a result, the Coast Guard plans to meet with MERPAC representatives in March 2017 to discuss whether guidance on developing the required QSS is necessary. Most of the training providers who responded to our survey reported that as of June 2016, they expect to meet the overall January 1, 2017, deadline for implementing the revised STCW requirements (81 percent). In general, the revised STCW implementation process consists of activities such as ensuring that instructors obtain additional training, providers update the training curriculum to reflect the revised STCW requirements, and providers develop a QSS, among other things. In all three categories, over half of the respondents reported that they will meet the implementation deadline for these activities. For example, 66 percent of respondents reported their instructors were fully trained as of June 2016, while 92 percent reported they will ensure that current instructors obtain the additional training required by the implementation deadline. 49 percent of respondents reported they have met the deadline for updating their curriculum to incorporate the revised STCW requirements as of June 2016, while 86 percent reported that they will have their curriculum revised by the implementation deadline. 41 percent of respondents reported they have implemented the QSS requirement as of June 2016, while 83 percent reported that they will meet this requirement by the implementation deadline. Those training providers not expecting to meet the requirements reported various reasons, including a lack of time, lack of knowledge about the new requirements, a desire to retire, or cost. For instance, two training providers stated that they were unaware of the revised requirements while one respondent reported plans to retire because the requirements are getting burdensome for the small training school. Among the federal and state maritime academies, six of the seven academies reported that as of June 2016, they expect to meet the overall January 1, 2017, STCW implementation deadline. More specifically, four of five academies who responded to our question regarding instructor training reported that as of June 2016, the current instructors at their institutions will obtain the additional training required to be STCW-compliant by the deadline; six of seven academies reported that as of June 2016, their curriculum will be updated by the deadline; and, six of seven academies reported that as of June 2016, their QSS will be implemented by the deadline. The one state academy that did not anticipate meeting the overall STCW implementation deadline indicated that the grandfathering guidelines for graduating cadets who may need to take additional classes to comply with the latest changes to the STCW requirements were insufficient. Regarding the lack of grandfathering guidelines, Coast Guard officials said that they assisted the academies with a bridging strategy to ensure that current and future students meet the new requirements and continue to work closely with all maritime academies to ensure compliance. While training providers reported progress in implementing the revised STCW requirements, they also noted various challenges in implementing these requirements. Based on survey responses in which training providers were asked to note—from a list of 14 possible implementation challenges—which challenges they faced, the most frequently reported challenges were interpreting the revised STCW requirements, recruiting qualified instructors, developing the organization’s QSS, developing the program’s curriculum, and mariners’ willingness to remain in the industry. With regard to developing a QSS, Coast Guard officials noted that since we concluded our survey in June 2016, when some training providers reported developing a QSS as a challenge, many of the training providers have succeeded in implementing QSS or expect to do so by the January 1, 2017, deadline. See figure 5 for the list of 14 possible implementation challenges and the training provider’s views on the extent to which they considered each to be a challenge. For additional details regarding the extent to which the respondents reported experiencing challenges in implementing the revised STCW requirements, see appendix IV. Interpreting the revised STCW requirements: The most frequently reported challenge by survey respondents was interpreting Coast Guard’s revision of the STCW requirements with 54 percent of survey respondents reporting this as a challenge. Six survey respondents reported that Coast Guard’s STCW guidance intended to help training providers interpret the revised requirements is hard to understand and according to one provider, puts undue burden on providers to remain compliant. Another training provider stated that the lack of “plain- language” guidance creates a challenge, especially for small schools that might not have the resources or sophistication to understand the language in the IMO convention or the regulation. Furthermore, of the training providers who reported that they sought clarification on the requirements from resources such as the Coast Guard’s call center, five respondents reported receiving ambiguous or conflicting information, one stated that representatives would read the guidance documents rather than provide explanations, and another stated that the representatives are more proficient in credentialing requirements rather than STCW requirements. When we asked Coast Guard about these challenges, officials responded that in addition to revising the NVICs based on training provider feedback, they also prepared responses for individual questions and have outreach activities planned as Coast Guard seeks to provide clarification to the providers. State maritime academies also reported challenges interpreting the revised STCW requirements. For example, officials from one state maritime academy stated that some of the revised STCW requirements became clear after they were subjected to a Coast Guard audit. Furthermore, other state maritime academy officials we interviewed stated that Coast Guard’s guidance does not offer much assistance to academies; as a result, the academies should be given separate STCW guidance that takes into consideration the academic system in which they operate. When asked about these challenges noted by the state maritime academies, Coast Guard officials stated that they are determining the type of guidance necessary to assist the state maritime academies and plan to develop guidance for the maritime academies in the future. Recruiting qualified instructors: Recruiting qualified instructors to teach STCW-related courses was the next most frequently reported challenge with 46 percent of respondents reporting it as a challenge. According to Coast Guard guidance, requesting approval of new instructors as of March 2014 should include documentation of the proposed instructor’s experience, training, or evidence of the ability to use effective instructional techniques that could include train-the-trainer certification. In their survey responses, five training providers reported that these requirements have decreased the supply of qualified instructors to teach STCW courses and three reported that instructors will require higher compensation. In addition, several of the training providers reported that qualified instructors may be unaffordable to some providers or the increased costs may be passed on to the mariners seeking STCW-related training. Additionally, the supply of qualified instructors is declining, especially for engineering instructors, according to 11 training providers. Seven providers reported that the cost or time commitment required for potential instructors to acquire the additional qualifications is a challenge. In addition, one provider reported that some qualified mariners who could potentially serve as faculty may not be interested in meeting the rigorous STCW faculty requirements. Two other providers reported that some qualified mariners may opt to take more competitive salaries at sea rather than working as instructors. The Coast Guard acknowledged the effort required for instructors to be compliant, but stated that the revised guidance has not changed substantially regarding instructor qualification and that instructors have always been expected to hold appropriate credentials to teach maritime courses. In addition, the Coast Guard officials stated that they are unable to speak to the challenge of recruiting qualified instructors for any specific training providers. Developing QSS: Almost half of the training providers–46 percent– reported that developing the organizations’ QSS was a challenge to meeting the deadline. One provider reported that due to the QSS development cost, it will not develop such a system and therefore may lose its STCW training status. Six providers reported that they believe the QSS requirement is an unnecessary administrative burden and expense to the providers, especially for small providers that may stop offering STCW courses because of the cost that may be associated with developing a QSS, according to a maritime professional. Two survey respondents also stated that they were reluctant to dedicate resources to developing a QSS because it was unclear at the time of our survey what would be required to be fully compliant. In addition, most state maritime academy officials we interviewed reported that a QSS is redundant since the academy’s accreditation status already ensures the quality of the maritime training programs. With regards to cost, Coast Guard officials stated that any cost incurred from developing a QSS is dependent on the provider since the process requires documenting what providers do to ensure program quality and compliance. According to Coast Guard officials, regarding the redundancy of a QSS, the maritime academies provided this comment during the development of the STCW final rule and in response text was added to the regulation to enable the Coast Guard to take accreditation body requirements into account when assessing compliance with applicable QSS requirements. As of November 2016, the Coast Guard is developing the policy to implement this regulatory flexibility for the maritime academies. In addition, Coast Guard officials stated that potential guidance may result after Coast Guard explores how the accreditation process could be used to fulfill the QSS requirements. Developing curriculum: Based on our survey, 44 percent of respondents reported that developing curriculum to meet the revised STCW requirements is an implementation challenge. For example, three providers reported that the curriculum development process related to STCW requirements is arduous, vague, or expensive. Two providers reported that having a sample curriculum related to STCW requirements would be helpful. In addition, one provider reported that academies needed more time to implement the STCW requirement changes within their academic systems to accommodate the needs of the cadet. When asked about this challenge, Coast Guard officials acknowledged there can be costs associated with curriculum development, but noted that the Coast Guard STCW regulation and policy guidance issued in January 2014 match the standards set by the IMO. Willingness to stay in the industry: According to some survey respondents, the effort required by mariners to comply with the revised STCW requirements may result in some mariners leaving the industry. Forty-one percent of the survey respondents reported that the willingness of STCW-certified merchant mariners to remain employed in the industry following the revised STCW requirements poses a challenge. In the narrative responses, ten training providers reported that more mariners may leave the industry or are looking for other employment options because it is too difficult to maintain a merchant mariner credential under the revised requirements. Training providers we interviewed also stated that some mariners are opting to retire rather than meeting the new requirements. Three narrative responses also noted that maintaining the credential is expensive because of the cost of training, cost of travel to attend training including lodging expenses, as well as the corresponding loss of wages experienced when mariners are not at sea while they attend training. Two survey respondents indicated that sometimes mariners pay these costs out of pocket or some costs may be covered by unions. When we asked about the challenge of mariner’s willingness to stay in the industry, Coast Guard officials stated that the guidance provides the minimum standards required of mariners and they have the flexibility to choose the courses or programs they wish to take. Coast Guard also acknowledged that some mariners may gravitate towards professions that give greater flexibility to their schedule and work-life balance. In addition to the challenges listed in the survey, survey respondents identified other challenges in their narrative responses, including the need for better harmonization of the Coast Guard’s training for domestic waterways and the STCW requirements. One provider reported that it has to use resources to cross-check both requirements to ensure that its program is accurate and in agreement. Academy officials we interviewed also reported that the overlapping of the domestic and STCW requirements is a strain on the time and resources of the academies. Coast Guard officials responded that in cases where a specific topic meets both a domestic and STCW requirement, it is only required to be done once and documented as meeting the STCW requirement. Coast Guard estimated the costs and benefits of implementing the revised STCW requirements in its regulatory analysis of the STCW final rule. Costs and benefits are two of the four elements that the Office of Management and Budget and GAO have identified as important to any regulatory assessment for federal rulemaking, and based on our analysis, Coast Guard’s rulemaking for implementing STCW regulatory revisions addressed all four elements. Coast Guard estimated the total present value cost of implementing the revised STCW requirements over 10 years to be $228.9 million, or about $32.6 million annually. Coast Guard estimates included implementation costs associated with four general areas—mariner training, medical examination, sea service, and training providers. As shown in figure 6, Coast Guard estimated the majority of costs were to meet mariner training requirements. Coast Guard also identified qualitative benefits expected from implementing the revised STCW requirements that would result from increased and consistent training and enhanced medical evaluation. Expected benefits included, for example, an increase in vessel safety and a decrease in the risk of accidents. Coast Guard officials told us that they did not quantify the benefits of implementing the revised STCW requirements because of uncertainty about the relationship between training and human factors involved in accidents. Officials stated that to estimate benefits, Coast Guard reviewed studies on the effectiveness of training in other industrial settings, but because of the difference in contexts and the range of measures of effectiveness, they concluded that the benefits transfer was not robust enough to quantify benefits for STCW. Instead, Coast Guard conducted a “break-even” analysis of the expected benefits, noting that break-even analyses are used for situations where benefits from a regulatory action cannot be quantified. Such analyses are intended to answer the question: “How small could the non- quantified benefits be before the rule would yield zero net benefits?” We describe the Coast Guard’s benefits estimates in more detail below. Executive Order 13563 directs agencies to periodically review significant regulations to identify those that may be outmoded, ineffective, insufficient or excessively burdensome, and to modify the regulations according to what has been learned. Coast Guard officials said they would consider conducting a retrospective analysis of its estimated costs and benefits of implementing the revised STCW requirements after sufficient time has passed for the costs and benefits to be realized, and if funds are available. Most training providers who responded to our survey (68 percent) reported that they anticipated that implementing the revised STCW requirements would increase their organization’s costs. About half of all survey respondents (49 percent) expected to increase their organization’s training prices in 2017 while 37 percent expected no change in prices. Training providers generally reported that they expected their costs of implementing STCW requirements to be equal to or higher than the Coast Guard’s estimates in its regulatory analysis of the STCW final rule. Specifically, in estimating the costs of implementing the revised STCW requirements, Coast Guard estimated average dollar costs for small and non-small training providers across five cost categories. For example, using Coast Guard estimates, the average cost for initial auditor training—one of the five cost categories—for small providers was $3,499 and for non-small providers was $16,023. Across these five cost categories, about half of responding training providers (46 to 50 percent) indicated that their costs would be similar to Coast Guard’s cost estimates, as shown in figure 7 below. About a third of respondents (28 to 39 percent) expect costs to be higher than Coast Guard estimated and 2 to 14 percent anticipated costs lower than Coast Guard’s estimates. In addition, a small number of providers (between 10 and 13) responded “other” to these questions. For example, one provider who indicated “other” when comparing anticipated costs to Coast Guard estimates said “our training system is much more complex than any other commercial provider” while another stated “my training school consists of a single all- in-one manager/owner/instructor.” Some survey respondents identified costs that they did not believe were included in Coast Guard’s average estimates for training providers. For example, while Coast Guard included estimates for developing QSS procedures, several training providers indicated that new QSS requirements could involve more administrative time than estimated by Coast Guard. Officials at one maritime academy indicated that they allocated 9 hours per week to maintain the STCW system and believed that the Coast Guard’s average estimates “did not come close to the true costs” incurred by a large training provider. Officials at another maritime academy indicated that implementing the requirements would require “more courses, more assessments, more record keeping, more simulation.” Coast Guard officials told us that they plan to consult with state academies about the perceived impacts related to implementing the requirements. A recently purchased simulator used for STCW training at a maritime academy is displayed in figure 8. In addition to administrative costs, academy officials stated that the extra days of sea time required under the revised STCW requirements cost an additional $7,000 a week to operate and staff the ship. Coast Guard stated that it developed its cost estimates for a typical or average entity, and therefore the costs used for estimating national effects did not include costs that a specific entity might incur. When asked for their perspectives on the training providers’ view of the cost of the revised STCW requirements, Coast Guard officials stated that providers had the opportunity to comment on the Coast Guard cost estimates during the supplemental notice period and those comments were adjudicated and applicable text amended before the final rule was issued. In estimating the benefits of implementing the revised STCW requirements, Coast Guard identified nine categories of potential benefits. Across these nine categories, survey respondents were mixed in their expectation of whether there would be either a positive effect (i.e., benefits would be realized) or no effect (i.e., no benefits) from implementing the revised STCW requirements. For example, as shown in figure 9 below, 70 percent of training providers indicated that increased mariner situational awareness was a benefit of the STCW regulatory revisions. Also, between zero and nine providers across categories reported the effects might be negative, rather than provide benefits, with one state maritime academy noting that the documentation required to demonstrate compliance with STCW—much of which has to be completed at sea—is cumbersome. Training providers varied by type of organization in their perspectives of the benefits of implementing the revised STCW requirements. For example, the U.S. Merchant Maritime Academy and most of state maritime academies’ cadet programs (4 of 6) and union training providers (3 of 5) expected that implementing the revised STCW requirements would have no effect on the potential benefit of decreasing the risk of property loss, whereas with other types of providers, such as colleges and universities, most (10 of 15) expected a positive effect from the benefit. We provided a draft of this report to DHS and the Department of Transportation (DOT) for review and comment. DHS provided technical comments, which we incorporated as appropriate. DOT had no comments on the report. We are sending copies of this report to the appropriate congressional committees, the Secretary of Homeland Security, and the Office of the Assistant Secretary for Administration, DOT. 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) 512-7141 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This report focuses on the maritime training providers’ perspectives on the U.S. Coast Guard’s (Coast Guard) guidance available to implement the revised Standards of Training, Certification and Watchkeeping for Seafarers (STCW) requirements, their progress implementing the revised requirements, and any costs and benefits associated with implementing the new requirements. Specifically, we addressed the following questions. 1. To what extent has Coast Guard provided sufficient guidance to training providers about addressing the revised STCW requirements? 2. What progress do training providers report in implementing the revised STCW requirements, and what challenges, if any, have they reported in doing so? 3. To what extent has Coast Guard evaluated the costs and benefits of the revised STCW requirements, and what impact, if any, do training providers report regarding the costs and benefits of implementing the requirements? To address all three objectives, we conducted a web-based survey of the universe of 167 training providers approved by the Coast Guard to teach STCW courses to obtain their perspective on each of our objectives. Coast Guard provided GAO with a list of all training providers approved to teach STCW courses, including contact information. We worked with Coast Guard and independently verified contact information, particularly e-mails (as the survey was web-based) to confirm the universe of 167 STCW training providers. We determined that this information was reliable for our purposes. To develop our survey questions, we reviewed the STCW final rule (including comments and STCW implementation cost estimates), relevant congressional testimony, Coast Guard’s guidance related to STCW implementation, and other STCW-related documents. We also discussed the survey topics with representatives from the Coast Guard, Maritime Administration (MARAD), and a maritime union. We pretested our survey with selected STCW training providers who were purposefully selected to represent a broad range of providers, including the Coast Guard Academy, a state maritime academy, a private training provider, a union training provider, and with Coast Guard officials, and made changes for clarity as needed. The survey was available for completion from March 21, 2016, through June 10, 2016, and we followed up by e-mailing or calling all participants who had not yet responded after 8 days and again every few weeks to encourage participation. Out of the universe of 167 STCW training providers, 136 responded for a response rate of 81 percent. Of those responding, 10 indicated they were not currently teaching STCW courses. As such, we removed these respondents from our sample resulting in a total population of 126 training providers teaching at least one STCW course, and subject to STCW regulatory requirements. Not all respondents answered every question so the response rate varied by question. We analyzed the numeric data with statistical software and the testimonial data with qualitative analysis software. Also, for all three objectives, we interviewed officials from the Coast Guard, selected training providers (including the federal and state maritime academies) and other stakeholders, including MARAD— primarily for their perspectives as we developed our survey. We also conducted interviews with Coast Guard officials responsible for maritime training to obtain their views on each of our objectives. In addition, to supplement training provider information gathered by the survey, we interviewed officials at the federal maritime academy and the state maritime academies to understand their unique perspective on implementing the revised STCW requirements. Four of the six state maritime academies and the federal maritime academy were interviewed by phone, and we conducted site visits at two state academies—Texas A&M at Galveston Maritime Academy and the Great Lakes Maritime Academy. These academies were selected because both academies had been recently audited by the Coast Guard for STCW compliance and could share what was learned from the audits. We also interviewed two private providers that were selected based on geographic proximity to the academy site visits. While our survey represents the perspectives of the of STCW training providers who responded, our interviews with training providers are not generalizable and are used to provide illustrative examples and context about the survey responses. To determine the extent to which Coast Guard provided sufficient guidance to training providers to implement the revised STCW requirements, we analyzed data from our survey and included relevant questions in our interviews with Coast Guard, stakeholders, and selected training providers. We reviewed and analyzed Coast Guard and MARAD documents including applicable Coast Guard training and audit guidance and reports, correspondence with training providers, STCW training workshop materials, the STCW final rule, and prior GAO reports. We reviewed Coast Guard’s updated Navigation and Vessel Inspection Circulars (NVIC), which Coast Guard provided to training providers as guidance to assist with implementing the revised STCW requirements. In our meetings with selected STCW training providers and stakeholders we discussed their experiences implementing the revised STCW requirements and coordinating with Coast Guard and MARAD to do so. With Coast Guard, we confirmed our understanding of their audit recommendations to the respective federal and state maritime academies. To describe the progress of training providers in implementing the revised STCW requirement and any challenges in doing so, we analyzed data from our survey and included relevant questions in our interviews with Coast Guard, stakeholders, and selected training providers. We reviewed the STCW final rule, applicable deadlines, and Coast Guard’s plan for training providers to transition between the existing and revised STCW requirements. For familiarity with the process at state maritime academies, we reviewed the maritime academy handbook. To describe Coast Guard’s assessment of progress made by the providers in implementing STCW revisions, we reviewed Coast Guard’s internal audit guidance, the audit reports conducted to date for the federal and state maritime academies. For our third objective regarding Coast Guard’s assessment of STCW costs and benefits, we analyzed data from our survey and included relevant questions in our interviews with Coast Guard and selected training providers. We reviewed congressional testimony, comments submitted for the Supplemental Notice of Proposed Rulemaking, and the STCW final rule to identify cost and benefit issues. We reviewed the STCW final rule and Final Rule Regulatory Analysis and Final Regulatory Flexibility Analysis prepared by the Coast Guard to document the agency’s estimated costs and benefits of revising STCW regulations. We compared the STCW final rule to Office of Management and Budget (OMB) criteria identifying key elements for effective rulemaking, and prior GAO work. We reviewed OMB regulatory requirements, including Circulars A-4 and A-94, and prior GAO work to identify key elements in conducting a regulatory cost-benefit analysis. We conducted this performance audit from September 2015 to January 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. The U.S. Coast Guard (Coast Guard) issues guidance for complying with its regulations, including STCW requirements, through the publication of Navigation and Vessel Inspection Circulars (NVIC). In 2014, Coast Guard reported plans to issue 26 NVICs pertaining to the revised STCW requirements. As of March 2016, Coast Guard had published 24 NVICs and reported plans to publish the additional NVICs pertaining to the revised STCW requirements. According to Coast Guard officials, the decision to publish a NVIC is based on a need to clarify a regulation and provide implementation guidance. Table 1 provides details regarding the survey respondents’ perspectives on the sufficiency of Coast Guard’s guidance (24 NVICs), as of June 2016 to implement the STCW requirements. The Coast Guard issues guidance for complying with its regulations, including STCW requirements, through the publication of Navigation and Vessel Inspection Circulars (NVIC). In 2014, Coast Guard reported plans to issue 26 NVICs pertaining to the revised STCW requirements. As of March 2016, Coast Guard had published 24 NVICs and reported plans to publish the additional NVICs pertaining to the revised STCW requirements. According to Coast Guard officials, the decision to publish a NVIC is based on a need to clarify a regulation and provide implementation guidance. Table 2 provides details regarding the survey respondents’ perspectives on Coast Guard’s timeliness in issuing guidance (24 NVICs), as of June 2016 to implement the STCW requirements. Based on GAO’s interviews with officials from Coast Guard, Maritime Administration, and other selected maritime training providers and stakeholders (including unions and associations), we identified the 14 most frequently cited possible challenges that providers may face when implementing the revised STCW requirements. Table 3 presents a summary of the extent to which GAO’s survey respondents reported experiencing challenges in implementing the revised STCW requirements in each of the 14 challenge categories. In addition to the contact above, Ellen Wolfe (Assistant Director); Frederick Lyles, Jr. (Analyst-in-Charge); David Bieler; Chuck Bausell; Eric Hauswirth; Susan Hsu; Monica Kelly; Tracey King; Dainia Lawes; Carl Ramirez; Cynthia Saunders; and Christine San all made key contributions to this report. | Merchant mariners operate U.S. commercial ships and support national defense in emergency and war. Coast Guard issues regulations and policies to ensure merchant mariners are credentialed and meet minimum international standards. To incorporate changes made to the international STCW Convention in 2010, Coast Guard issued regulations in December 2013 that training providers must implement by January 1, 2017, to ensure mariners meet the revised requirements. These changes are intended to help reduce the risk of accidents in U.S. and international waters. GAO was asked to review Coast Guard and training providers' implementation of the revised STCW requirements. This report addresses (1) the extent to which Coast Guard provided sufficient guidance to training providers about the revised STCW requirements; (2) the progress training providers report in implementing the revised STCW requirements; and challenges reported in doing so; and, (3) the extent to which Coast Guard evaluated costs and benefits of the revised STCW requirements, and impacts training providers report about the costs and benefits of implementing the revised requirements. GAO conducted a web-based survey from March 2016 to June 2016 of all 167 Coast Guard-approved STCW training providers. Eighty-one percent responded, although response rates varied for individual questions. GAO also reviewed Coast Guard's guidance and reports and interviewed officials. GAO is not making recommendations. Most training providers (80 percent) who responded to GAO's survey reported that they were satisfied with guidance the U.S. Coast Guard (Coast Guard) provided to assist them in implementing the revised International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW) requirements. However, 58 percent of respondents, including state maritime academies, private for-profit colleges, and others, reported that the lack of timely Coast Guard guidance for developing a quality assurance process—Quality Standards System (QSS)—affected their ability to implement the revised STCW requirements. A QSS is intended to ensure that training providers have a documented quality system in place to monitor training activities. Coast Guard officials said the agency plans to meet with industry stakeholders in March 2017 to discuss whether additional QSS guidance is necessary. Most of the training providers (81 percent) who responded to GAO's survey reported that they plan to meet the January 1, 2017, deadline to implement the revised STCW requirements, but also reported some challenges in doing so. For example, over half of the respondents (54 percent) reported that interpreting the revised STCW requirements was a challenge. To address this issue, Coast Guard has ongoing outreach efforts to obtain feedback from training providers, help them interpret Coast Guard's regulations, and determine what additional guidance is needed. Almost half of the respondents (46 percent) reported that recruiting qualified course instructors was a challenge. However, Coast Guard stated that the revised requirements related to instructor's qualifications have not changed substantially; therefore, the challenge experienced with recruiting instructors may be related to specific training providers, rather than to the revised STCW requirements. Training providers not expecting to meet the deadline for implementing the revised STCW requirements (19 percent) provided various reasons, such as a lack of funding to address the requirements, needing additional Coast Guard guidance, or lacking the time to complete the required documentation. Coast Guard evaluated the costs and benefits of the revised STCW requirements, and training providers who responded to GAO's survey reported related impacts of implementing the revised requirements. For example, Coast Guard evaluated the average costs to training providers for developing a QSS and the costs for conducting STCW audits. About half of the surveyed training providers expected their costs would be similar to Coast Guard's estimates. About one third anticipated incurring costs higher than the Coast Guard's average estimate due to needing more time for administrative tasks than Coast Guard allowed or purchasing additional training equipment. Coast Guard officials said they estimated average costs, and therefore did not consider specific items that particular training providers may need. Over half of training providers agreed with Coast Guard's assessment of potential benefits from the revised STCW requirements, such as increased vessel safety, with most of the remaining providers expecting no effect from the STCW changes. |
Fire is a natural process that plays an important role in maintaining the health of many forest and grassland ecosystems, but wildland fire can also endanger the homes and lives of people living in or near wildlands. Areas where structures and other human development meet or intermingle with undeveloped wildland are commonly referred to as the wildland-urban interface. Forest Service and university researchers estimate that more than 42 million homes in the lower 48 states are located in such areas, though the risk from wildland fire in these areas varies widely. When wildland fires threaten homes, personnel and equipment from federal, state, local, or tribal firefighting organizations, as well as contractors or the military, may be mobilized for fire suppression. Effective communication among firefighters and other public safety personnel, primarily using handheld portable radios and mobile radios in vehicles, is needed to ensure safe and successful firefighting efforts. Although people choosing to live near wildlands may enjoy many benefits from their location, they also run the risk that their homes may be damaged or destroyed by a wildland fire. Wildland fires have destroyed an average of 850 homes per year since 1984, according to a National Fire Protection Association official. However, losses since 2000 have risen to an average of 1,100 homes annually. These losses occurred in many states throughout the nation, including Arizona, California, Florida, and New Mexico, although California has suffered the highest losses overall. Losing homes to wildland fires has long been a problem. Severe fires across the northern United States in 1910 resulted in the destruction of entire towns and, in California, homes have been destroyed in nearly every decade since 1930. The problem is not limited to the United States; wildland fires have damaged or destroyed homes in other countries as well, including Australia, Canada, and France. Most remote wildland fires are ignited by lightning; and humans, intentionally or unintentionally, start the rest. Fire requires three elements—oxygen, heat, and fuel—to ignite and continue burning. Once a fire has begun, a number of factors—such as terrain, weather, and the type of nearby vegetation or other fuels, including structures—influence how fast and how intensely the fire spreads. For example, fire can burn very rapidly up a steep slope. Adverse weather conditions—especially hot, dry weather with high winds—together with adequate fuels can turn a low-intensity fire into a high-intensity fire that firefighters may be unable to control until the weather changes. Any combustible object in a fire’s path, including homes and other structures, can fuel a wildland fire and sustain it. If any one of these three elements is removed, however—such as when firefighters remove vegetation or other fuels from a strip of land near a wildland fire, called a fire break—a fire will normally become less intense and eventually die out. Wildland fires can threaten homes or other structures in several ways: Surface fires burn vegetation or other fuels near the surface of the ground, such as shrubs, fallen leaves, small branches, and roots (see fig. 3). These fires can ignite a home by burning nearby vegetation and eventually igniting flammable portions of it, including exterior walls or siding; attached structures, such as a fence or deck; or other flammable materials, such as firewood or patio furniture. (In the electronic version of this report, a video clip illustrating surface fire is available at http://www.gao.gov/media/video/d05380v1.mpg.) Crown fires burn the tops, or crowns, of trees. Crown fires normally begin as surface fires and move up the trees by burning “ladder fuel,” such as nearby shrubs or low tree branches. Crown fires place homes at risk because they create intense heat, which can ignite portions of structures, if flames are within approximately 100 feet of the structure, even without direct contact. Figure 4 shows a crown fire burning in trees. (In the electronic version of this report, a video clip illustrating crown fire created in an experiment in the Northwest Territories of Canada is available at http://www.gao.gov/media/video/d05380v2.mpg.) Spot fires are started by embers, or firebrands, that can be carried a mile or more away from the main fire, depending on wind conditions. Firebrands can ignite a structure by landing on the roof or by entering a vent or other opening. Firebrands can ignite many homes and surrounding vegetation simultaneously, increasing the complexity of firefighting efforts. (In the electronic version of this report, a video clip illustrating a cloud of firebrands is available at http://www.gao.gov/media/video/d05380v3.mpg.) Homes can be more flammable than the trees, shrubs, or other vegetation surrounding them (see fig. 5). Wildland fires can cause extensive and costly damage, but when compared with losses from other natural disasters or even other residential fires, losses from wildland fires are relatively low. From 1983 through 2002, costs and damage from wildland fires in the United States exceeded $1 billion in 2 years and $2 billion in 3 years. During this same 20-year period, however, wildland fires accounted for only about 2 percent of total insured losses from all natural disasters. In contrast, tornadoes accounted for 32 percent of total insured losses and hurricanes for 28 percent. In 2003, severe fires in Southern California destroyed more than 3,600 homes, with total damages estimated at more than $2 billion but, in comparison, hurricanes in the Southeast in 2004 damaged an estimated one in five homes in Florida, with estimated total damages of $42 billion. Further, houses damaged or destroyed by wildland fires accounted for less than 1 percent of the estimated 400,000 residential fires that occurred annually from 1994 through 1998. Losses from wildland fire could increase in the future, as more people move to wildland-urban interface areas. Census Bureau data for 2000 through 2004 indicate that those states with the largest percentage increases in population growth are in the West and South, including Arizona, California, and Florida, where many wildland fires occur. Officials from California, Florida, and New Mexico told us that the wildland-urban interface areas in their states have grown significantly in recent years, and the growth is expected to continue. In California, an estimated 4.9 million of the state’s 12 million housing units are located in this area, and 3.2 million of these are at significant risk from wildland fire. Addressing threats from wildland fires is a shared responsibility. However, homeowners and state and local governments have the primary responsibility for ensuring that preventive steps are taken to help protect homes from wildland fires. While the federal government does not have a primary responsibility, it has played a role through its efforts to educate and assist communities in taking preventive steps. Because the vast majority of structures damaged or destroyed by wildland fires are located on private property, much of the responsibility for taking adequate steps to minimize or prevent damage from wildland fire rests with property owners. State and local governments, as well as the federal government and nongovernmental groups, help to educate homeowners and others about wildland fire and ways to minimize or prevent property damage. State and local officials also can establish and enforce land-use restrictions and laws that require defensible space and fire-resistant building materials. Finally, homebuilders choose the building materials and construction methods used, in accordance with local building codes, when building a home, and insurance companies reimburse their clients for losses, including those from wildland fires. Once a wildland fire starts, many different agencies assist in the efforts to manage or suppress it. To fight fires, the United States uses an interagency system whereby needed personnel, equipment, aircraft, and supplies are ordered through a three-tiered—local, regional, and national—dispatching system. Federal, state, local, and tribal government agencies; private contractors; and, in some cases, the military, supply firefighting personnel and equipment, which is coordinated through various dispatch centers. The National Interagency Coordination Center (NICC) in Boise, Idaho, is the primary center for coordinating and mobilizing wildland firefighting resources nationwide. NICC is also responsible for coordinating with the Department of Defense (DOD) if military assets are needed. When requests exceed available resources, fires are prioritized, with those threatening lives and property receiving higher priority for resources. Although this interagency response system is an effective way to leverage limited firefighting resources, communications challenges may arise because the various agencies responding to a fire may communicate over different radio frequency bands or with incompatible communications equipment. Problems with communications interoperability occur primarily during the early efforts to suppress the fire, called the initial and extended attack phases, before national and state caches of interoperable radios can be deployed to the incident. Land mobile radio systems are the primary means of communication among public safety personnel operating in a single area. These systems consist of a regularly interacting set of components including a base station, which controls the transmission and reception of audio signals among radios; mobile radios in vehicles and handheld portable radios carried by emergency personnel; and stations, known as repeaters, which relay radio signals (see fig. 6). Radio signals travel through space in the form of waves. These waves vary in length, and each wavelength is associated with a particular radio frequency. Radio frequencies are grouped into bands. Of the more than 450 frequency bands in the radio spectrum, 10, scattered across the spectrum, are allocated to public safety agencies (see fig. 7). The radio spectrum is finite, however, and additional frequencies cannot be added or created. As a result, efforts are increasing to make more efficient use of existing spectrum, including moving toward narrowband radios, which use channels 12.5 kHz wide, in contrast to the channels 25 kHz wide used by wideband radios. A firefighting or public safety agency typically uses a radio frequency band appropriate for its locale, either rural or urban. Bands at the lower end of the radio spectrum, such as VHF (very high frequency), work well in rural areas where radio signals can travel long distances without obstruction from buildings or other structures. Federal firefighting agencies, such as the Forest Service, and many state firefighting agencies operate radios in the VHF band. In urban areas, firefighting and other public safety agencies may operate radios on higher frequencies, such as those in the UHF (ultrahigh frequency) or 800 MHz bands, because these frequencies can penetrate buildings and provide better communications capabilities for an urban setting. As we previously reported, when federal, state, and local emergency response agencies work together, for example to fight a fire in the wildland-urban interface, they may not be able to communicate with one another because they operate in different bands along the radio frequency spectrum. In addition to operating on different frequency bands, some agencies use incompatible communications systems that are not interoperable. Various reports have identified problems with agencies using aging or incompatible communications systems as a factor hampering communications between public safety agencies. Incompatible communications systems exist, in part, because some manufacturers make radio equipment based on their own proprietary standards that are not always compatible with those of other manufacturers. While there has been progress in developing national standards to help ensure interoperability, lack of funding can affect an agency’s ability to upgrade to newer communications systems based on these standards. The lack of communications interoperability among firefighting and other first-responder agencies can impair their ability to respond to emergencies quickly and safely, and cost lives among responders and those they are trying to assist. Our review addressed the following objectives: (1) measures that can help protect structures from wildland fires, (2) factors that affect the use of these protective measures, and (3) the role that technology plays in improving firefighting agencies’ ability to communicate during wildland fires. In addition, we were asked to describe the process for using military resources in responding to wildland fires. To address the first three of these objectives, as detailed below, we contracted with the National Academy of Sciences (NAS) to convene a symposium of experts and we visited six states. In addition, we reviewed studies and other pertinent documents and conducted interviews with a broad range of individuals and organizations to obtain information to address individual objectives. We conducted our review in accordance with generally accepted government auditing standards from May 2004 to April 2005. We worked with NAS to convene a panel of experts for a 2-day symposium in August 2004. This symposium addressed the role of technology and other measures to help protect structures from wildland fires and the factors affecting their use. It also addressed technologies for improving communications among agencies fighting wildland fires. Twenty-five experts participated in the symposium. (See app. II for a list of participants.) Federal experts included scientists or specialists in fire behavior, building and materials technologies, and communications technologies. Other experts included county and city firefighting officials, university researchers specializing in behavioral sciences or risk management, and specialists on building codes and other fire protection measures. To obtain additional information on our objectives and to identify different approaches that regions, states, or communities are taking to address the risk to structures from wildland fire, interoperability of communications, or use of military resources, we conducted site visits to six states: California, Florida, Idaho, Montana, New Mexico, and Washington. We selected these states to evaluate a variety of approaches used in different regions of the country with disparate population densities and varied terrain and vegetation, which can affect the severity of wildland fires. At each location, we reviewed documents and interviewed officials to discuss: (1) the steps that can be taken to protect structures from wildland fires, including efforts that encourage the voluntary use of these steps and those requiring their use; (2) the factors affecting the use of these steps; and (3) the status of communications interoperability and efforts being made to address communications difficulties. At each location, we also interviewed state and local officials, including fire managers or firefighters, fire marshals, emergency management personnel, elected officials, and other government officials such as land-use planners. In addition, we interviewed homeowners in several of the visited states to obtain their perspective on the effectiveness of measures to protect structures from wildland fires and the efforts to increase use of such measures. To gather information on the measures that can help protect structures from wildland fires, we reviewed studies and pertinent documents and interviewed officials with federal agencies involved in fire research, building construction and materials design and research, fire prevention efforts, and fire suppression. Our sources included the Forest Service within the Department of Agriculture and several of its research stations, including the Fire Science Laboratory, the Missoula Technology and Development Center, and the Forest Products Laboratory; the Department of the Interior, including the Bureau of Land Management; the National Institute of Standards and Technology within the Department of Commerce; and the National Interagency Fire Center in Boise, Idaho. We also interviewed representatives from other organizations including the Institute for Business and Home Safety, the National Fire Protection Association, and the National Association of Homebuilders. The scope of our study included technologies that could be incorporated into structures or into communities to help them better withstand wildland fires, but it did not include technologies for the suppression of wildland fires. To identify factors affecting the use of protective measures and the steps being taken to increase their use, we carried out a number of activities. First, because the primary national effort to reduce fire risk to structures is the Firewise Communities program, we reviewed Firewise Communities program documents and interviewed program officials and a range of program participants. We also attended a 2004 national Firewise Communities conference in Denver, Colorado, which addressed current efforts and remaining challenges, and a 2004 Forest Service conference in Boise, Idaho, which addressed wildland fire issues. Second, we reviewed government and other research studies examining the use of protective measures and the effectiveness of programs designed to increase their use. Third, to expand the geographic coverage of our study and to identify broader concerns, we reviewed documents or interviewed officials from federal firefighting agencies, the Federal Emergency Management Agency within the Department of Homeland Security, the National Association of Counties, and the Western Governors’ Association. Finally, to obtain information on the role of the insurance industry in protecting structures from wildland fires, we interviewed officials from the Insurances Services Office, the California FAIR plan program, the Personal Insurance Federation of California, state insurance agencies from several states, and from two insurance companies. To gather information on the role that technology plays in improving firefighting agencies’ ability to communicate during wildland fires, we reviewed reports including previous GAO reports on interoperability and radio spectrum management, National Task Force on Interoperability reports, and Wireless Public Safety Interoperable Communications Program (SAFECOM) reports. We also interviewed officials from federal agencies involved in firefighting, including the Forest Service, the Bureau of Land Management, and the National Interagency Communications Center at the National Interagency Fire Center in Boise, Idaho, and federal agencies involved in communications technologies and related issues, including the Office of the Assistant Secretary of Defense for Homeland Defense and the Naval Research Laboratory, both within the Department of Defense, and the Federal Emergency Management Agency and the Office of Interoperability and Compatibility, both within the Department of Homeland Security. We obtained information on available communications technologies from several manufacturers. To obtain information on the use of military resources, we reviewed relevant legislation, agreements between DOD and federal or state firefighting agencies, policies, and procedures governing the use of military resources to fight wildland fires. We also reviewed reports evaluating the use of military resources including a 2004 Office of Management and Budget report and reports on the Southern California fires of 2003. We spoke with officials from the Office of the Assistant Secretary of Defense for Homeland Defense and fire or military officials in California, Florida, Idaho, New Mexico, and Washington to obtain their perspectives on the use of military resources to assist wildland fire suppression efforts in those states. Creating and maintaining defensible space and using fire-resistant roofs and vents are critical to protecting structures from wildland fires. Analysis of past fires and research experiments have shown that reducing vegetation and other flammable materials within a radius of 30 to 100 feet around a structure removes fuels that could bring a surface fire in contact with the structure’s walls and can reduce heat generated by a crown fire that could otherwise damage the structure. Although defensible space can reduce the risk from surface and crown fires, it cannot prevent firebrands from igniting the roof or entering an opening and igniting a structure. Using fire-resistant roof-covering materials, which inhibit ignition, and screening exterior vents and other openings can help protect against firebrands and provide another important level of protection. Several other technologies can supplement defensible space and fire-resistant roofs and vents. Some of these technologies, like chemical agents, help protect individual structures, while others, like geographic information systems, help protect communities. Managing vegetation and reducing or eliminating flammable materials within 30 to 100 feet of a structure creates a defensible space that substantially reduces the likelihood that a wildland fire will damage or destroy the structure. Because wildland-urban interface fires may threaten hundreds of homes simultaneously and overwhelm the firefighting resources available to protect them, the goal of defensible space is to protect a structure from wildland fire without requiring fire suppression. Defensible space offers protection by breaking up continuous fuels (including plants, leaves, needles, or debris) that could otherwise allow a surface fire to contact the structure and ignite it. Defensible space also helps protect against crown fires. Reducing the density of large trees around a structure decreases the heat intensity of any nearby fire, thus helping to prevent structures from igniting. Defensible space begins at the outer limit of any exterior component of a structure and does not require that all trees and plants be eliminated (see fig. 8). The 30 to 100 feet of defensible space extends beyond exterior components such as decks, fences, or porches and, under certain conditions, homeowners may keep some plants or trees adjacent to their homes. Plants within the 30-to-100-foot radius should be carefully spaced and not highly flammable. Trees should have their lower branches removed, with no branches hanging over the roof. In addition, moving other flammable materials, such as firewood piles and flammable outdoor furniture, away from the structure also contributes to defensible space. When individual homeowners do not own 30 to 100 feet of property around their homes, as is the case in many subdivisions, homeowners may need to cooperate with neighbors or adjacent property owners to ensure that adequate defensible space is created and maintained across multiple properties. Figure 9 shows a subdivision in California that managed vegetation between homes and around the community and survived a wildland fire in 2004. In addition to creating and maintaining defensible space, effective wildland fire protection calls for both roofing with fire-resistant materials and screening exterior vents or openings to keep out firebrands, which can travel a mile or more through the air. Although defensible space can reduce the risk from crown and surface fires, it cannot prevent firebrands from entering and igniting a structure’s highly flammable interior. Roofs can be made fire-resistant by using appropriate protective covering materials, either when building new homes or retrofitting or remodeling existing homes. Materials such as asphalt composition, clay, concrete, metal, slate, treated wood products, and even synthetics, such as rubber, can all be used to achieve a “class A” roof. Some of these protective covering materials will not ignite even on direct contact with fire. These fire-resistant covering materials are available at costs similar to more flammable materials, such as cedar shakes. In addition to covering material, a roof’s design, construction quality, and condition also influence its susceptibility to ignition. For example, certain complex roof patterns have valleys and crevices that can trap leaves, needles, and other flammable debris, increasing the likelihood of ignition. Even when defensible space and fire-resistant roofing protect a structure from the outside, it can still ignite from within if firebrands enter through vents or other openings. Most structures have some ventilation in crawl spaces or attics for moisture control (see fig. 10). Often located at the gable ends of the roof or under the eaves, such vents allow air to flow into and through the attic. Other openings may also be left by poor construction, deterioration, or ill-fitting joints between walls and roof. Covering vents and other openings with screens that will not burn or melt, substantially reduces the risk of entry and ignition by firebrands. The Firewise Communities program, a national program which educates homeowners about wildland fire and steps to protect homes against them, recommends screen openings be one-eighth inch or less. Analysis of fires over the last half century has demonstrated the importance of defensible space and fire-resistant roofs and vents as protective measures for structures. In the 1961 Belair-Brentwood Fire and the 1990 Painted Cave Fire, both in California, 85 to 95 percent of homes with a nonflammable roof, and at least 30 feet of defensible space, survived without fire department intervention. In the 1981 Atlas Peak Fire in California, out of the 323 structures threatened, only 5 of the 111 structures with defensible space were damaged or destroyed. In contrast, 91 of the 111 structures without defensible space were either damaged or destroyed. In the 1985 Palm Coast Fire in Florida, 130 homes were damaged or destroyed. Two of the most predictive factors for whether homes in this fire burned or survived were fire-resistant vents and defensible space. Those homes with flammable, unprotected vents were identified as particularly vulnerable. In 2003, the Simi Fire in Ventura County, California, threatened thousands of structures. According to the Ventura County fire marshal, of the few structures actually destroyed during these fires, most did not observe the county’s ordinance requiring 100 feet of defensible space between the structure and flammable vegetation, or they lacked county- recommended fire-resistant roofs and properly screened vents. Experimental research on wildland fire has corroborated the effectiveness of defensible space and fire-resistant roofs. A researcher at the Forest Service’s Fire Science Laboratory in Missoula, Montana, predicted that a crown fire would have to come within 100 feet of a structure for it to ignite; he based this prediction on a theoretical model incorporating conservative estimates of the heat an intense crown fire would produce and the ignitability of wood. The researcher tested the model’s results in a series of experiments while working with a group of international fire researchers in Canada’s Northwest Territories (see fig. 11). During these experiments, five-and-a-half acre plots of trees were ignited under conditions that produced a crown fire. Wood walls were exposed at varying distances to the fire’s heat. Walls located 33 feet from the crown fire ignited during three of seven experimental fires and significantly scorched in the other four fires. Walls located 66 feet from the crown fire did not ignite or sustain visible damage. These experiments also demonstrated that fire-resistant roofs can effectively protect structures’ highly flammable interiors from igniting. Using a model structure with a roof covering made from composition shingles, fire researchers also set fire to the pine needles completely covering the roof. The composition roof did not ignite, and the structure remained undamaged. (In the electronic version of this report, a video clip illustrating this experiment is available at http://www.gao.gov/media/video/d05380v4.mpg.) Finally, experts from the symposium convened for us by the National Academy of Sciences (NAS) emphasized that defensible space and fire- resistant roofs and vents are the most critical protective measures. Symposium experts stated that defensible space is critical for protecting structures from wildland fire. These experts told us that if defensible space and fire-resistant roofs and vents were correctly and consistently used by homeowners, the risk posed by wildland fire would be significantly reduced. Moreover, in visits to California, Florida, Idaho, Montana, New Mexico, and Washington, we met with fire officials who confirmed the symposium experts’ view—that 30 to 100 feet of defensible space and fire- resistant roofs and vents are vital to protecting structures from wildland fires. Symposium experts and fire officials we spoke with identified other technologies that can help protect individual structures from wildland fires. A few of these technologies, like fire-resistant building materials (other than roofing), are permanent, requiring little intervention by homeowners or firefighters, while other technologies, like chemical agents, are temporary and require active human intervention. Still other technologies, like geographic information systems (GIS) mapping, can be used to help protect entire communities. See appendix III for more information on these technologies. Fire-resistant windows. Fire-resistant windows help protect a structure from wildland fire by reducing the risk a window will break and allow fire to enter a structure. Windows constructed of double- paned glass, glass block, or tempered glass can help resist breakage. Fire-resistant building materials. Fire-resistant building materials for walls, siding, decks, and doors play an important role in protecting structures by helping to prevent ignition. During a wildland fire, flames or firebrands may come in contact with a structure or intense heat may either ignite the exterior of a structure or melt it, thus exposing the structure’s interior to the fire. Exterior walls, siding, decks, and doors made of fire-resistant building materials, such as fiber-cement, brick, stone, metal, and stucco, help structures resist such damage and destruction. Chemical agents. Firefighting chemical agents, such as foams and gels, are temporary protective measures that can be applied as an exterior coating shortly before a wildland fire reaches a structure. Foams, typically detergent based, are combined with water or forced air. Gels are polymers (plastics) that can hold many times their weight in water. Both are designed to be sprayed onto a structure, coating it with a protective outer shield against ignition (see fig. 12). For example, California Division of Forestry and Fire Protection officials estimated that in 2003, using gels helped save between 75 and 100 homes from the Paradise Fire and more than 300 homes from the Cedar Fire in San Diego County. The disadvantages of using foams and gels are that they often need to be applied to a structure by a homeowner or firefighter. Chemical agents may also need to be periodically reapplied or sprayed with water to remain effective, and they can be difficult to clean up. Sprinkler systems. Sprinkler systems, which can be installed inside or outside a structure, lower the risk of ignition or damage. For example, the California Governor’s Blue Ribbon Commission recommended adding internal attic sprinklers to revised building codes as a response to lessons learned from the 2003 wildland fires. Sprinklers, however, require reliable sources of water and, in some cases, electricity to be effective. Several firefighting officials told us that during wildland fires, power and water services may not be adequate for sprinklers to function properly. For example, an investigation after California’s 1991 Oakland Hills Fire noted that external sprinkler systems might have saved some homes if water flow and pressure had been adequate. In addition to technologies aimed at protecting individual structures, symposium experts and fire officials we met with told us that one important technology exists, geographic information systems (GIS) mapping, that can reduce the risk of wildland fire damage to an entire community. GIS is a computer-based information system that can be used to efficiently store, analyze, and display multiple forms of information on a single map. GIS technologies allow fire officials and local and regional land managers to combine vegetation, fuel, and topography data into separate layers of a single GIS map to identify areas in need of vegetation management or to set priorities for fuel breaks. State and county officials we met with emphasized the value of GIS in community education and community-planning efforts to protect structures and communities from wildland fire damage within their jurisdictions. For example, the state of Florida has developed the Florida Risk Assessment System. This interactive GIS provides Florida Division of Forestry officials a detailed visual representation of data on fuels, topography, and weather. Displaying these data on one map helps officials determine which communities are at high risk and identify which areas near these communities need treatments to reduce fuels (see fig. 13). Some emerging technologies could assist in protecting communities, although they need more research, testing, and time to fully develop. Emerging technologies are as follows: Fire behavior modeling. Forest Service and other researchers have developed computer models to predict wildland fire behavior, but these models do not accurately predict fire behavior in the wildland-urban interface. Existing models have helped officials identify areas likely to experience intense wildland fires, identify suitable locations for fuel breaks, predict the effect of a fuel break on fire behavior, and aid suppression by predicting overall behavior of a given fire. These models do not, however, consider the effect that structures and landscaping have on wildland fire behavior. Some researchers told us that developing models that consider how fire spreads from house to house might help improve the design of communities in the wildland-urban interface. Such models might also help homeowners compare how different landscaping options could alter fire behavior. The Forest Service, National Institute of Standards and Technology, and Los Alamos National Laboratory have proposed a 5-year, $10 million project to develop such models. Automated detection systems. Sensors using infrared, ultraviolet, or temperature-sensitive devices can be placed around a community to detect the presence of wildland fire. On detecting a fire, a sensor could set off an audible alarm or could be connected via radio or satellite to a device that would notify homeowners or emergency personnel. Several such sensors could be networked together to provide broad coverage of the area surrounding a community. According to fire officials, sensor systems may prove particularly helpful in protecting communities in areas of rugged terrain or poor access where wildland fire might be difficult to locate. Many of these systems are still in development, however, and false alarms are a concern. Homeowners may not take steps to protect their homes from wildland fires because of the time or expense involved, competing concerns such as aesthetics or privacy, lack of understanding of the nature of wildland fire risks, and failure to recognize that they share responsibility for protecting their homes. Government agencies and other organizations are engaged in a variety of efforts to increase the use of protective measures, such as defensible space and fire-resistant building materials and design. These efforts include education to increase awareness by homeowners and others about steps they can take to reduce risks from wildland fire, monetary assistance to create defensible space, and laws requiring the use of protective measures. In addition, some insurance companies direct homeowners in high-risk areas to create defensible space. Fire officials told us that each of these approaches provided benefits but also posed challenges. Time or the expense involved is one of the primary reasons behind homeowners’ resistance to creating defensible space or installing fire- resistant roofs, fire officials told us. Homeowners surveyed in three communities recently threatened by wildland fires in Colorado and Oregon also most frequently cited expense and time as impediments to creating defensible space. Creating and maintaining defensible space involves trade-offs between money and time. Out-of-pocket expenses may be negligible when homeowners create defensible space themselves but completing the work can require substantial time and effort. Homeowners may also find it difficult to clear and transport any vegetation to appropriate disposal sites. Alternatively, homeowners can pay someone to create defensible space on their property. Fire officials estimate that the price of this work—including thinning trees and some replanting but not major landscaping—can be several thousand dollars or more depending on vegetation type and the topography of, and access to, a particular property. The New Mexico Forestry Division, for example, has estimated the price of creating 1 acre of defensible space around a structure in heavily forested areas in that state at about $1,700 to $2,400, although this estimate excludes the expense of removing large trees that are close to structures. A state forestry official estimated that removing such trees could cost $800 to $2,000 each. Second, regarding fire-resistant roofs, if homeowners wait until their existing roofs need replacement, cost does not have to be a major factor because fire-resistant roof-covering materials are available at similar cost to more flammable ones. Homeowners may also be reluctant to create defensible space because of the importance they place on other considerations, such as the role of vegetation in their property’s appearance, privacy, and wildlife habitat. Homeowners’ concerns about the effect of defensible space on these features can be critical since such features influence homeowners’ decisions to move nearer to wildlands in the first place. The design of defensible space is flexible, however, and can be done in ways that minimize the impact on appearance or wildlife habitat or even enhance them. When deciding whether to create defensible space, homeowners may also weigh the effects of landscaping on shade, energy efficiency, and water use, and they may sometimes receive contradictory advice from different government agencies about landscaping choices. For instance, water management districts in Florida promote landscaping choices that conserve water, but some of these choices may increase risk from wildland fire. Another reason homeowners may not take protective measures is that they may not understand how wildland fires damage or destroy homes or how effective protective measures can be. An expert at the symposium convened for us by the National Academy of Sciences (NAS) said that because many homeowners think of wildland fires as intense crown fires, they do not believe that relatively simple steps like creating defensible space can be effective and, therefore, do not take such steps. On the contrary, however, defensible space can lessen the intensity of crown fires and, together with fire-resistant roofs and vents, can effectively protect against firebrands or low-intensity surface fires, which often damage structures. Forest Service researchers have reported that some homeowners do not think it worthwhile to create defensible space because they have seen a fire jump a six-lane highway. Fire officials said that these homeowners do not understand that defensible space is not intended to stop a fire from spreading but only to prevent it from reaching and igniting structures. In addition, homeowners may not use protective measures because they believe that fire officials are responsible for protecting their homes and do not recognize they share in this responsibility. Fire officials told us that homeowners who have recently moved to the wildland-urban interface may not have experienced a wildland fire and may not realize their homes are at risk and that they should consider protective steps. Fire officials also said such newcomers may expect the same level of service they received in more urban areas and do not understand that rural areas may have fewer available firefighters and longer response times. Also, when a wildland fire burns near communities, so many houses may be threatened simultaneously that firefighters may be unable to protect them all. In such cases, defensible space and fire-resistant building materials greatly reduce a structure’s risk. Educating homeowners about the risks posed by wildland fire and the steps that can be taken to mitigate these risks is a critical step in increasing the use of measures to protect homes from wildland fires. Educating homeowners is effective in part because it can help overcome their reluctance to use protective measures, for instance, by showing them that defensible space can preserve or enhance their property’s appearance and that even large trees can remain close to a structure, as long as defensible space is designed to protect those trees. Education also helps state and local government officials and professionals, such as landscape architects and planners, who influence where and how development occurs. Federal, state, and local government agencies; universities and extension programs; nongovernmental organizations; and industry organizations are all involved in efforts to educate the public about protecting structures from wildland fires. The primary national effort to educate homeowners about protecting structures from wildland fire is the Firewise Communities program, which also promotes steps that state and local officials can take to educate homeowners. (The Firewise Communities Web site address, along with information on related Web sites, is included in app. IV.) Because it seeks to increase voluntary use of protective measures, the Firewise Communities program requires homeowner and community involvement to be successful. To this end, since 1998, the Firewise Communities program has conducted more than 30 workshops, attended by approximately 3,000 people from 44 states, and has supported over 500 local or regional workshops reaching over 15,000 participants. The program has also distributed videos, books, brochures, and other materials that promote Firewise landscaping and construction. Finally, the program has recognized more than 100 communities in 26 states as “Firewise” communities. Homeowners in these communities, along with fire officials, assessed the community’s wildland fire risk, developed a plan to mitigate those risks, and undertook activities to implement the plan. Other education efforts are directed at state and local government officials and professionals, such as landscape architects and planners. For example, the American Planning Association and the National Fire Protection Association reported in February 2005 on approaches to educating planners about the risks wildland fires pose to communities and steps that local governments can take to reduce those risks. The report provides examples of planning approaches that have been adopted and discusses their shortcomings and is expected to be distributed to approximately 1,300 planning agencies nationwide. An American Planning Association official said that, as more development occurs in the wildland-urban interface, local governments must plan development wisely to help reduce the risk from wildland fire. Examples of other education efforts from the states we visited include the following: The Institute of Business and Home Safety; the U.S. Forest Service; Alachua County, Florida; and others sponsored a demonstration project near Gainesville, Florida, that included landscaping a house to create defensible space and replacing the roof and siding with fire-resistant materials (see fig. 14). This project was intended to increase fire awareness among homeowners in the community and to show that creating defensible space could also be attractive and provide other amenities. Information on the project, including many photographs, was included on a Forest Service Web site so that other homeowners could view the project. The Sonoran Institute and the National Association of Counties sponsored a September 2004 workshop attended by county officials from Idaho, Montana, and Wyoming to discuss the role of zoning and other growth management approaches in reducing the wildland fire risk to new development. The workshop discussed the costs associated with new development in the wildland-urban interface, such as increased fire suppression costs, and the importance of land-use planning and other approaches to reduce risks from wildland fires, according to the workshop organizer. In Florida, the Department of Community Affairs and Division of Forestry published a handbook in April 2004 that describes different wildland fire mitigation strategies that communities in Florida have adopted. The handbook contains information directed at homeowners, homebuilders, government officials, and professionals such as planners and landscape architects. The section on landscaping, for instance, provides examples of less flammable plants—such as azaleas, dogwoods, and oaks—appropriate for planting in areas at risk of wildland fire. Federal, state, and local officials we met with said that although education efforts are critical to increasing awareness of the risks of wildland fire and of the steps that can be taken to reduce those risks, they face challenges that will take time to overcome. Because homeowners have concerns other than reducing the risk from wildland fires, providing information on risks and steps to reduce those risks, officials and researchers said, may not result in homeowners taking action. Similarly, providing information to state or local government officials—for instance, about laws or land-use planning strategies to reduce the risks to structures from wildland fire— may not lead those officials to adopt such measures. To increase the likelihood of success, symposium experts and other officials said those conducting education programs should recognize that multiple approaches exist to making a structure more fire-resistant, and educators should assist homeowners to find the approach that best suits their needs. Information describing defensible space, for instance, can show several different ways of making a structure more fire-resistant so that homeowners can see the effect on the appearance of their property. Federal, state, and local agencies are also taking steps to directly assist individual homeowners and communities in creating defensible space and reducing hazardous fuels. This assistance can help homeowners balance the trade-offs between expense and time in creating defensible space. Under the National Fire Plan, federal firefighting agencies provide grants or otherwise assist in reducing fuels on private land. For instance, the Forest Service provided approximately $11.6 million (adjusted for inflation) to the New Mexico Forestry Division from fiscal year 2001 through 2004 that the state could use to assist reduction of fuels on nonfederal land. Grants to reduce fuels on private property typically require the homeowner to pay a portion of project costs. National Fire Plan funds have also been used to create fuel breaks around communities. For example, the Washington Department of Natural Resources received a $340,000 grant that it used to create a fuel break around the town of Roslyn, reducing fuels in an approximately 150-foot-wide buffer zone. Fire officials told us the fuel break by itself would not prevent a wildland fire from entering the community, but that it would assist suppression efforts by reducing fire intensity close to the community. The grant also funded creation of defensible space for an additional 144 homes located outside the fuel break. State and local governments have provided similar assistance. The Florida Division of Forestry, for instance, has used state and federal funds to establish four mitigation teams that reduce fuels on private lands by conducting prescribed burns and mechanically removing vegetation to create fuel breaks around communities at high risk of wildland fires. In other cases, local governments have helped homeowners to chip or remove vegetation produced by the creation of defensible space. Santa Fe County, New Mexico, for instance, bought two grinders in 2003 to chip vegetation and established locations where homeowners from participating communities could bring plant material they removed from their property. The county fire marshal told us that this program had assisted approximately 1,000 residents. Federal, state, and local fire officials and homeowners told us that efforts such as these are helpful but also raise some concerns. First, because vegetation grows back, fuel breaks and defensible space need to be maintained to be effective (see fig. 15). To address this concern, Florida Division of Forestry officials told us that the division requires communities it assists to sign an agreement to maintain the defensible space or fuel breaks. Second, fire officials said it is difficult to identify sources for grants and other assistance. In some of the states we visited, federal and state officials are working to assist homeowners and local officials to identify such sources. Firewise Communities program officials said they have identified assistance available in many states and posted a list on their Web site (see app. IV). Finally, some homeowners raised concerns about grant eligibility requirements. New Mexico, for instance, requires grants or assistance to be distributed to homeowners through another government entity, for example, a city fire department or local governmental district. If a local government is not able to sponsor the grant, residents must incorporate as a not-for-profit organization to be eligible, a process a participating homeowner told us was frustrating and time-consuming. States, counties, and cities can adopt laws designed to reduce the risk to homes from wildland fires by requiring protective measures, such as creation of defensible space or the use of fire-resistant building materials. Local governments can also improve fire safety through land-use planning, by restricting development or requiring additional protective measures in particularly fire-prone areas. Ventura County, California, fire officials attribute the relatively few houses in that county damaged by the 2003 Southern California fires to, in part, the county’s adoption and enforcement of laws requiring 100 feet of defensible space and the use of fire-resistant building materials. Such steps are particularly effective at reducing the risk of wildland fires for new developments because it is cheaper to select building materials and incorporate fire-resistant community design before construction begins. After the 2003 Southern California fires, for instance, San Bernardino County officials reported that communities developed more recently under requirements regarding vegetation and building materials sustained far less damage during those fires than did older communities. Symposium experts told us that as more people move into the wildland-urban interface, the benefits of local governments’ requiring protective measures are likely to increase. States or local governments can adopt or adapt model laws requiring protective measures developed by one of several organizations, including the International Code Council and the National Fire Protection Association, or they can develop their own requirements. Laws adopted by individual jurisdictions vary but can include requirements for the creation of defensible space and use of fire-resistant building materials and design (see table 1). Some jurisdictions have applied land-use planning to restrict development in areas that are at particularly high risk of wildland fire. Alachua County, Florida, for instance, amended its comprehensive plan in 2002 to address wildland fire risks. Under the plan, the county will not approve new developments unless they are designed to provide adequate protection from wildland fire, as determined by the county fire chief. For laws and land-use planning to be an effective tool in reducing damage to structures from wildland fires, individual state and local governments must adopt and enforce them. State and local fire officials told us that although no one has compiled a complete list of governments that have adopted laws designed to reduce the risk to structures from wildland fire, many at-risk jurisdictions have adopted laws, and many others have not. Symposium experts and fire officials said that the primary reason for not adopting laws is community opposition to them. Other officials, homeowners, and a homebuilding industry representative expressed concern that some proposed laws may not offer significant additional protection from wildland fire or may not be cost-effective, considering the low probability that a home would be destroyed. Symposium experts recognized opposition to such laws but stressed the importance of state and local governments’ adoption of them. Moreover, once adopted, laws must be enforced to be effective. Effective enforcement requires confirming that homeowners and others comply with requirements and ensuring that requirements are not weakened by exemptions for individual developments. Ventura County officials told us that active enforcement of their laws was an important factor in the relatively few houses damaged in that county during the 2003 Southern California fires. They also said that compliance increased as homeowners became more familiar with the requirements and the enforcement program. Nevertheless, symposium experts said many fire departments, counties, and cities do not have sufficient resources to effectively enforce laws, or they may be pressured by homeowners or developers not to. In addition, the effectiveness of laws can be undercut by variances exempting individual developments from specific requirements, such as emergency access. In some cases, officials said such variances may be warranted, for instance if the proposed development is not at significant risk, or if additional measures are incorporated to increase protection. In other cases, county or city officials may be pressured to approve a variance even if the development is at risk. Although wildland fire has not resulted in significant losses for the insurance industry in comparison with other disasters, some insurance companies have instituted programs designed to increase policyholders’ use of protective measures in some at-risk areas. Since 1993, for instance, one major company has evaluated high-risk properties in California for defensible space before underwriting new policies. A company official said that 200 to 500 feet of defensible space is often required, depending on factors such as topography, vegetation density, and type of construction. In 2004, the company began expanding this program to other western states. Another major company initiated a pilot program in 2003 in Colorado, Utah, and Wyoming, under which the company inspected properties of policyholders living in certain high-risk areas in those states and notified policyholders of any actions needed to establish defensible space according to the standards required or recommended by their local fire departments. Policyholders would have at least 18 months to perform any work needed to meet those standards, according to the company official in charge of the program and, if the corrective actions were not completed, the company could choose not to renew the policy. The official said that it is too early to evaluate the program’s success but he expects the program to continue and perhaps expand to other regions of the country. Some fire officials have said that the insurance industry should take a larger role in encouraging use of protective measures, such as by offering discounts on premiums to policyholders who have defensible space. Insurance industry officials we spoke with said that the share of premiums associated with wildland fire risk is relatively low and would not provide a meaningful incentive for homeowners. Although industry losses have been low historically, officials from the Insurance Services Office told us that recent trends toward increased fire severity and more people living in at- risk areas mean that future losses may be higher. As we previously mentioned, homeowners and state and local governments have the primary responsibility for taking preventive steps to protect homes from wildland fires. Nevertheless, the federal government currently funds education for homeowners and communities, primarily through the Firewise Communities program, and provides grants to states and communities to use on preventive measures to protect structures, under the National Fire Plan and other sources. Key to choosing the appropriate approach will be determining what the federal role should be in this area, given that the majority of the structures damaged by wildland fires are located on private property, and losses are normally covered by the fire portion of homeowners’ insurance. In addition, although many homes are at risk from wildland fire, only a small fraction of those are actually damaged or destroyed in any given year, and damages and insured losses from wildland fire are significantly less than from either other natural disasters or other types of structure fires. Should the federal government choose to continue or change its role, it can use a variety of policy options to motivate or mandate homeowners to implement measures to protect structures from wildland fires. These options include education partnerships, grants to states and localities to promote the use of protective measures, tax incentives, and building and land use regulations. However, additional information in several areas would be helpful in more clearly defining the problem and determining the appropriate level of federal efforts to address it. Such information includes the scope and scale of the risk to homes from wildland fires, the actual losses incurred from wildland fires, the extent of efforts homeowners are already making to address wildland fire risks, and the extent to which homeowners cannot obtain private insurance. Most of this information, including the scope and scale of the risk, is not readily available or easily quantifiable. There are three main considerations regarding education partnerships and grants to undertake preventive measures. First, because resources are scarce, spending decisions must be based on a careful assessment of whether the benefits to the nation from these efforts to reduce the risk to privately owned structures exceed their costs. Second, it is important to strike a balance between accountability and flexibility. Accountability can be achieved by establishing performance measures and outcome goals and measuring results. Doing so would allow flexibility in how funds are used, while at the same time ensuring national oversight. For example, information measuring the results and the effectiveness of federal grant making under the National Fire Plan would be useful in determining whether continued or additional funding for the program is needed. However, developing the appropriate performance measures is complicated because it is difficult to determine the number of structures that would have been destroyed or damaged if preventive measures had not been taken. The third consideration is targeting the funds to those with the greatest need. To effectively target grants to address the greatest threats to structures from wildland fires requires information on the relative risks from wildland fires faced by different communities. Tax incentives are the result of special exclusions, exemptions, deductions, credits, deferrals, or tax rates in the federal tax laws. Unlike grants, tax incentives do not generally permit the same degree of federal targeting and oversight, and they generally are available to all potential beneficiaries who satisfy congressionally established criteria. In the case of wildland fire, while potentially millions of homes are at risk and might qualify for tax incentives, the number of homes that actually are damaged or destroyed by wildland fires each year is a small fraction of those at risk. To make a reasoned judgment about the effectiveness of this policy option, additional information would be needed on the number of homeowners that could qualify for tax incentives and possible cost and benefits of the incentives. The federal government has little authority over land-use planning or building on private land. The authority to develop, adopt, administer, and enforce building and land-use regulations has traditionally rested with the states, which in turn have delegated some or all of their authority to local governments. In a few instances, such as the Coastal Zone Management Act, the federal government has provided incentives for state and local governments to adopt development plans that meet specific criteria. Congress could provide similar incentives for state and local governments to adopt building and land-use regulations addressing threats to structures from wildland fires. However, state and local officials we spoke with expressed concern about having the federal government take a role in these types of regulations rather than leaving responsibility at the state and local level. While a variety of existing technologies can help link incompatible communications systems and others are being developed to provide enhanced interoperability, effective adoption of any technology requires planning and coordination among federal, state, local, and tribal agencies that work together to respond to emergencies, including wildland fires. Without such planning and coordination, new investments in communications equipment or infrastructure may not improve the effectiveness of communications between agencies. The Department of Homeland Security (DHS) is leading federal efforts to address interoperability problems across all levels of government, but as we previously reported, progress so far has been limited. Some state and local government efforts are also under way to improve communications interoperability. A number of current and emerging technologies can help overcome differences in frequencies or communications equipment and improve communications interoperability among firefighting agencies. These include technologies for short-term solutions—often called patchwork interoperability—to interconnect disparate communications systems and longer-term improvements to communications equipment and infrastructure. Patchwork interoperability uses technology to interconnect two or more disparate radio systems so that voice or data from one system can be made available to all systems. The principal advantage of this solution is that agencies can continue to use existing communications systems, an important consideration when funds to buy new equipment are limited. According to an official from DHS’s Office for Interoperability and Compatibility, a major disadvantage to all patchwork solutions is that they require twice as much spectrum since they have to tie up channels on both connected systems. Three main patchwork technologies are currently available. Appendix V provides more detail about each of these technologies. Audio switches provide interoperability by connecting radio and other communications systems to a device that sends the audio signal from one agency’s radio to all other connected radio systems. Audio switches can interconnect several different radio systems, regardless of the frequency bands or type of equipment used. Crossband repeaters provide interoperability between systems operating on different radio frequency bands by changing frequencies between the two radio systems. Console-to-console patches link the dispatch consoles of two radio systems so that the radios connected to each system can communicate with one another. Dispatch consoles are located at the dispatch center where dispatchers receive incoming radio calls. Audio switches are easily transportable and can be used to create temporary interoperability, which makes them useful for wildland firefighting where multiple agencies temporarily come together to fight the fire. In addition to ease of transport, audio switches are flexible and allow a variety of communications systems, including radio and telephone, to be connected. Public safety agencies in several localities, including Washington, use them. In addition, the National Interagency Incident Communications Division at the National Interagency Fire Center (NIFC) recently purchased two of these devices to use to connect radio systems during major public safety incidents. An audio switch costs about $7,000 without the radio interface modules or cables. Each interface module costs about $1,100, and cables are available for about $140 each. A crossband repeater provides interoperability between systems operating on different radio frequency bands by changing the frequency of the signal received and sending it out on another frequency. For example, a crossband repeater can receive a VHF (very high frequency) signal and retransmit it as a UHF (ultrahigh frequency) signal. Crossband repeaters can connect base stations or mobile radios, whether hand carried or in vehicles. A variety of crossband repeaters are available ranging in price from $4,000 to $33,000 each. Crossband repeaters can cost more than audio switches, which may put them beyond the reach of jurisdictions with limited funding. Still, according to a communications specialist at NIFC, crossband repeaters are an effective interoperability solution often used by federal firefighting agencies. Unlike audio switches or crossband repeaters, a console-to-console patch is not an “on-the-scene” device but instead the connection occurs between consoles located at the dispatch centers where calls for assistance are received. The costs of such a connection vary widely, depending on whether consoles are patched together temporarily over a public telephone line, or permanently over a dedicated leased line or a dedicated microwave or fiber link. The costs for a dedicated leased line would consist primarily of recurring telephone line charges. In contrast, a microwave link connecting two locations about 15 to 25 miles apart could require an initial investment of about $70,000. Other interoperability solutions involve developing and adopting more sophisticated radio systems that follow common standards or can be programmed to work on any frequency and to use any desired modulation type, such as AM or FM. Project 25 radios, software-defined radios, and Voice over Internet Protocol are the primary examples of these improved communications systems. Appendix V provides more detail about each of these technologies. Project 25 radios, which are currently available, must meet a set of standards for digital two-way radio systems that allow for interoperability between all jurisdictions using these systems. Software-defined radios, which are still being developed, are designed to transmit and receive over a wide range of frequencies and use any desired modulations, such as AM or FM. Voice over Internet Protocol treats both voice and data as digital information and enables their movement over any existing Internet Protocol data network. Project 25, also called APCO 25, was established in 1989 to provide detailed standards for digital two-way wireless communications systems so that all purchasers of Project 25-compatible equipment can communicate with each other. They can also communicate with older, analog radios. Project 25 radios, at about $1,700 to $2,500 each, cost more than other available radios that cost around $1,200 each. Federal, state, and local officials we spoke with agreed that, while Project 25 radios could provide interoperability benefits, funding and other limitations will likely result in phased adoption. For example, a federal communications specialist said that the Forest Service will be purchasing Project 25 radios over a 10-year replacement cycle. As of December 2003, the state of Washington had about 400 Project 25-compatible radios, of a total of 8,000 portable radios owned by the state. None of the 400, however, are owned by the agency responsible for wildland firefighting. Software-defined radios and Voice over Internet Protocol appear to hold promise for improving interoperability among firefighting and other public safety agencies. Voice over Internet Protocol offers the flexibility to transmit both voice and data over a data network. This could be useful for firefighting agencies that need weather and other information when making decisions affecting fire suppression efforts. However, no standards exist for radio communications using Voice over Internet Protocol and, as a result, manufacturers have produced proprietary systems that may not be interoperable. Software-defined radios will allow interoperability among agencies using different frequency bands, different operational modes (digital or analog), proprietary systems from different manufacturers, or different modulations (such as AM or FM). However, software-defined radios are still being developed and are not yet available for use by public safety agencies. In the past, public safety agencies have depended on their own stand-alone communications systems, without considering interoperability with other agencies. Yet as firefighting and other public safety agencies increasingly work together to respond to emergencies, including wildland fires, personnel from different agencies need to be able to communicate with one another. Reports by GAO, the National Task Force on Interoperability, and others have identified lack of planning and coordination as key reasons for lack of communications interoperability among responding agencies. According to these reports, federal, state, and local government agencies have not worked together to identify their communications needs and develop a coordinated plan to meet them. Whether the solution is a short-term patchwork approach or a long-term communications upgrade, officials we spoke with explained that planning and coordination among agencies are critical for successfully determining which technology to adopt and for agreeing on funding sources, timing, training, maintenance, and other key operational and management issues. States and local governments play an important role in developing and implementing plans for interoperable communications because they own most of the physical infrastructure for public safety systems, such as radios, base stations, repeaters, and other equipment. In recent years, the federal government has focused increased attention on improving planning and coordination to achieve communications interoperability. The Wireless Public Safety Interoperable Communications Program (SAFECOM) within DHS’s Office of Interoperability and Compatibility is responsible for addressing interoperability and compatibility of emergency responder equipment, including communications. SAFECOM was established to address public safety communications issues within the federal government and to help state, local, and tribal public safety agencies improve their responses through more effective and efficient interoperable wireless communications. We reported, in April 2004, that SAFECOM had made limited progress in addressing its overall program objective of achieving communications interoperability among entities at all levels of government. Further, we reported in July 2004 that the nationwide data needed to compare current communications interoperability conditions and needs, develop plans for improvement, and measure progress over time were not available. In that report, we recommended, among other things, that DHS continue to develop a nationwide database and common terminology for public safety interoperability communications channels and assess interoperability in specific locations against defined requirements. DHS agreed with these recommendations. DHS has been working on a number of initiatives since SAFECOM began. In March 2004, SAFECOM published a Statement of Requirements for Public Safety Wireless Communications and Interoperability to begin identifying the specific communications needs of public safety agencies. The statement of requirements is being updated to further refine the information and is scheduled for release to the public by June 30, 2005. In addition, SAFECOM published the Statewide Communication Interoperability Planning Methodology in November 2004, which was developed in a joint project with the commonwealth of Virginia. The methodology describes a step-by-step process for developing a locally driven statewide strategic plan for enhancing communications interoperability, including key steps and time frames. Finally, in January 2005, SAFECOM awarded a contract to develop and execute a nationwide interoperability baseline study, which SAFECOM officials anticipate will be completed by December 30, 2005. According to officials, this study will provide an understanding of the current state of interoperability nationwide, as well as serving as a tool to measure future improvements made through local, state, and federal public safety communications initiatives. In addition to federal efforts, a variety of steps have been taken by state and local agencies. Several states, including California, Florida, Idaho, Missouri, and Washington, as well as the commonwealth of Virginia have developed statewide groups to address communications interoperability. For example, Washington established the Washington State Interoperability Executive Committee in July 2003. According to a state official, the committee was created to ensure communications interoperability by managing and coordinating the state’s investments in communications systems. The committee’s responsibilities included completing an inventory of state government-operated public safety communications systems, preparing a statewide public safety communications plan, establishing standards for radios, seeking funding for wireless communications, and fostering cooperation among emergency response organizations. By December 2003, the group had developed an inventory of state-operated public safety communications systems and in March 2004 the group published an interim statewide public safety communications systems plan. In some cases, neighboring jurisdictions or public safety agencies are working together to address communications issues. To improve interoperability between federal, state, and local responders in Los Angeles County, the Los Angeles Regional Tactical Communications Systems Executive Committee was formed. According to a county fire official, barriers to interoperability in the county and with neighboring counties include agencies operating on different radio frequencies and using incompatible technologies, as well as a lack of funding for communications systems. The group is using a two-track effort to improve communications: (1) acquiring and using interconnection devices, such as audio switches, with existing communication resources to enhance interoperability and (2) rebuilding communications infrastructures for improved interoperability in the long-term. As of February 2005, the Los Angeles County Fire Department had acquired three audio switch units, according to a county fire official. | Since 1984, wildland fires have burned an average of more than 850 homes each year in the United States and, because more people are moving into fire-prone areas bordering wildlands, the number of homes at risk is likely to grow. The primary responsibility for ensuring that preventive steps are taken to protect homes lies with homeowners and state and local governments, not the federal government. Although losses from wildland fires made up only 2 percent of all insured catastrophic losses from 1983 through 2002, fires can result in billions of dollars in damages. Once a wildland fire starts, various parties can be mobilized to fight it, including federal, state, local, and tribal firefighting agencies and, in some cases, the military. The ability to communicate among all parties--known as interoperability--is essential but, as GAO has reported previously, is hampered because different public safety agencies operate on different radio frequencies or use incompatible communications equipment. GAO was asked to assess, among other issues, (1) measures that can help protect structures from wildland fires, (2) factors affecting use of protective measures, and (3) the role technology plays in improving firefighting agencies' ability to communicate during wildland fires. The two most effective measures for protecting structures from wildland fires are: (1) creating and maintaining a buffer, called defensible space, from 30 to 100 feet wide around a structure, where vegetation and other flammable objects are reduced or eliminated; and (2) using fire-resistant roofs and vents. In addition to roofs and vents, other technologies--such as fire-resistant windows and building materials, chemical agents, sprinklers, and geographic information systems mapping--can help in protecting structures and communities, but they play a secondary role. A lthough protective measures are available, many property owners have not adopted them because of the time or expense involved, competing concerns such as aesthetics or privacy, misperceptions about wildland fire risks, and lack of awareness of their shared responsibility for fire protection. Federal, state, and local governments, as well as other organizations, are attempting to increase property owners' use of protective measures through education, direct monetary assistance, and laws requiring such measures. In addition, some insurance companies have begun to direct property owners in high-risk areas to take protective steps. Existing technologies, such as audio switches, can help link incompatible communication systems, and new technologies, such as software-defined radios, are being developed following common standards or with enhanced capabilities to overcome incompatibility barriers. Technology alone, however, cannot solve communications problems for those responding to wildland fires. Rather, planning and coordination among federal, state, and local public safety agencies is needed to resolve issues such as which technologies to adopt, cost sharing, operating procedures, training, and maintenance. The Department of Homeland Security is leading federal efforts to improve communications interoperability across all levels of government. In addition to federal efforts, several states and local jurisdictions are pursuing initiatives to improve communications interoperability. |
The Davis-Bacon Act was enacted in 1931, in part, to protect communities and workers from the economic disruption caused by contractors hiring lower-wage workers from outside their local area, thus obtaining federal construction contracts by underbidding competitors who pay local wage rates. Davis-Bacon generally requires employers to pay locally prevailing wages and fringe benefits to laborers and mechanics employed on federally funded construction projects in excess of $2,000. The Recovery Act requires all laborers and mechanics employed by contractors and subcontractors on projects funded directly or assisted by the federal government through the Recovery Act also be paid at least the prevailing wage rate under Davis-Bacon. Our previous work found 40 programs, such as the Weatherization Assistance Program, newly subject to Davis- Bacon requirements as a result of the Recovery Act’s prevailing wage provision. Of these, 33 programs existed prior to the Recovery Act but were subject to the Davis-Bacon requirements for the first time, and 7 were newly created programs. In 2009, federally funded construction and rehabilitation, including projects funded through the Recovery Act, totaled about $220 billion. Labor administers the Davis-Bacon Act through its Wage and Hour Division, which conducts voluntary surveys of construction contractors and interested third parties on both federal and nonfederal projects to obtain information on wages paid to workers in each construction job classification by locality. It then uses the data submitted on these survey forms to determine local prevailing wage and fringe benefit rates. In 2002, Labor began conducting simultaneous statewide surveys for all four of its construction types: highway, residential, building, and heavy. Labor describes highway construction as the construction, alteration, or repair of roads, streets, highways, runways, alleys, trails, parking areas, and other similar projects not incidental to building or heavy construction. Residential construction includes single-family homes and apartment buildings that are not more than four stories. If a structure that houses people is over four stories or if it houses machinery, equipment, or supplies, it is considered building construction. Heavy construction generally includes any project that does not fall into the other three categories—for example, dam and sewer projects. Labor determines which states it will survey each year based on a variety of factors, including the date of a state’s most recent survey, planned federal construction, and complaints or requests from interested parties on current wage determinations. The calculated wage and fringe benefit rates that result from the surveys are posted online in wage determinations and used by contractors working on federal construction projects to prepare bids and pay workers. Both GAO and the Labor OIG have reported concerns with Labor’s wage determination process. In 1996, we found Labor had internal control weaknesses that contributed to lack of confidence in the wage determinations, including limitations in Labor’s verification of wage and fringe benefit data, its computer capabilities, and an appeals process that was difficult for interested parties to access. In 1997, the OIG found much of the data it examined to be inaccurate and potentially biased due to weaknesses in survey methodology. For fiscal year 1997, Congress directed $3.75 million toward improvements to the wage determination process. Using five criteria—feasibility/viability, timeliness, accuracy, completeness, and cost—Labor evaluated two options: Reengineering: Apply new technologies and processes to the existing Davis-Bacon survey program to increase participation in and improve the accuracy and timeliness of the surveys. Reinvention: Use existing Bureau of Labor Statistics (BLS) data, specifically data from BLS’s Occupational Employment Statistics survey and National Compensation Survey, as the primary basis for Davis-Bacon wage determinations. In 1999, as Labor was evaluating these options, we again reviewed the wage determination process and found, in response to a directive from a congressional committee and our recommendation, Labor had implemented a program to verify a sample of wage survey data, including verifying data on site using employer payrolls. However, we agreed with the OIG that verification efforts be viewed as temporary steps until more fundamental reforms could be made to Labor’s survey methodology. We also found that reengineering or reinvention had the potential to improve the accuracy and timeliness of the wage determination process. In January 2001, Labor reported to Congress it would pursue reengineering. Labor concluded that reinvention (using BLS data) would have the benefits of accuracy and timeliness, but presented challenges, including difficulty in determining fringe benefits and in producing wage estimates for a broad range of construction job classifications. Reengineering, which included improvements to the wage survey form (including a scannable form and online version) and a computer system to assist with data clarification and analysis, would make it feasible to survey every area of the country for all four construction types no less than every 3 years, Labor concluded. In 2004, the Labor OIG found Labor’s reengineering had not resolved past concerns. In a sample of wage survey forms (known as WD-10s) from before and after reengineering, the OIG found errors in almost 100 percent of verified survey forms. The OIG said these errors occurred even with a revised WD-10, the introduction of an online WD-10, and efforts by Labor analysts to review and correct data. Mistakes in survey data included respondents using incorrect peak weeks, miscounts in the number of workers in each job classification, and misreporting of wage rates—for example, reporting one wage rate for a job classification when two or more wage rates existed. In addition, the OIG reported concerns about bias because only contractors with the personnel to complete WD-10s may respond and some may not participate to avoid involvement with the government. The OIG also found that higher participation by either unions or nonunion contractors could potentially weight the wage and benefit rates in their favor. Finally, the OIG noted there had been little improvement since its 1997 review in the time required to issue wage determinations. The current survey process, which conducts statewide surveys for all construction types, consists of five basic phases (see fig. 1). Prior to the start of a survey, Labor identifies the state, construction types, and survey time frame—the time period in which a construction project needs to be active to meet survey criteria—and requests that CIRPC provide a report on active construction projects for the identified time frame, construction type, and geographical area. F.W. Dodge Reports for those projects are then ordered and reviewed to ensure they meet the basic criteria of the survey. Once a survey is scheduled, Labor usually conducts pre-survey briefings for interested parties to clarify survey procedures and provide information on how data should be submitted. Labor then sends surveys to general contractors identified through the Dodge Reports and relevant interested parties in the area to be surveyed. (See app. II for a copy of the wage survey.) It also requests information from federal agencies on construction projects that meet survey criteria. A follow-up letter is sent to general contractors who do not respond. Subcontractors, identified by the general contractors, are also sent an initial letter with a survey and a follow- up letter if they do not respond. Completed wage survey forms are returned by either contractors or interested parties and are reviewed, under a contract with Labor, by CIRPC, which matches submitted information with its construction project and forwards it to the appropriate Labor regional office. The regional offices clarify missing, ambiguous, or inconsistent information to the extent possible, and pull random samples of wage survey forms to verify by phone or on site. Officials request that supporting payroll documentation be sent to the regional office. For on-site verification, Labor contracts with a private accounting firm whose auditors review payroll records. Any discrepancies between the wage survey form and the contractor’s payroll records are reviewed and corrected in the survey data by Labor regional staff. Contractors selected for verification, who are not able or willing to provide payroll records, can still be included in the survey in most cases. See appendix III for a more detailed description of the wage determination process. Labor uses several procedures to calculate wage rates and determine if it has sufficient information from collected and verified surveys to issue a wage determination—a compilation of prevailing wage rates for multiple job classifications in a given area. In determining a prevailing wage for a specific job classification, Labor considers sufficient data to be the receipt of data on at least three workers from two different employers in its designated area who have that job. Then, in accordance with its regulations, Labor uses a “50- percent rule” to calculate the prevailing wage. The 50-percent rule states the prevailing wage is the wage paid to the majority (over 50 percent) of workers employed in a specific job classification on similar projects in the area. If the same rate is not paid to a majority (over 50 percent) of workers in a job classification, the prevailing wage is the average wage rate weighted by the number of employees for which that rate was reported. In cases where the prevailing rate is also a collectively bargained, or union, rate, the rate is determined to be “union-prevailing.” According to Labor’s policy, union- prevailing wage rates in wage determinations can be updated when there is a new collective bargaining agreement (CBA) without Labor conducting a new survey. Nonunion-prevailing wage rates are not updated until a new survey is conducted. To issue a wage determination for a construction type in a given area, Labor must, according to its procedures, also have sufficient data to determine prevailing wages for at least 50 percent of key job classifications. Key job classifications are those determined necessary for one or more of the four construction types. By statute, Labor must issue wage determinations based on similar projects in the “civil subdivision of the state” in which the federal work is to be performed. Labor’s regulations state the civil subdivision will be the county, unless there are insufficient wage data. When data from a county are insufficient to issue a wage rate for a job classification, a group of counties is created by combining a rural county’s data with data from one or more contiguous rural counties. A metropolitan county’s data are combined with data from other counties in the state within the metropolitan statistical area (MSA). If data are still insufficient to issue a wage rate, a supergroup is created by combining a rural county’s data with data from additional contiguous rural counties, or a metropolitan county’s data are combined with county data from other MSAs or the consolidated MSA counties. Finally, if this supergroup still does not provide sufficient wage data to issue a wage rate for a job classification, a statewide rate is created by combining data for all rural counties or all metropolitan counties in the state. Counties are combined based on whether they are metropolitan or rural, and cannot be mixed. Once wage determinations are issued, an interested party may seek reconsideration and review through an appeals process. See figure 2 for an example of how wage data from Miami-Dade County, Florida, are combined, as needed, with data from other counties to create group, supergroup, and state wage rates. Labor has taken several steps over the last few years to address issues with its Davis-Bacon wage surveys, including completing a number of open surveys and changing how it collects and processes some survey data in its efforts to improve timeliness and accuracy. However, these efforts may not achieve Labor’s desired results. We found some surveys initiated under the new process are behind schedule and some published wage rates are based on outdated data. In 2007, Labor officials decided not to initiate any new surveys in order to finalize and publish results from 22 open surveys, which accumulated after Labor began conducting statewide surveys in 2002. Regional office officials said it was difficult and time-consuming to clarify and verify data in these surveys because contractors often did not have easy access to records for survey data which, in some cases, had been submitted several years earlier. As of September 1, 2010, results from 20 of the 22 surveys were published and results from the remaining 2 were in the process of being published. Officials said once results from all 22 surveys are published, they will be able to focus on more recent surveys, which will reduce delays in processing and increase accuracy because more recently collected information is easier and less time-consuming to clarify and verify with contractors. Labor also changed how it collects survey data for its four construction types after it conducted an informal review in 2009. Labor officials said they had been using a “one size fits all” approach to surveys and were not accounting for differences in types of construction activity, the demographic characteristics of a given state, and available sources of wage data. To address these differences, Labor began surveying some of its four construction types separately instead of surveying all construction types simultaneously in a given state. Labor also began using certified payrolls as the primary data source for highway surveys. Labor officials said most highway construction has a federal component and certified payrolls provide accurate and reliable wage data. Officials also said using certified payrolls eliminates the need for on-site verification of reported wage data, although Labor continues to survey interested parties. Officials estimate these efforts will reduce processing time for highway surveys by more than 80 percent, or from about 42 months to 8 months. Labor adjusted its survey processes for residential, building, and heavy construction types as well. For surveys of residential construction, Labor plans to phone contractors and unions and visit contractor associations to increase a historically low response. Officials said these collection methods will be possible because of the small number of residential projects compared to other construction types. Labor began conducting a new residential survey in 2010. For building and heavy construction, Labor started a pilot with five surveys in 2009, adjusting survey time frames— the time period in which a construction project has to be active for it to meet survey criteria—to better manage the quantity of data received. Labor found its previous 1–year survey time frame produced, in some cases, too many or too few responses for building and heavy surveys. Instead, by adjusting the survey time frame to account for the number of projects in a particular region (with shorter time frames for areas in which there are many active projects), Labor expects to reduce the time needed to process surveys and determine prevailing wages. Overall, Labor estimates these changes will reduce processing time for building and heavy surveys by approximately 54 percent, or from about 37 months to 17 months. Labor also revised its approach to processing data for all surveys. Labor’s regional offices began reviewing and analyzing survey forms when they are received rather than waiting until a survey closes. Labor officials said this processing of data in “real time” will improve timeliness and accuracy because survey respondents will be better able to recall the submitted information when contacted by regional office staff for clarification and verification. While it is too early to fully assess the effects of Labor’s 2009 changes, our review found timeliness is still an issue and improvements expected from processing changes may not be fully realized. Of the 16 surveys started under Labor’s new processes at the time of our review, we were unable to analyze the timeliness of 4—3 highway surveys and 1 building and heavy survey—because of unclear dates in Labor’s data. A senior Labor official said regional offices differed as to when they recorded dates for key survey activities, and we found some recorded dates were out of sequence. During the course of our review, the senior Labor official said regional offices will consistently enter key dates for future surveys, which will allow Labor to better assess whether new processes are improving timeliness. Of the remaining 12 surveys for which we were able to assess timeliness, 8 were highway surveys for which Labor requested certified payrolls. Of those 8, we found 6 were behind schedule, 1 was on schedule, and 1 had not started as of September 1, 2010 (see fig. 3). A senior Labor official said staff did not immediately start processing all certified payrolls— requested for all federal projects within a specific 1-year period—when they were received because of regional office workloads. As a result, some certified payroll data were months old before Labor surveyed interested parties. For example, as of September 1, 2010, certified payroll data for the Florida 2009 highway survey were 8 months old, though Labor had not yet surveyed interested parties. Moreover, processing certified payrolls may be labor-intensive and time-consuming. A senior Labor official said the agency cannot predict how many certified payrolls will be submitted by state departments of transportation and often receives boxes of documents for each survey. Some regional office officials said extracting information from certified payrolls is difficult because of inconsistent formats and frequently requires clarification with contractors. To address these potential delays, a senior Labor official said they are considering collecting certified payrolls monthly from states with upcoming surveys, and processing the payrolls as they are received. The remaining 4 surveys were building and heavy surveys and all were behind schedule as of September 1, 2010 (see fig. 4). In conducting a “universe” or “census” survey of all active construction projects within a designated time frame and area, Labor accepts data from a variety of sources, including contractors and interested parties. As a result, the number of returned survey forms and the time required to clarify data can vary widely. For example, for 14 surveys conducted under past processes, the number of survey forms received for each ranged from less than 2,000 to over 8,000, and the average processing time for data clarification and analysis ranged from 10 months to more than 40. After the 2009 changes, Labor estimates survey data clarification and analysis will take about 1 to 7 months, depending on construction type. Some of the anticipated time savings, particularly for building and heavy surveys, is based on managing fewer forms because of its focus on the number of projects in a particular region rather than a 1-year time frame. However, by accepting data submitted by contractors and interested parties on any relevant project as part of its universal survey approach, Labor is limited in its ability to predict how many forms will be returned and the time needed to process them. The more time required, the more likely wage rates will be outdated when published in wage determinations. In addition, Labor cannot entirely control when it receives survey forms. Though Labor officials said processing survey forms as they are received will improve timeliness, some regional office officials told us this “real time” processing approach has a limited effect because the bulk of the forms are returned on the last day of a survey. Additionally, officials in two of the three regional offices we visited said this new approach is not substantially different from their previous procedure. Since our site visits, a senior Labor official said analysts at regional offices have noticed a difference between processing forms in “real time” and their previous procedure, and that increased use of online submissions is expected to help reduce last-minute survey returns. To address such challenges, OMB guidance suggests agencies consider the benefits and costs of conducting a sample survey instead of a census survey. According to OMB, a sample can be used to ensure data quality in a way that is often more efficient and economical than a census. The fact that Labor is behind schedule on surveys even with the new 2009 processes may affect the agency’s ability to update the many published nonunion-prevailing wage rates, which are several years old. Labor’s fiscal year 2010 performance goal was for 90 percent of published wage rates for building, heavy, and highway construction types to be no more than 3 years old. Our analysis of published rates for these three construction types found 61 percent were 3 years old or less as of November 12, 2010. However, this figure is somewhat misleading because it includes both union-prevailing and nonunion-prevailing wage rates, which differ in how they are updated. Union-prevailing rates, which constitute almost two- thirds of the over 650,000 published building, heavy, and highway rates, may be updated when new CBAs are negotiated, and we found almost 75 percent of those rates were 3 years old or less as of November 12, 2010. However, 36 percent of nonunion-prevailing rates, which are not updated until Labor conducts a new survey, were 3 years old or less, and almost 46 percent were 10 or more years old. One regional office official and two stakeholders we interviewed said Labor, in some cases, has had to update nonunion-prevailing rates without a new survey because they no longer complied with the federal minimum wage. Moreover, wage rates at the time of publication may reflect wage data from several years prior due to processing delays. For example, of the 20 open surveys for which Labor had published results as of September 1, 2010, 9 published in 2009 or 2010 were based on data 5 or more years old at the time of publication and, of those, 3 were based on data 7 or more years old. Though these survey results were only recently published, the age of the wage data they contain means those states will likely need to be resurveyed soon. Several of the union and contractor association officials we interviewed said the age of the Davis-Bacon nonunion-prevailing rates means they often do not reflect actual prevailing wages. As a result, they said it is more difficult for both union and nonunion contractors to successfully bid on federal projects because they cannot recruit workers with artificially low wages but risk losing contracts if their bids reflect more realistic wages. Labor officials said the only way to correct the age disparity between union- and nonunion-prevailing rates is to conduct surveys more frequently; however, some regional office officials said the goal to survey each area every 3 years is not feasible with current processes. Those who said it is feasible cited the need for adequate technology and staffing, which they said is not in place in all regional offices. Although Labor has made recent changes to data collection and processing, some critical problems with its survey methodology have not been addressed. Our review identified persisting shortcomings in the representativeness of survey results and the sufficiency of data gathered for Labor’s county-focused wage determinations. OMB guidance states that agencies need to consider the potential impact of response rate and nonresponse on the quality of information obtained from a survey, and suggests agencies consult with trained survey methodologists when designing surveys to address this issue. Rather than conducting a formal evaluation of the wage survey process and consulting with experts in survey design and methodology, a senior Labor official said the agency based changes on an informal review that drew on staff experiences. While our prior work has shown it is reasonable and desirable to obtain input from knowledgeable staff, technical guidance from experts is considered critical to ensure the validity and reliability of survey results. Labor cannot determine whether its Davis-Bacon survey results are representative of prevailing wage rates because it does not currently calculate response rates or conduct a nonresponse analysis. According to OMB, response rate calculation and nonresponse analysis are important because a low response rate may mean survey results are misleading or inaccurate if those who respond to a survey differ substantially and systematically from those who do not respond. A Labor official said that when the agency started conducting statewide surveys in 2002, it stopped calculating overall response rates because of the large volume of data received and challenges in tracking who submitted specific information. In addition, the official said Labor could not collect enough data to meet its then-standard of data on at least six workers from three different employers for each job classification, so it changed the standard to its current three workers from two employers. This standard can be met using data from a single county, multiple counties within a state, or statewide. Also, aside from a second letter sent automatically to survey nonrespondents, Labor does not currently have a program to systematically follow up with or analyze all nonrespondents. Labor’s own procedures manual recognizes nonresponse as a potential source of survey bias and indicates there is a higher risk nonrespondents will be nonunion contractors because they may have greater difficulty in compiling wage information or be more cautious about reporting wage data. Despite this guidance, regional office officials said they spend the bulk of their time clarifying data received. Of Labor’s published wage rates as of November 12, 2010, about 63 percent were union-prevailing; in contrast, about 14 percent of construction workers nationwide were represented by unions in 2010, according to BLS figures. Several of the stakeholders we interviewed said the fact that Labor does not ensure the representativeness of the survey responses reduces the accuracy of the published wage rates. In addition, some regional office officials said statistical sampling may make wage rates more accurate, although they cautioned that some contractors or interested parties may not support a change to sampling if it meant they would be excluded from participating in the survey. During the course of our review, a senior official said Labor is taking steps to again calculate response rates, beginning with updates to the survey database and changes to the survey form, which will more clearly identify who submitted wage information. However, because Labor has not yet fully implemented these changes, it is unclear if they will lead to improving the quality of the survey. Although its regulations state the county will normally be the civil subdivision for which a prevailing wage is determined, Labor is often unable to issue wage rates for job classifications at the county level because it does not collect enough data to meet its current sufficiency standard of wage information on at least three workers from two employers. In the results from the four surveys we reviewed—Florida 2005, Maryland 2005, Tennessee 2006, and West Texas Metropolitan 2006—Labor issued about 11 percent of wage rates for key job classifications using data from a single county (see fig. 5). About 22 percent of the wage rates were issued at the group level (combined data from a group of counties within the same state) and about 20 percent at the supergroup level (combined data from other groups of counties within the same state). Almost 40 percent of the wage rates were issued at the statewide level incorporating data from either all metropolitan or all rural counties in the state. The remaining 7 percent were issued for combined counties for which the geographic calculation level was not available. (For more information on how the geographic level of issued wage rates varied by construction type and by metropolitan and rural rates, see app. I.) In 1997, Labor’s OIG reported that issuing rates by county may cause wage decisions to be based on an inadequate number of responses. In our review of the four surveys, we found one-quarter of the final wage rates for key job classifications were based on wages reported for six or fewer workers (see fig. 6). (For more information on how the number of workers used to determine rates varied by construction type and by metropolitan and rural rates, see app. I.) In the surveys we reviewed, we also found Labor sometimes determined prevailing wages based on small amounts of data even in metropolitan areas. For example, in the 2005 survey of building construction in Florida, the prevailing wage rate for a forklift operator in Miami-Dade County was based on wages reported for five workers statewide. The statutory requirement to issue Davis-Bacon prevailing wages based on a “civil subdivision of the state” also limits Labor’s options to address inadequate data. For example, Labor is not able to augment its survey data with data from other sources because those sources may draw from other geographic areas, such as MSAs, which are not the same as civil subdivisions. Officials from Labor’s survey contractor, CIRPC, said one way to improve accuracy is to survey areas other than counties. CIRPC officials said the current wage survey uses arbitrary geographic divisions, in contrast to other groupings, such as the economic areas used by the Bureau of Economic Analysis, which are based on relevant regional markets that frequently cross county and state lines. These groupings, they said, are more reflective of area wage rates. Some stakeholders said the focus on county-level wage rates results in the publication of illogical rates. One contractor association representative said metropolitan statistical areas would be more appropriate in New York, for example, because there is a larger difference in wages between upstate and downstate New York than between the counties containing the cities of Rochester, Syracuse, and Buffalo. Another contractor association representative said the geographic divisions used by Labor for prevailing wages are illogical for projects not confined to a single county, offering the example of a contractor paving a road that crossed a county line and who was forced to pay workers different wage rates based on which side of the line they worked. In our interviews with stakeholders about additional issues with Labor’s wage determination process, they provided several reasons why contractors have little or no incentive to participate in the Davis-Bacon wage survey. First, 19 of 29 stakeholders said contractors may not have the time or resources to respond. An employee for one contractor said she had returned the wage survey but might not have had she known it was voluntary because her company was short-staffed. Other stakeholders said contractors might not see the survey as a priority. Second, 16 stakeholders said contractors either may not understand the purpose of the survey or do not see the point in responding because they believe the prevailing wages issued by Labor are inaccurate. Third, 10 stakeholders said contractors may be reluctant to provide information to the government because they view it as proprietary or fear that doing so will subject them to audits. Finally, 8 stakeholders said contractors who do not work on public projects may not understand the survey is soliciting wage data from private as well as public projects so they do not think they need to respond. For instance, representatives from one state contractor association said some contractors believe the wage survey only serves to perpetuate established rates because wage surveys sent by Labor may have the names of projects subject to Davis-Bacon already entered on the form. Officials we interviewed in Labor regional offices echoed many of these concerns. They said contractors either think their survey responses will not make a difference in the determination of prevailing wages or are unaware they are being asked to submit information on private projects. A contributing factor, one official said, is that the survey announcement letter may not clearly communicate it is soliciting information on both public and private construction. In our review of the contractor announcement letter, we found it states that requested information will be used to set prevailing wages and asks the contractor to fill out the wage survey for the construction project listed on the form and any additional projects that fit survey criteria. But the letter does not specifically state that Labor is soliciting data for both public and private projects. (See app. IV for copies of the survey announcement letters sent to contractors and interested parties.) Additionally, some regional office officials said larger contractors may be more likely to respond because they have more resources, including administrative personnel, to complete the survey form. They said contractors also may not respond because they find the form complicated or do not understand its importance. Yet if contractors call the regional office and Labor staff have an opportunity to explain the reason for the survey and answer questions, many of those callers seem more receptive to participating, some regional office officials said. A lack of survey participation by those on private construction projects could result in Labor having to use data from federal projects, which are already paying Davis-Bacon wages, to set prevailing wages for building and residential construction. Per its regulations, Labor uses federal project data in all highway and heavy surveys, but it only uses federal project data in building and residential surveys when it lacks sufficient data from nonfederal projects. In the results from the four surveys we reviewed, almost one- quarter of the building wage rates and over two-thirds of the residential rates for the 16 key job classifications, such as carpenter and common laborer, included federal data. (For more information on how the percentage of federal data varied by metropolitan and rural rates, see app. I.) While 19 of the 27 contractors and interested parties we interviewed said the wage survey form, which Labor officials said was last updated in 2004, is generally easy to understand, some identified challenges in completing specific sections. For example, five stakeholders said it is difficult to know which job classification applies to their workers. Representatives from one national contractor association said they had previously informed Labor the survey form does not reflect nonunion industry practices and contractors may not track data in a way that makes it easy to fill out the form. As a result, they said most nonunion contractors opt not to return the wage survey rather than attempt to break down their data to fit its format. Other state contractor association representatives said workers on some construction sites today perform tasks across multiple job classifications; for example, a carpenter may also perform some tasks of a laborer. Yet the survey form asks contractors to provide wages for a worker by a single job classification. In addition, officials from one state local union said, to assist contractor participation in the survey, they created and distributed their own spreadsheet for contractors to fill out because they thought it would be more easily understood than Labor’s wage survey form. Labor reported to Congress in 2006 that use of the scannable survey form resulted in submission of more complete data, but our analysis of reports for four state surveys found most verified forms still had errors. During on- site verification, Labor’s contracted accounting firm compares clarified wage survey data to a sample of contractor payroll records and reports any discrepancies. These auditor reports show mistakes occurred most often in the number of employees reported in each job classification, listed hourly and fringe benefit wage rates, and project dollar value, some of which were also issues in the 2004 Labor OIG report. A senior Labor official said one reason contractors make errors on the form may be because they fill it out from memory rather than consulting their payroll records. Officials said they expect such errors to decrease under the new survey processes as Labor analysts clarify contractor-submitted data sooner. Some of these errors may be due to the fact that Labor did not pretest its current survey form with respondents. Officials said they are planning another update to address portions of the form that consistently confuse respondents. These include not having a place to note an “interested party,” rather than a “contractor” or “subcontractor,” is filling out the survey form, as well as improvements to the section on job classifications and fringe benefits. Labor officials said they have solicited input on potential revisions from CIRPC; their on-site verification contractor; the U.S. Census Bureau, which is contracted to mail out the survey forms for Labor; and their regional offices. During our interviews, a Labor official said the agency would like to solicit input on proposed changes from survey respondents, but could not provide specifics. Although part of Labor’s on-site verification process is to ask contractors questions about using the current form, Labor needs feedback on proposed changes to assess whether they will accomplish the goals of eliminating confusion and reducing errors. OMB guidance states that careful questionnaire design and pretesting can reduce measurement error and provide insights into how alternative wording can affect survey respondents’ answers. Pretesting the new survey form with respondents to ensure changes achieve the desired results will be particularly important given that a Labor official said changing the form is a major undertaking. Labor officials did not have a specific time frame for implementing the new form because they said they are waiting for upgrades to the wage survey data system and their first priority is improving the online version of the form. Planned improvements to the online version include allowing respondents to save information rather than having to complete a survey before exiting. Seven stakeholders we interviewed agreed the ability to fill out the form online was important, but four of the seven were unaware it was already an option. Labor’s Davis-Bacon prevailing wage rates are publicly reported online at Wage Determinations Online for use by contractors and others to prepare bids for and pay workers on federal construction projects. While 6 of 27 stakeholders we interviewed said the general contractor provided the necessary wage information or they found the online wage determinations relatively easy to use, others reported problems. For example, while OMB and Labor guidance on data quality states that “influential” financial information provided by the agency should include a high level of transparency on data and methods, 15 stakeholders said there is a lack of transparency in the wage determinations because key information is not available or hard to find. In addition, both union and nonunion stakeholders said Labor’s wage determination Web site should more clearly present information on the number of workers and wage rates used to calculate prevailing wages for each job classification. Labor currently makes some of this information available in a report known as a WD-22. The printed WD-22 provides, for each job classification, information on the final prevailing wage and fringe benefit rates, the total number of workers reported, and the method of rate calculation—for example, whether the rate was based on a majority or an average (see fig. 7). A WD-22 is created for each state survey by construction type, but this information is not available on Labor’s wage determination Web site. A senior Labor official said the WD-22 information is currently available upon request; though, the agency is considering posting it online along with other information used to determine wage rates. In the listing above, the "SU" designation means that rates listed under the identifier do not reflect collectively bargained wage and fringe benefit rates. Other designations indicate unions whose rates have been determined to be prevailing. Labor also changes the date at the top of a wage determination each calendar year in a “roll-over” process. Officials said the date is changed to inform users the posted wage rates are valid for the current year, but the wage rates contained in the determination are not necessarily updated. In the Florida example (see fig. 8), the date at the top of the wage determination is October 8, 2010, but wage rates associated with the “SU,” or survey, designator on the lower half of the page are from May 22, 2009, the publication date of the survey used to set those rates. A senior Labor official was not aware of users confusing the roll-over date on the wage determination with the survey publication date. However, OMB guidance states that when disseminating information products to users, key variables should be defined and the time period covered by the information and the date last updated should be provided. Not clearly explaining each of these dates within the wage determination reduces the transparency of when the last survey was conducted for an area, especially if many years have passed. Additionally, if the wage determination only contains union-prevailing rates, it does not contain any information about when the area was last surveyed. Finally, 9 of 27 stakeholders said missing wage rates are also a challenge. Specific job classifications may be missing from a wage determination if Labor received insufficient survey data. If job classifications are missing, contractors do not know what to bid on federal projects because they do not know what they will have to pay some workers, workers do not know what pay they will receive, and federal contracting agencies cannot accurately estimate costs. When a wage rate for a job classification is missing from the wage determination, it must be requested from Labor through a conformance process. While federal projects have contracting officers who typically request the conformance on behalf of the contactor, eight stakeholders said the contracting officers may not be familiar with the prevailing wages or the conformance process. Representatives from one national contractor association said the difficulty of bidding on projects when wage rates are missing, and then having to file a conformance request in order to know what to pay, can deter smaller contactors who might otherwise be interested in federal work. A Labor official said the rates issued via conformance requests—an average of over 3,000 per year were filed in fiscal years 2007, 2008, and 2009—are only good for the specific project on which they are issued and many are repeated requests for job classifications for workers who operate specific pieces of highway construction equipment. The best way to reduce conformance requests, the official said, is to conduct surveys that report wage rates for all job classifications. The pre-survey briefing is one of Labor’s primary outreach efforts to inform stakeholders about an upcoming survey. These briefings are conducted by regional office staff either before or at the start of a survey. A headquarters Labor official said regional offices notify state contractor associations and work through the Building & Construction Trades Department to notify unions about pre-survey briefings and ask them to pass the information along to their members. While the official said there is no required number of pre-survey briefings, regional office officials said they ranged from one briefing for two states to five briefings within one state for recent surveys depending on a state’s size and characteristics. Officials said they generally hold separate briefings for unions and nonunion contractors/contractor associations. The presentation includes information on how wage and fringe benefit data are obtained and compiled, sufficiency requirements for issuing rates and wage determinations, and the process for filing conformances and wage determination appeals. A headquarters official said they are currently revising the presentation’s information on how to fill out the survey form. Stakeholder awareness of the pre-survey briefings was mixed. In three states surveyed for building and heavy construction in either 2009 or 2010—Arizona, North Carolina, and West Virginia—all the union representatives we interviewed said they were aware of the pre-survey briefing and representatives from four of the six state contractor associations we interviewed said they were aware a briefing had been conducted. Of the 12 contractors we interviewed in Florida and New York who were last surveyed in 2005 and 2006, respectively, none were aware that a briefing had been conducted prior to the survey. Several regional office officials said the pre-survey briefings for unions generally have greater attendance than those for contractors. While one stakeholder said copies of the slides were provided at the briefing, a Labor headquarters official said the information is not available online for those who are unable to attend in person. Seven of 27 stakeholders indicated that alternative approaches, such as webinars or audioconferences, might be helpful ways to reach additional contractors. CIRPC officials said more outreach by Labor could improve the accuracy of the surveys because contractors would better understand why and how the surveys are conducted, thereby encouraging more to participate. They said they previously recommended that Labor wage analysts call contractors prior to survey distribution to make them aware of the survey and to assure them their submitted data would be protected. OMB guidance states that sending a letter in advance of a survey to alert respondents can improve response rates. A senior Labor official said they are conducting pre-survey briefings instead of calling respondents in advance. For more than a decade, reviews of the Davis-Bacon wage survey have highlighted methodological problems in the determination of wages paid to workers on federally funded construction projects. In response to those criticisms, Labor has improved its process, most recently seeking out new data sources for some construction types and adjusting the data collection and processing time frames. Yet without clear tracking of key survey dates and the time spent in various processing activities, Labor cannot assess if its changes are improving survey timeliness and thus the accuracy of published wage rates. Additionally, these efforts do not effectively address some key issues with how data are collected. Because Labor has not conducted checks over the past several years on the representativeness of the data it receives, it cannot have high confidence its results accurately reflect prevailing wages, no matter how diligently its staff work to clarify and verify submitted data. If the resultant prevailing wage rates are too high, they potentially cost the federal government and taxpayers more for publicly funded construction projects or, if too low, they cost workers in compensation. While Labor officials rightly used experience and corporate knowledge in designing recent changes to survey methodology, they did not enlist objective survey expertise to ensure methods were sound and in accordance with best practices. Survey methodology that does not follow best practices lowers confidence in the process and puts participation by private contractors at risk. Labor’s regulatory goal to issue wage rates at the county level may also limit its ability to improve survey representativeness and timeliness. Labor often must combine data from multiple counties to meet its own relatively low sufficiency standards to publish wage rates for specific job classifications which, in the end, may reflect the wages for as few as three employees from two contractors for an entire state. The statutory requirement to issue prevailing wages by “civil subdivision of the state” limits Labor’s ability to account for relevant regional markets that cross county or state boundaries or to tap into data based on other geographic groupings. Use of other data sources to augment Davis-Bacon survey data could shorten the time needed to publish wage rates and reduce the number of conformances that contractors must file for missing wage rates. Given the voluntary nature of the survey, participants who take the time to respond should have confidence their information will be considered in determining prevailing wages. They should also be able to understand how their information is used. Increased transparency in how the wage rates are calculated and improved clarity in published wage determinations would provide stakeholders assurance the wage rates are accurate and encourage greater participation of the construction employer community. To improve the quality of Labor’s Davis-Bacon wage survey data, Congress may wish to consider amending the language of the Davis-Bacon Act to allow Labor to use wage data from geographic groupings other than civil subdivisions of states, such as metropolitan statistical areas or Bureau of Economic Analysis’ economic areas. To improve the quality and timeliness of Labor’s Davis-Bacon wage surveys, we recommend that the Secretary of Labor direct the Wage and Hour Division to enlist the National Academies, or another independent statistical organization, to evaluate and provide objective advice on the survey, including its methods and design; the potential for conducting a sample survey instead of a census survey; the collection, processing, tracking, and analysis of data; and promotion of survey awareness. To improve the transparency of wage determinations while maintaining the confidentiality of specific survey respondents, we recommend that the Secretary of Labor direct the Wage and Hour Division to publicly provide additional information on the data used to calculate its Davis-Bacon wage rates, such as the number and wages of workers included in each wage rate calculation, and to clearly communicate the meaning of various dates and codes used in wage determinations in the same place the prevailing wage rates are posted. We provided a draft of this report to Labor for review and comment. The agency provided written comments, which are reproduced in appendix VI. Labor agreed with our recommendation to improve the transparency of the wage determinations and indicated it is taking steps to do so. However, the agency said our recommendation to obtain objective expert advice on its survey design and methodology may be premature because additional changes are currently being implemented or will be implemented based on a 2004 review of the program by McGraw-Hill Construction Analytics. The McGraw-Hill review was a process evaluation that assessed many aspects of the wage survey; however, Labor officials did not indicate during our interviews that the results of that evaluation were serving as the foundation for their recent changes nor was the evaluation referred to in documentation Labor provided regarding its recent changes. Moreover, the McGraw-Hill report did not address certain issues related to the survey’s design and methodology. Therefore, we continue to believe that Labor should have an independent statistical organization provide advice on survey methods for the following reasons: Labor cites examples of improvements to its processes and information technology systems so that surveys can be completed and published in a more timely manner. We also cited many of these data collection and processing changes in our report along with the agency’s expected reduction in processing times for highway, building, and heavy surveys. The survey timelines, which we used to assess whether surveys conducted under new processes were on schedule, were provided to us by the agency and included reductions in and elimination of various survey steps. Yet according to those agency timelines, many of the surveys were behind schedule. Labor commented it has reduced the time to publish survey results for building and heavy construction from several years to an average of 2 years. However, we believe it may face challenges staying on schedule if it cannot more accurately predict how many survey forms it will receive and the time required to process them. Possibilities to better predict the number of survey responses, such as statistical sampling rather than the current census survey, could be explored with survey experts. Labor also noted, as we did in our report, that it is again working to calculate response rates and we believe this is a step in the right direction. However, only calculating response rates will not ensure that the data Labor is using to calculate prevailing wages are truly representative of the wages being paid in a particular area. If a response rate is low—some wage rates are calculated on as few as three workers—then Labor must also analyze nonrespondents to ensure that those who received a survey but did not respond do not significantly differ from those who responded. Survey expertise could assist with this critical data quality check to help ensure prevailing wages are representative of wages actually paid to workers. Labor commented that the current survey form was not recently redesigned, but is a scannable version of the form that was last updated in 2004. We adjusted our report language accordingly. The agency also noted that errors on wage survey forms typically result from errors in the information provided by survey respondents rather than errors made by Wage and Hour Division employees. We agree; however, we believe the fact that respondents continue to make some of the same errors in completing the wage survey form that were identified by the Labor OIG in 2004 is a concern. Labor did not pretest the current form with survey respondents to ensure clarity, which could partially explain why contractors and interested parties made errors. A professional survey methodologist could develop a pretesting plan to address issues that affect the quality of the survey data, such as respondent comprehension, retrieval, judgment, and response formulation. We believe it is critical for Labor to obtain expert methodological advice because this would allow the agency to make course corrections before time and money are spent implementing new procedures that may increase the speed of processing data, but not sufficiently address its quality. While Labor indicated the cost of contracting for an expert review is a concern, not ensuring the quality and representativeness of the data can be costly in other ways: the federal government could pay more for construction than it needs to or workers may earn less than they should. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have 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 major contributions to this report are listed in appendix VII. Our review examined (1) the extent to which the Department of Labor (Labor) has addressed concerns regarding the quality of the Davis-Bacon wage determination process and (2) the additional issues identified by stakeholders regarding the wage determination process. To address these objectives, we reviewed key documents, including past GAO and Department of Labor Office of Inspector General (OIG) reviews of the program, agency documents on recent changes to the wage survey process, and relevant federal laws and regulations; interviewed agency officials and representatives from organizations with whom the agency contracts some aspects of the survey process; analyzed (1) data from Labor’s Automated Survey Data System (ASDS), Wage Determination Generation System (WDGS), and the Davis-Bacon survey schedule Web site (http://www.dol.gov/whd/programs/ dbra/schedule.htm); (2) reports produced by Labor’s contracted accounting firm for on-site verification of submitted payroll records; and (3) Labor’s conformance logs for fiscal years 2007 through 2009; conducted site visits to three of Labor’s five regional offices that conduct Davis-Bacon wage surveys, as well as to the Construction Industry Research and Policy Center (CIRPC), which is contracted to assist Labor with the wage survey process; interviewed approximately 30 stakeholders, including representatives from academia, contractor associations, and unions, as well as individual contractors and performed a content analysis of their comments; and attended a Labor prevailing wage conference. We conducted this performance audit from September 2009 through March 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. To evaluate how Labor has addressed past concerns with the quality of the Davis-Bacon wage determination process, we reviewed past reports, reviewed key agency documents, and interviewed Labor officials. We reviewed two Labor OIG reports and their associated recommendations, as well as our own previous work. In addition, we reviewed agency correspondence with Congress and the Office of Management and Budget (OMB) describing Labor’s changes to the wage determination process based on past program audits, the effectiveness of those changes, and planned future changes. To assess recent changes made to the wage survey process and their expected outcomes, we interviewed officials and reviewed agency documents, such as the Davis-Bacon manual of operations and Labor’s revised timelines for building, heavy, and highway surveys starting in 2009. Using Labor’s revised timelines, we calculated the expected reduction in the amount of time from the start of each survey to publication of wage rates. To assess whether Labor’s surveys under the new processes were on schedule, we reviewed an ASDS Individual Time Tracking Report by Activity/Survey for October 1, 2009, through September 1, 2010, that provided the number of staff hours logged in each survey activity for the pilot building and heavy surveys and highway surveys started under the new processes. We then compared the last activity in which staff hours had been logged for each survey with its expected activity based on the date the regional office entered the survey into ASDS and Labor’s new timelines. We could not calculate the exact number of days surveys were ahead of or behind schedule because Labor did not have a report that reliably recorded the date a survey moved from one activity to the next. Additionally, for one state building and heavy survey and three state highway surveys, we could not calculate the actual timelines because the dates in the data provided by Labor were out of sequence. Labor officials provided inconsistent guidance on which activity in their timelines reflected the actual start of a survey; however, for various reasons, we used the date the survey was recorded as being entered into the database for our analysis of whether the surveys were on schedule. During our review, a senior Labor official indicated the appropriate survey start date was the date the survey was entered into ASDS by regional office officials. Toward the end of our review, the official indicated the correct start date was the date surveys were first mailed to contractors or interested parties because each region had its own method for when it entered surveys into ASDS. For example, some regions entered surveys when they planned them while others entered surveys when they ordered Dodge Reports. We believe using the date surveys were first mailed as the start date would exclude certain key activities on Labor’s survey timeline, such as ordering, receiving, and cleaning the Dodge Report data for building and heavy surveys and inputting interested party lists for highway surveys. Nonetheless, we conducted an additional timeliness analysis using alternative start dates based on Labor’s concerns. Given that Labor officials were concerned the regional offices may enter building and heavy surveys into ASDS before actually starting them, we used the date the Dodge data were requested, which is the second step in the new process. For the building and heavy surveys we reviewed, none of them changed status based on the alternative start date. In other words, all were still behind schedule. For highway surveys, we used the date surveys were first mailed to interested parties as the start date for the alternative analysis. For the highway surveys we reviewed, only one changed status from behind schedule to ahead of schedule. Therefore, based on the limited changes to our findings from using alternative start dates, as well as the fact that the alternative start dates exclude parts of the survey process on which Labor had been working to improve timeliness and for which staff had logged hours, we decided to conduct our analysis using the original date provided by Labor (the date the regional offices entered the survey into ASDS). To assess the adequacy of Labor’s current wage survey methodology we compared it with survey guidance published by OMB and Labor. We used data from ASDS to evaluate the geographic level at which rates were issued and the number of workers used to issue rates. For both analyses, we used data from four surveys—Florida 2005, Maryland 2005, Tennessee 2006, and West Texas Metropolitan 2006—that were issued in 2009 or 2010. We selected these surveys because they were recently published and represented geographic diversity, to the extent possible, in terms of the Labor regional offices that conducted the surveys. The data from the surveys we reviewed included the following construction types: Florida—building, heavy, highway, and residential; Maryland—building, heavy, and residential; Tennessee—building, heavy, highway, and residential; and West Texas Metropolitan—building and residential. The survey results included metropolitan and rural rates for all construction types with the exception of the Maryland heavy construction type and the West Texas survey, which only included metropolitan rates. To evaluate the geographic level at which wage rates were issued, we analyzed, for each survey in our review, the “calculation basis” field on Labor’s WD-22 form, which indicates whether the wage rate for each job classification was determined based on county-level data, multi-county data, or statewide data. We were unable to determine the geographic level for rates that had been combined in the final WD-22 so we reported them separately. Regional office officials said they may combine rates from counties with the exact same wage and fringe benefit data in the final WD- 22. However, the rates being combined may have been calculated at different geographic levels—for example, one county’s rates may have been calculated at the group level while another county’s rates may have been calculated at the supergroup level. Because the geographic level at which rates for each combined county were calculated is not reported on the WD-22, we reported the percentage of these rates separately. We analyzed geographic levels for key job classifications only because nonkey job classifications cannot be issued at the supergroup or state level. Key job classifications are those determined by Labor to be necessary for one or more of the four construction types, as follows: Building Construction: bricklayer, boilermaker, carpenter, cement mason, electrician, heat and frost insulators/asbestos workers/pipe insulators, iron worker, laborer-common, painter, pipefitter, plumber, power equipment operator, roofer, sheet metal worker, tile setter, and truck driver. Heavy Construction and Highway Construction: carpenter, cement mason, electrician, iron worker, laborer-common, painter, power equipment operator, and truck driver. Residential Construction: bricklayer, carpenter, cement mason, electrician, iron worker, laborer-common, painter, plumber, power equipment operator, roofer, sheet metal worker, and truck driver. Table 1 provides the percentage of wage rates issued at each geographic level by construction type and metropolitan or rural designation for the four surveys we reviewed. We also used WD-22 data to determine the number of workers used to calculate wage rates for all key job classifications for the four surveys in our review. Using the “total number reported” column in WD-22 reports, we calculated the number of workers whose wage rates were included in each wage rate calculation for key job classifications. We reported the data by quartiles with the exception of the “3 workers” category, which we broke out separately because it is the minimum number of workers for which Labor must receive data in order to issue a wage rate for a job classification. Table 2 provides the percentage of key job classification rates issued by number of workers, construction type, and metropolitan or rural designation for the four surveys we reviewed. Finally, we used WD-22 data to determine the percentage of wage rates that included federal data. We calculated this percentage for the building and residential construction types for the surveys in our review because Labor uses federal data for these construction types only when it has insufficient survey data, whereas federal data are used in all highway and heavy surveys. Table 3 provides the percentage of key job classification wage rates using federal data by construction type and metropolitan or rural designation for the four surveys we reviewed. To determine the age of wage rates, we used WDGS data on published wage rates provided by Labor officials on November 12, 2010. We analyzed the age of wage rates for building, heavy, and highway construction because Labor considered only those construction types in its fiscal year 2010 performance goal. We analyzed the age of wage rates in two ways: first, combining nonunion- and union-prevailing wage rates together, as Labor does, and then separately to identify any trends by type of rate. To determine the age of data used to calculate prevailing wage rates for the 22 open surveys that accumulated since Labor began conducting statewide surveys, we analyzed survey time frames and cutoff dates from Labor’s Davis-Bacon and Related Acts survey schedule Web site (http://www.dol.gov/whd/programs/dbra/schedule.htm) and interviewed Labor officials. To assess the number of wage survey forms, or WD-10s, that had errors and the types of errors that most commonly occurred, we analyzed on-site verification reports prepared by Labor’s contracted accounting firm for the four states in our review. We analyzed the verification reports to determine what percentage of wage survey forms that were verified had errors and what type of errors occurred. To identify and categorize the errors, we recorded if the accounting firm marked an error in the following fields: project value, construction type, additional trade/classification, employee classification, work performed, paid under collective bargaining agreement (CBA), number of employees, peak week, hourly rate, fringe benefit, health and welfare, pension, holiday and vacation, apprentice training, and other. We counted a wage survey form as having multiple errors if it had an error in more than one category. To determine the average number of conformance requests filed for missing classifications in fiscal years 2007 through 2009, we used the “tracking number” field in Labor’s conformance request log. We counted the number of requests with distinct tracking numbers, excluding entries that did not have tracking numbers, and then calculated the average over the 3-year period. To assess the reliability of the data we used in our analyses, we performed the following steps: (1) reviewed pertinent system and process documentation, (2) interviewed agency officials knowledgeable about the data and system during each regional office site visit, and (3) performed electronic testing of required data fields. We found the data we reviewed to be reliable for our purposes. To obtain information from staff who clarify and analyze survey information, we conducted site visits to three of the five Labor regional offices that process Davis-Bacon wage surveys—Northeast region (Philadelphia, Pennsylvania); Southeast region (Atlanta, Georgia); and Southwest region (Dallas, Texas)—as well as CIRPC at the University of Tennessee. At each regional office, we interviewed the director of enforcement, the regional wage specialist, the senior wage analyst, and wage analysts. At CIRPC, we interviewed the associate directors, the senior wage analyst equivalent, and wage analysts. Also, to gain a thorough understanding of how wage analysts process survey data and document decisions, we interviewed staff at each regional office about ASDS. We selected our site visit locations based on the fact that Labor headquarters officials said these regional offices were currently conducting surveys using new processes. Additionally, we visited CIRPC to determine how contractors are selected for survey participation and on- site verification, and how CIRPC provides support to the regional offices in implementing the new survey processes. To determine what additional issues stakeholders may have with the wage determination process, we initially explored surveying contractors and union officials in states where Labor had recently conducted a wage survey. We believed it was important for us to survey contractors who had recently received a wage survey from Labor so they could recall their experience of responding to the wage survey or their reasons for not responding. However, Labor officials had concerns about us surveying contractors in states where Labor had completed wage survey data collection, but was still in the process of contacting contractors for data clarification and verification. Labor officials believed contractors might get confused if they received requests for information from more than one agency and were concerned our activities might affect their efforts. We agreed with these concerns. Therefore, instead of surveying contractors, we opted to conduct semi-structured interviews with a wide variety of Davis-Bacon stakeholders. Also, in order to solicit opinions directly from contractors but not interfere with Labor’s ongoing efforts, we interviewed a small number of individual contractors in states that had been surveyed less recently but where the results of those wage surveys had been published. Given that it had been a few years since Labor sent wage survey forms to these contractors, we believed we would obtain better information through personal interviews than a survey. We conducted semi-structured interviews with approximately 30 representatives from academia, contractor associations, unions, and individual contractors. Our semi-structured interview protocol allowed us to ask questions of numerous organizations and individuals, offering each interviewee the opportunity to respond to the same general set of questions, but also allowed for flexibility in asking follow-up questions and, in limited circumstances, for the omission of questions when appropriate. For example, we did not ask representatives from academia about filling out the survey form or attending pre-survey briefings because they would typically not be involved in these activities. In our findings, we noted cases in which we did not ask all stakeholders a particular question. To select representatives from academia, we conducted a literature review to identify studies that reviewed or evaluated the Davis-Bacon wage survey process. To obtain opinions from both unionized and nonunionized contractors, we interviewed representatives from the national organizations of the Associated Builders and Contractors, Inc. (ABC) and the Associated General Contractors of America (AGC). To obtain views from construction unions, we interviewed representatives from the AFL- CIO and the International Brotherhood of Electrical Workers (IBEW). We selected IBEW because it has one of the largest memberships among construction industry unions and electricians are considered a key class for all four of Labor’s construction types. To obtain a state-level perspective from contractors’ associations and unions, we interviewed representatives from state ABC and AGC chapters, as well as IBEW locals in Arizona, North Carolina, and West Virginia. We chose these three states because they had been surveyed in 2009 or 2010 by different Labor regional offices. In addition, because Arizona, North Carolina, and West Virginia have low to medium levels of workers represented by unions, according to the Bureau of Labor Statistics (BLS), we interviewed representatives from ABC and AGC in New York, the state with the highest level of unionization. We also interviewed individual contractors in New York and Florida. We chose New York and Florida because they had been surveyed fairly recently and represented diversity in geography and the percentage of all workers represented by unions. To select contractors, we requested Labor data including the lists of contacts who had been sent wage survey forms and who had returned them. Then, to the extent possible, we matched the data using the contact identification field to determine which contacts had responded or not responded. In each state, we identified the counties with the highest number of respondents because there were fewer respondents than nonrespondents. We selected certain ZIP codes within each selected county based on the highest concentration of respondents, as well as site visit logistics. We then ordered the list of respondents and nonrespondents by ZIP code and called contractors asking them to meet with us. If we were unable to reach a contractor or if a contractor declined, we moved to the next contractor on the list and continued until we had a mix of respondents and nonrespondents who agreed to be interviewed. We conducted a content analysis on the information gathered through the stakeholder interviews. Interview responses and comments were categorized by an analyst to identify common themes. A pretest of the themes was reviewed by the engagement’s methodologist before all comments were categorized. The categorization of the comments was then independently checked, and agreed upon, by another analyst for verification purposes. While we selected our stakeholders to include a wide variety of positions, the opinions expressed are specific to those we interviewed and are not generalizable. We attended Davis-Bacon-related sessions of Labor’s November 2010 prevailing wage conference in Cleveland, Ohio, to obtain additional stakeholder perspectives on the wage determination process and use of published wage determinations through observation of Labor’s presentations and question and answer sessions. II: Wage Survey Form (WD-10) The Davis-Bacon Act requires that workers employed on federal construction contracts valued in excess of $2,000 be paid, at a minimum, wages and fringe benefits that the Secretary of Labor determines to be prevailing for corresponding classes of workers employed on public and private projects that are similar in character to the contract work in the civil subdivision of the state where the construction takes place. To determine the prevailing wages and fringe benefits in various areas throughout the United States, Labor’s Wage and Hour Division periodically surveys wages and fringe benefits paid to workers in four basic types of construction: building, residential, highway, and heavy. 2, 3 Labor collects data through statewide surveys, except in large states, such as Texas and California. Labor’s regulations state that the county will normally be the civil subdivision at which a prevailing wage is determined, although Labor may consider wages paid on similar construction in surrounding counties if it is determined there has not been sufficient similar construction activity within the given area in the past year. Data from projects in metropolitan counties are considered separately from those in rural counties. If similar construction in surrounding counties, or in the state, is not sufficient, Labor may consider wages paid on projects completed more than 1 year prior to the start of a survey. Wage rates are issued for a series of job classifications in each of the four basic types of construction, so each wage determination requires the calculation of prevailing wages for many different trades, such as electrician, plumber, and carpenter. Labor’s wage determination process consists of five basic stages: 1. Planning and scheduling surveys to collect data on wages and fringe benefits in similar job classifications on comparable construction projects. The process described here is based on Labor regulations, procedures manuals and documents, and statements by officials. GAO did not verify whether all procedures were followed in all cases. Heavy construction is a catch-all grouping that includes projects not properly classified under the other three types of construction; for example, dredging and sewer projects. 2. Conducting surveys of employers and interested parties, such as representatives of unions or contractor associations. 3. Clarifying and analyzing respondents’ data. 4. Issuing the wage determinations. 5. Reconsideration and review of wage determinations through an appeals process. Labor attempts to survey the complete “universe” of relevant construction contractors active within a particular area during a specific period of time. Labor schedules surveys by identifying those areas and construction types most in need of a survey, based on criteria that include age of the most recent survey; volume of federal construction in the area; requests or complaints from interested parties, such as state and county agencies, unions, and contractor associations; and evidence that wage rates in a region have changed. Labor uses two management tools, the Regional Survey Planning Report and the Uniform Survey Planning Procedure, to help prioritize planned surveys. The Regional Survey Planning Report is provided by CIRPC at the University of Tennessee and contains information about construction activity nationwide, including the number and value of active projects, the number and value of federally owned projects, the date of the most recent survey in each county, and whether the existing wage determinations for each county are union-prevailing, nonunion-prevailing, or a combination of both. Labor uses the Uniform Survey Planning Procedure to weigh the need for surveys by area and construction type. Once Labor designates an area and construction type (i.e., building, residential, highway, or heavy) for a survey, it proposes a survey time frame, or reference period during which the construction projects considered in the survey must be “active.” Generally, the preliminary time frame is the preceding 12-month period, the survey start date is approximately 3 months after the survey is assigned, and the survey cutoff date is 4 to 6 months from the start date, depending on the size of the survey. However, the survey time frame, start date, and cutoff date may be shortened or lengthened based on individual circumstances of the survey. Once these parameters are established, Labor enters the survey information into ASDS. To identify projects that meet the established survey criteria (the designated area, construction type, and survey time frame), Labor uses F.W. Dodge data produced in reports known as Dodge Reports. Labor supplements these data with information provided by contractors listed in the Dodge Reports, by industry associations, and from regional office files to find additional relevant construction projects. Analysts at CIRPC screen the data to ensure projects selected meet the criteria before the survey begins. Projects must be of the correct construction type, be in the correct geographic area, fall within the survey time frame, and have a value of at least $2,000. CIRPC also checks for duplicate project information to minimize contacts to a contractor working on multiple projects that meet survey criteria. Labor notifies contractors and interested parties—including contractor associations, unions, government agencies, and Members of Congress—of upcoming surveys by posting survey information on its Web site, sending letters, and conducting pre-survey briefings. Contractor and interested party records are sent to the U.S. Census Bureau, which distributes the notification letters encouraging participation in the survey. Labor’s regional offices arrange pre-survey briefings with interested parties prior to or at the start of a survey to clarify survey procedures and provide information on how to complete and submit wage survey forms, known as WD-10s. Data requested on the WD-10 form include a description of the project and its location; the contractor’s name and address; the project value and start and end dates; the wage rate and fringe benefits paid to each worker on the project; and the number of workers employed in each job classification during the week of peak activity for that classification. The peak week for each job classification is the week when the most workers were employed in that particular classification. For an example of how Labor collects peak week data on a WD-10, see appendix II. The Census Bureau conducts four mailings throughout a survey. The first mailing includes letters and WD-10 wage survey forms to general contractors and interested parties. (For examples of survey announcement letters sent to contractors and interested parties, see app. IV.) General contractors listed on the Dodge Reports receive WD-10 forms with project names identified through the Dodge Reports, as well as additional blank forms for other projects. General contractors not listed on the Dodge Reports and interested parties receive a limited number of blank WD-10 forms, but additional forms are available upon request. In addition, all general contractors receive forms to provide information on subcontractors who worked on projects being surveyed. Members of Congress receive one blank WD-10 form and are not contacted again unless a survey is extended. The second mailing is only to general contractors who do not respond to the first mailing and includes the WD- 10 forms with project names from the Dodge Report and subcontractor list forms provided in the first mailing. The third mailing is to all reported subcontractors and newly reported general contractors and includes WD- 10 forms with project names and blank WD-10 forms. The fourth and final mailing is to all subcontractors who do not respond and newly reported subcontractors and only includes WD-10 forms. Survey respondents may submit paper WD-10 forms or complete forms electronically on Labor’s Web site. Census scans returned paper WD-10 forms into Labor’s ASDS. WD-10 forms submitted electronically are loaded directly into ASDS. Any additional information submitted must be entered into ASDS manually. CIRPC reviews the completed WD-10s, matches submitted information with the associated project, and forwards the WD- 10s to Labor regional offices. Labor’s wage analysts begin to review and analyze the data as they receive the completed WD-10s. Wage analysts’ first step in the review process is to determine whether the project reported on the WD-10 form is within the scope of the survey, or “usable.” Since the WD-10 forms may provide more information about a project than the Dodge Report, wage analysts review the data to determine whether the project meets the four basic survey criteria (correct construction type, geographic area, time frame, and project value). If a project does not meet the four criteria, it is determined unusable and any associated WD-10 forms are excluded from the survey. Once Labor has determined a project and WD-10 form are usable, wage analysts call contractors to clarify any information that is unclear or incomplete. Wage analysts record information about the clarification call in ASDS, including the date and name of the person contacted and any information that resulted in changes to the WD-10 form. Wage analysts review each section of the WD-10 forms and clarify the information, as necessary. Specifically, the analysts verify contractor and subcontractor information; project name, description, and location; whether the project received federal or state funding; start and end dates and value of the project; type of construction (i.e., building, residential, highway, or heavy); employee job classifications; the peak week ending date; the number of employees reported; the basic hourly rate; fringe benefits rates; and whether the wages were paid under a CBA, among other data. In addition to contractors, interested parties may also submit WD-10 forms for a project. However, Labor clarifies submitted data with the relevant contractor, regardless of the source, and excludes information provided by an interested party if it duplicates data provided by the contractor unless data are submitted on specific job classifications that were not included by the contractor. Labor also verifies rates paid under a CBA, or union rates, to ensure they are accurately reported. Similarly, because of variations in industry practices across the country, known as “area practice,” wage analysts may call contractors to clarify the type of work employees in certain job classifications are actually performing. This is necessary because, for a given prevailing wage, the scope of work covered by the job classification must reflect the actual prevailing area practice. An area practice issue exists when the same work is performed by employees in more than one classification in a given location. For example, a worker under the general electrician classification may perform tasks in addition to general electrical work, such as alarm installation and low voltage wiring. If there is another specialty classification installing alarms in the same location, it may indicate an area practice issue. In some geographic areas, particular work may be performed frequently and widely enough by a specialty classification such that the traditional practice by the general classification may be replaced by the practice of the specialty classification. Labor conducts several processes to verify data submitted in a survey. For data submitted by interested parties and contractors, Labor’s regional offices verify a random sample of data. To verify reported data, regional offices contact selected contractors and third parties to request payroll documentation, though data provided without documentation may still be used. In addition to remote verification of randomly selected contractors, on-site verification of a weighted sample of contractors is conducted. The on-site verification selection is designed to include those contractors with the biggest impact on the prevailing wage rate for each job classification. Once the weighted sample of contractors has been selected, an independent auditing firm contracted by Labor arranges an appointment with each contractor to meet and review supporting records. The auditing firm prepares and submits a report documenting the differences between the submitted and verified information, including differences in project and wage data. Wage analysts in Labor’s regional offices update information in ASDS that may have changed as a result of these verification processes. In addition to wage data collected on WD-10 forms, Labor uses certified payroll data from projects that receive federal funding and meet survey criteria. For surveys of highway and heavy construction projects, Labor always uses certified payroll data, while it is only included in building and residential surveys if the submitted WD-10 forms do not provide enough information to make a wage determination. In addition, for highway surveys only, Labor sometimes adopts rates published by state departments of transportation if a state has conducted its own prevailing wage survey and data collected separately by Labor support the prevailing wage rates established by the state. Labor also updates union-prevailing wage rates when unions submit updated CBAs to Labor headquarters. Once all verified and corrected data have been entered into ASDS, Labor calculates the prevailing wage rate for each job classification in a survey. If a majority of workers (more than 50 percent) in a job classification are paid the same rate, that rate is determined the prevailing wage. If the same rate is not paid to a majority (over 50 percent) of workers in a job classification, the prevailing wage is the average wage rate weighted by the number of employees for which that rate was reported. Prevailing fringe benefits are determined only if a majority of the workers in a job classification receive fringe benefits. Once that condition is met, the prevailing fringe benefit is calculated for each job classification similarly to the way the prevailing wage rate is calculated. The prevailing rates resulting from the calculations will be either “union-prevailing”—if a majority of workers is paid under a CBA—or “nonunion-prevailing” rates. A prevailing wage rate for a job classification is only issued if there are sufficient data to make a determination. For data to be sufficient, Labor must receive wage information on at least three employees from at least two contractors for that job classification. If Labor receives sufficient data based on information collected at the county level for a job classification, a prevailing wage rate is determined using data from a single county. If data are insufficient at the county level, Labor includes data from federal projects in that county. If data are still insufficient, Labor includes data from contiguous counties, combined in “groups” or “supergroups” of counties, until data are sufficient to make a prevailing wage determination. Expansion to include other counties, if necessary, may continue until data from all counties in the state are combined. However, Labor’s regulations require wage data from projects in metropolitan and rural counties be separated when determining prevailing wages. For metropolitan counties, data are combined with data from one or more counties within the metropolitan statistical area, while data from rural counties are combined with data from other rural counties. Once the prevailing wage rates have been calculated, the regional offices transmit survey results to headquarters for final review. Labor headquarters issues wage determinations after reviewing recommended wage rates submitted by the regional offices. The prevailing wage rates are transmitted electronically to the WDGS for publication online at www.wdol.gov, where they are publicly available. Labor sometimes modifies wage determinations to keep them current or correct errors. Generally, modifications affect a limited number of job classifications within a wage determination. If a prevailing wage rate is not provided for a specific job classification in a wage determination, a contractor may request a rate for that classification, known as a conformance, through the contracting agency overseeing the specific project. The rate determined in the conformance process only applies to workers in that classification for the contract in question. Any interested party may request reconsideration and review of Labor’s wage determinations. The regional offices accept initial inquiries after a wage determination has been issued. Any interested party may request reconsideration from headquarters in writing and include any relevant information, such as wage payment data or project descriptions, to assist with the review. Labor’s regulations state that the Wage and Hour Division Administrator will generally respond within 30 days of receipt of the request. If the interested party’s request for reconsideration is denied, the interested party may file an appeal with Labor’s Administrative Review Board, which consists of three members appointed by the Secretary of Labor. All decisions by the Administrative Review Board are final. Any new wage determination resulting from such an appeal must be issued prior to the award of the contract in question, or before the start of construction if there is no award. In addition to the contact named above, the following staff made key contributions to this report: Gretta L. Goodwin, Assistant Director and Amy Anderson, analyst-in-charge, managed all aspects of this assignment; and Brenna Guarneros, analyst, made significant contributions to all phases of the work. In addition, John J. Barrett, analyst, made significant contributions to design and data collection; Christopher Zbrozek, intern, assisted in data collection and analysis; Walter Vance, Melinda Cordero, and Carl Barden provided assistance in designing the study and conducting data analysis; Susan Aschoff assisted in message and report development; Mimi Nguyen created the report’s graphics; Alexander Galuten provided legal advice; Erin Godtland, Barbara Steel-Lowney, and Yunsian Tai referenced the report; and Roshni Dave, Ronald Fecso, Kim Frankena, Mark Gaffigan, Charles A. Jeszeck, David Marroni, Mary Mohiyuddin, Stuart Ryba, David Wise, and William Woods provided guidance. | Procedures for determining Davis-Bacon prevailing wage rates, which must be paid to workers on certain federally funded construction projects, and their vulnerability to the use of inaccurate data have long been an issue for Congress, employers, and workers. In this report, GAO examined (1) the extent to which the Department of Labor (Labor) has addressed concerns regarding the quality of the Davis-Bacon wage determination process, and (2) additional issues identified by stakeholders regarding the wage determination process. GAO interviewed Labor officials, representatives from contractor associations and unions, contractors, and researchers; conducted site visits to three Labor regional offices; and analyzed data from Labor's wage survey database. Recent efforts to improve the Davis-Bacon wage survey have not addressed key issues with timeliness, representativeness, and the utility of using the county as the basis for the wage calculation. Labor has made some data collection and processing changes; however, we found some surveys initiated under the new processes were behind Labor's processing schedule. Labor did not consult survey design experts, and some criticisms of the survey and wage determination process have not been addressed, including the representativeness and sufficiency of the data collected. For example, Labor cannot determine whether its wage determinations accurately reflect prevailing wages because it does not currently calculate response rates or analyze survey nonrespondents. And, while Labor is required by law to issue wage rates by the "civil subdivision of the state," the goal to issue them at the county level is often not met because of insufficient survey response. In the published results for the four surveys in our review, Labor issued about 11 percent of wage rates for key job classifications (types of workers needed for one or more of Labor's construction types) using data from a single county. The rest were issued at the multi-county or state level. Over one-quarter of the wage rates were based on six or fewer workers. Little incentive to participate in Labor's Davis-Bacon wage surveys and a lack of transparency in the survey process remain key issues for stakeholders. Stakeholders said contractors may not participate because they lack resources, may not understand the purpose of the survey, or may not see the point in responding because they believe the prevailing wages issued by Labor are inaccurate. While most stakeholders said the survey form was generally easy to understand, some identified challenges with completing specific sections. Our review of reports by Labor's contracted auditor for four published surveys found most survey forms verified against payroll data had errors in areas such as number of employees and hourly and fringe benefit rates. Both contractor association and union officials said addressing a lack of transparency in how the published wage rates are set could result in a better understanding of the process and greater participation in the survey. GAO suggests Congress consider amending its requirement that Labor issue wage rates by civil subdivision to allow more flexibility. To improve the quality and timeliness of the Davis-Bacon wage surveys, GAO recommends Labor obtain objective expert advice on its survey design and methodology. GAO also recommends Labor take steps to improve the transparency of its wage determinations. Labor agreed with the second recommendation, but said obtaining expert survey advice may be premature given ongoing changes. We believe obtaining expert advice is critical for improving the quality of wage determinations. |
Over the last three decades, Congress has enacted several laws to assist agencies and the federal government in managing IT investments. For example, to assist agencies in managing their investments, Congress enacted the Clinger-Cohen Act of 1996. This act requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by federal agencies and report to Congress on the net program performance benefits achieved as a result of these investments. Most recently, in December 2014, Congress enacted IT acquisition reform legislation (commonly referred to as the Federal Information Technology Acquisition Reform Act or FITARA) that, among other things, requires OMB to develop standardized performance metrics, including cost savings, and to submit quarterly reports to Congress on cost savings. In carrying out its responsibilities, OMB uses several data collection mechanisms to oversee federal IT spending during the annual budget formulation process. Specifically, OMB requires federal departments and agencies to provide information related to their Major IT Business Cases (previously known as exhibit 300) and IT Portfolio Summary (previously known as exhibit 53). Major IT Business Case. The purpose of this requirement is to provide a business case for each major IT investment and to allow OMB to monitor IT investments once they are funded. Agencies are required to provide information on each major investment’s cost, schedule, and performance. IT Portfolio Summary. The purpose of the IT portfolio summary is to identify all IT investments—both major and non-major —and their associated costs within a federal organization. This information is designed, in part, to help OMB better understand what agencies are spending on IT investments. OMB directs agencies to break down IT investment costs into two categories: (1) O&M and (2) development, modernization, and enhancement (DME). O&M (also known as steady state) costs refer to the expenses required to operate and maintain an IT asset in a production environment. DME costs refers to those projects and activities that lead to new IT assets/systems, or change or modify existing IT assets to substantively improve capability or performance. Beginning in 2014, OMB directed agencies to further break down their O&M and DME costs to identify provisioned IT service costs. A provisioned IT service is one that is (1) owned, operated, and provided by an outside vendor or external government organization and (2) consumed by the agency on an as-needed basis. Examples of provisioned IT service could include cloud services or shared services from another federal agency or a private service provider. About 8.5 percent of federal agencies’ planned spending for fiscal year 2016 has gone toward provisioned IT services, leaving the vast majority of spending going toward IT that is non-provisioned. Figure 1 shows the breakdown in planned spending for fiscal year 2016. Further, OMB has developed guidance that calls for agencies to develop an operational analysis policy for examining the ongoing performance of existing legacy IT investments to measure, among other things, whether the investment is continuing to meet business and customer needs. This guidance calls for the policy to provide for an annual operational analysis of each investment that addresses cost, schedule, customer satisfaction, strategic and business results, financial goals, and innovation. Nevertheless, federal IT investments have too frequently failed or incurred cost overruns and schedule slippages while contributing little to mission-related outcomes. The federal government has spent billions of dollars on failed and poorly performing IT investments which often suffered from ineffective management, such as project planning, requirements definition, and program oversight and governance. Accordingly, in February 2015, we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. This area highlights several critical IT initiatives underway, including reviews of troubled projects, an emphasis on incremental development, a key transparency website, data center consolidation, and the O&M of legacy systems. To make progress in this area, we identified actions that OMB and the agencies need to take. These include implementing the recently-enacted statutory requirements promoting IT acquisition reform, as well as implementing our previous recommendations. In the last 6 years, we made approximately 800 recommendations to OMB and multiple agencies to improve effective and efficient investment in IT. As of October 2015, about 32 percent of these recommendations had been implemented. OMB has implemented a series of initiatives to improve the oversight of underperforming investments and more effectively manage IT. These efforts include the following: IT Dashboard. In June 2009, to further improve the transparency into and oversight of agencies’ IT investments, OMB publicly deployed the IT Dashboard. As part of this effort, OMB issued guidance directing federal agencies to report, via the Dashboard, the performance of their IT investments. Currently, the Dashboard publicly displays information on the cost, schedule, and performance of over 700 major federal IT investments at 26 federal agencies. Further, the public display of these data is intended to allow OMB, other oversight bodies, and the general public to hold the government agencies accountable for results and progress. Among other things, agencies are to submit ratings from their Chief Information Officers (CIO), which, according to OMB’s instructions, should reflect the level of risk facing an investment relative to that investment’s ability to accomplish its goals. To do so, each agency CIO is to assess his or her IT investments against a set of six pre-established evaluation factors identified by OMB and then assign a rating of 1 (high risk and red) to 5 (low risk and green) based on the CIO’s best judgement of the level of risk facing the investment. Over the past several years, we have made over 20 recommendations to help improve the accuracy and reliability of the information on the IT Dashboard and to increase its availability. Most agencies agreed with our recommendations or had no comment. TechStat reviews. In January 2010, the Federal CIO began leading TechStat sessions—face-to-face meetings to terminate or turn around IT investments that are failing or are not producing results. These meetings involve OMB and agency leadership and are intended to increase accountability and improve performance. OMB also empowered agency CIOs to begin to hold their own TechStat sessions within their respective agencies by June 2012. In June 2013, we reported that OMB and selected agencies held multiple TechStats, but additional OMB oversight was needed to ensure that these meetings were having the appropriate impact on underperforming projects and that resulting cost savings were valid. Among other things, we recommended that OMB require agencies to address high- risk investments. OMB generally agreed with this recommendation. However, as of October 28, 2015, OMB had only conducted one TechStat review in the prior 2 years and OMB had not listed any savings from TechStats in its quarterly reporting to Congress since June 2012. Cloud computing strategy. In order to accelerate the adoption of cloud computing solutions across the government, OMB’s 25-Point IT Reform Plan included a “Cloud First” policy that required each agency CIO to, among other things, implement cloud-based solutions whenever a secure, reliable, and cost-effective cloud option exists. Building on this requirement, in February 2011, OMB issued the Federal Cloud Computing Strategy, which provided definitions of cloud computing services; benefits of cloud services, such as accelerating data center consolidations; case studies to support agencies’ migration to cloud computing; and roles and responsibilities for federal agencies. In April 2016, we reported, among other things, that we had identified 10 key practices that if included in cloud service agreements can help agencies ensure services are performed effectively, efficiently, and securely. OMB’s guidance, released in February 2012, included most of the key practices, and we recommended that OMB include all 10 key practices in future guidance. PortfolioStat reviews. To better manage existing IT systems, OMB launched the PortfolioStat initiative in March 2012, which requires agencies to conduct an annual, agency-wide IT portfolio review to, among other things, reduce commodity IT spending and demonstrate how their IT investments align with the agency’s mission and business functions. In 2013 and 2015 we reported that agencies had the potential to save at least $3.8 billion through this initiative. However, we noted that weaknesses existed in agencies’ implementation of the initiative; therefore, we made more than 60 recommendations to OMB and agencies. OMB partially agreed with our recommendations, and responses from 21 of the agencies varied, with some agreeing and others not. IT Shared Services Strategy. In May 2012, OMB released its Federal IT Shared Services Strategy. The strategy requires agencies to use shared services—IT functions that are provided for consumption by multiple organizations within or between federal agencies—for IT service delivery in order to increase return on investment, eliminate waste and duplication, and improve the effectiveness of IT solutions. Examples of commodity IT areas to consider migrating to a shared environment, as described in the strategy, include software licenses, e-mail systems, and human resource systems. We have previously reported on legacy IT and the need for the federal government to improve its oversight of such investments. For example, in October 2012, we reported on agencies’ operational analyses policies and practices. As previously mentioned, operational analysis is a key performance evaluation and oversight mechanism required by OMB to ensure O&M investments continue to meet agency needs. In particular, we reported that although OMB guidance called for agencies to develop an operational analysis policy and perform such analyses annually, the extent to which the selected five federal agencies we reviewed carried out these tasks varied significantly. Specifically, the Departments of Homeland Security (DHS) and Health and Human Services (HHS) developed policies and conducted analyses, but excluded key investments and assessment factors. The Departments of Defense (Defense), the Treasury (Treasury), and Veterans Affairs (VA) had not developed a policy or conducted operational analyses. As such, we recommended that the agencies develop operational analysis policies, annually perform operational analyses on all investments, and ensure the assessments include all key factors. Further, we recommended that OMB revise its guidance to include directing agencies to post the results of such analyses on the IT Dashboard. OMB and the five selected agencies agreed with our recommendations and have efforts planned and underway to address them. In particular, OMB issued guidance in August 2012 directing agencies to report operational analysis results along with their fiscal year 2014 budget submission documentation (e.g., exhibit 300) to OMB. Thus far, operational analyses have not yet been posted on the IT Dashboard. We further reported in November 2013 that agencies were not conducting proper analyses. Specifically, we reported on IT O&M investments and the use of operational analyses at selected agencies and determined that of the top 10 investments with the largest spending in O&M, only the DHS investment underwent an operational analysis. DHS’s analysis addressed most, but not all, of the factors that OMB called for (e.g., comparing current cost and schedule against original estimates). DHS officials attributed this to the department still being in the process of implementing its new operational analysis policy. The remaining agencies did not assess their investments, which accounted for $7.4 billion in reported O&M spending. Agency officials cited several reasons for not doing so, including relying on budget submission and related management reviews that measure performance; however, OMB has noted that these are not a substitute for an operational analysis. Consequently, we recommended that seven agencies perform operational analyses on their IT O&M investments and that DHS ensure that its analysis was complete and addressed all OMB factors. Three of the agencies agreed with our recommendations; two partially agreed; and two agencies had no comments. Federal agencies reported spending the majority of their fiscal year 2015 IT funds on operating and maintaining a large number of legacy (i.e., steady-state) investments. Of the more than $80 billion reportedly spent on federal IT in fiscal year 2015, 26 federal agencies spent about $61 billion on O&M, more than three-quarters of the total amount spent. Specifically, data from the IT Dashboard shows that, in 2015, 5,233 of the government’s nearly 7,000 investments were spending all of their funds on O&M activities. This is a little more than three times the amount spent on DME activities (See figure 2). According to agency data reported to OMB’s IT Dashboard, the 10 IT investments spending the most on O&M for fiscal year 2015 total $12.5 billion, 20 percent of the total O&M spending, and range from $4.4 billion on the Department of Health and Human Services’ (HHS) Centers for Medicare and Medicaid Services’ Medicaid Management Information System to $666.1 million on HHS’s Centers for Medicare and Medicaid Services IT Infrastructure investment (see table 1). Over the past 7 fiscal years, O&M spending has increased, while the amount invested in developing new systems has decreased by about $7.3 billion since fiscal year 2010. (See figure 3.) Further, agencies have increased the amount of O&M spending relative to their overall IT spending by 9 percent since 2010. Specifically, in fiscal year 2010, O&M spending was 68 percent of the federal IT budget, while in fiscal year 2017, agencies plan to spend 77 percent of their IT funds on O&M. (See figure 4.) Further, 15 of the 26 agencies have increased their spending on O&M from fiscal year 2010 to fiscal year 2015, with 10 of these agencies having over a $100 million increase. The spending changes per agency range from an approximately $4 billion increase (HHS) to a decrease of $600 million (National Aeronautics and Space Administration). See table 2 for more details on agency spending. In addition, 20 of the 26 agencies have increased the percentage of total IT spending on O&M from fiscal year 2010 to fiscal year 2015, with 13 agencies having an increase of over 5 percent. The percentage of total IT spending on O&M ranges from a 20 percent increase (Department of Education) to a 16 percent decrease (Office of Personnel Management). Appendix II provides detailed information on agency spending on operations and maintenance from fiscal year 2010 to fiscal year 2015. According to agency officials, reasons for the increase in O&M spending include the recent shift of major systems from DME to O&M (as the investment completed development activities and began O&M activities); and rising costs to maintain legacy IT infrastructure, such as those that use older programming languages. They also noted that improved reporting (i.e., ensuring that O&M expenditures were properly reported as O&M instead of as DME) has made it appear that O&M spending has increased. For example, a DHS official in the Office of the CIO stated that one reason for the increased spending on O&M as a percentage of its total is because initially DHS had high DME spending to setup the agency, but now that the major parts of the agency are established, the funding has shifted to O&M. DHS officials stated that they anticipate future increases in DME funding as prioritized IT modernization efforts are approved and funded. Further, an official in Department of State’s (State) Bureau of Information Resource Management stated that the increase is largely due to increased costs of maintaining the infrastructure, including meeting security requirements. Moreover, VA officials stated that updates to its technology are the primary reason for the increase in spending. In addition, an official in HHS’s Office of the CIO stated that the increased spending on O&M was largely due to grants to states and local entities for new programs, such as the Affordable Care Act. Conversely, several agencies have decreased spending on O&M. For example, as we have previously reported, the Department of Energy (Energy) reduced spending by approximately $300 million, which it attributed to the reclassification of high performance computers from the IT portfolio to facilities. According to Energy officials, these investments were re-categorized because they include both supercomputers and laboratory facilities. Similarly, the Department of Commerce (Commerce) reduced spending by approximately $110 million and attributed it to the reclassification of satellite ground systems from its IT portfolio. In making this decision, Commerce determined that it needed to refocus oversight efforts to a more appropriate level and consequently minimized the role of the CIO and others in the oversight of satellites. We disagreed with these reclassifications, and reported that they run contrary to the Clinger-Cohen Act of 1996, which specifies requirements for the management of IT. Further, we reported that by gathering incomplete information on IT investments, OMB increases the risk of not fulfilling its oversight responsibilities, of agencies making inefficient and ineffective investment decisions, and of Congress and the public being misinformed as to the performance of federal IT investments. We recommended that Energy and Commerce appropriately categorize their IT investments, but both agencies disagreed. A policy analyst within OMB’s Office of E-Government and Information Technology expressed concern when agencies, or their bureaus, spend a low percentage of their IT funds on DME. The analyst further stated that this could indicate that the agency’s maintenance costs are reducing its flexibility and the agency or bureau is unable to innovate. For example, 5 of the 26 agencies that report to the IT Dashboard reported spending less than 10 percent on DME activities in fiscal year 2015 (see table 3). Further, 34 percent of bureaus (i.e., 51 of the 151) spent less than 10 percent on DME. For more details on the bureaus spending less than 10 percent on DME activities, see appendix III. According to agency officials, reasons for these bureaus’ low spending on DME include the size and mission of the bureau (e.g., smaller bureaus do not perform much DME work), as well as several bureaus having recently completed major DME work that is now in the O&M phase. Further, according to Commerce officials, one of their bureaus had no actual IT systems in its budget, as its IT has been absorbed by headquarters, and thus any DME spending is part of the Office of IT Services’ budget. OMB staff in the Office of E-Government and Information Technology have recognized the upward trend of O&M spending and identified several contributing factors, including (1) the support of O&M activities requires maintaining legacy hardware, which costs more over time, and (2) costs are increased in maintaining applications and systems that use older programming languages, since programmers knowledgeable in these older languages are becoming increasingly rare and thus more expensive. Further, OMB officials stated that in several situations where agencies are not sure whether to report costs as O&M or DME, agencies default to reporting as O&M. According to OMB, agencies tend to categorize investments as O&M because they attract less oversight, require reduced documentation, and have a lower risk of losing funding. OMB encourages agencies to adopt provisioned IT services, such as cloud computing and shared services, to make IT more efficient and agile, and enable innovation. Specifically, it provides an approach for agencies to implement cloud-based solutions whenever a secure, reliable, and cost-effective cloud option exists and to use shared services for IT service delivery in order to increase return on investment, eliminate waste and duplication, and improve the effectiveness of IT solutions. Further, as part of its guidance on the implementation of recent IT legislation, OMB identified a series of performance metrics for agencies’ PortfolioStat sessions to measure the federal government’s progress in driving value in federal IT investments. One measure is the percent of IT spending on non-provisioned O&M spending. An OMB official stated that focusing on the O&M spending that has not been provisioned will allow OMB to identify legacy systems in need of modernization. Federal agencies reported spending $55 billion—69 percent of total IT spending—on non-provisioned O&M in fiscal year 2015, with the percent allocated to non-provisioned O&M varying by agency. For example, State allocates about 87 percent of its IT spending on non-provisioned O&M, whereas the Department of Transportation (DOT) allocates 50 percent. See figure 5 for details on agencies’ planned spending allocations. Additionally, OMB has not identified an associated goal with its non- provisioned IT measure that is part of PortfolioStat process. An OMB official within the Office of E-Government and Information Technology stated that the aim is for the amount of spending on DME and provisioned IT services to rise, thus reducing the percent of spending on non- provisioned IT. This official also stated that OMB has not identified a specific goal for the measure because it would be ever changing. While goals for performance measures may change over time, it is still important for OMB to set a target by which agencies can measure their progress in meeting this measure. In particular, leading practices stress that organizations should measure performance in order to evaluate the success or failure of their activities and programs. Performance measurement involves identifying performance goals and measures, identifying targets for improving performance, and measuring progress against those targets. Without links to outcomes and goals, organizations are not able to effectively measure progress toward those goals. Further, OMB’s own website, performance.gov states that when measuring performance, a goal is a simple but powerful way to motivate people and communicate priorities. In addition, the website states that the federal government operates more effectively when agency leaders, at all levels of the organization, starting at the top, set clear measurable goals aligned to achieving better outcomes. Until OMB develops a specific goal associated with measuring non- provisioned services, OMB and agencies will be limited in their ability to evaluate progress that has been made and whether or not they are achieving their goals to increase the amount spent on development activities and provisioned IT services. According to OMB guidance, the O&M phase is often the longest phase of an investment and can consume more than 80 percent of the total lifecycle costs. As such, agencies must actively manage their investment during this phase. To help them do so, OMB requires that CIOs submit ratings that reflect the level of risk facing an investment. Several O&M investments were rated as moderate to high risk in fiscal year 2015. Specifically, CIOs from the 12 selected agencies reported that 23 of their 187 major IT O&M investments were moderate to high risk as of August 2015. They requested $922.9 million in fiscal year 2016 for these investments. Of the 23 investments, agencies had plans to replace or modernize 19 investments. However, the plans for 12 of those were general or tentative in that the agencies did not provide specificity on time frames, activities to be performed, or functions to be replaced or enhanced. Further, agencies did not plan to modernize or replace 4 of the investments (see table 4). The lack of specific plans to modernize or replace these investments could result in wasteful spending on moderate- and high-risk investments. In instances where investments experience problems, agencies can perform a TechStat, a face-to-face meeting to terminate or turn around IT investments that are failing or not producing results. In addition, OMB directs agencies to monitor O&M investments through operational analyses, which should be performed annually and assess costs, schedules, whether the investment is still meeting customer and business needs, and investment performance. While agencies generally conducted the required operational analyses, they did not consistently perform TechStat reviews on all of the at-risk investments. Table 5 provides details on the 23 investments and whether the operational analyses and TechStats were performed. Although not required, agencies had performed TechStats on only five of the at-risk investments. Moreover, TechStats were not performed on three of the four investments rated as high risk: DHS’s Customs and Border Protection - Integrated Fixed Towers, HHS’s Trusted Internet Connection Investment, and U.S. Department of Agriculture’s (USDA) Enterprise Telecommunications Shared Services. Agencies provided several reasons for not conducting TechStats. For example, according to agency officials, several of the investments’ risk levels were reduced to low or moderately-low risk in the months since the IT Dashboard had been publicly updated. An Acting Deputy Executive Director in DHS’s Enterprise Business Management Office stated that the agency had performed an internal “health assessment” on its Integrated Fixed Towers investment, understood the issues it was facing, and decided that a TechStat was not necessary. An official from HHS’s Office of the CIO stated that, at the time it was evaluated, its Trusted Internet Connection Investment did not meet its internal TechStat criteria of having cost variance over 10 percent. An official from USDA’s Office of the CIO stated that while the office did not hold a formal TechStat, the program was required to work on a corrective action plan and has since been upgraded from high to moderate risk. It should be noted that recent legislation requires agencies to perform a review of each major IT investment that receives a high-risk rating for 4 consecutive quarters. Further, the associated OMB guidance requires agencies to hold a TechStat on an investment if it has been rated as high risk for 3 consecutive months. In addition, operational analyses were not conducted for four at-risk investments. These investments were: Commerce’s Enterprise Cyber Security Monitoring and Operations, DHS’s Integrated Fixed Towers, Treasury’s Departmental Offices IT Infrastructure Mainframes and Servers Services and Support, and Treasury’s Departmental Offices IT Infrastructure End User Systems and Support. An official from Commerce’s Office of the CIO stated that, in place of operational analyses, National Weather Service (the responsible bureau) reviews the status of the previous month’s activities for the development, integration, modification, and procurement to report issues to management. However, Commerce’s monthly process does not include all of the key elements of an operational analysis. The Integrated Fixed Towers Program Manager stated that since the investment had only become operational in October 2015, an operational analysis was not yet required. DHS plans to perform the analysis on the investment in August 2017. Performing the analysis once the investment is operational will enable DHS to determine whether it is meeting the needs of the agency and delivering the expected value. The Director of Treasury’s Capital Planning and Investment Control program stated that the department’s policy does not require infrastructure investments to have an operational analysis performed. However, OMB’s guidance on operational analyses does not exclude infrastructure investments. Until agencies ensure that their O&M investments are fully reviewed, the government’s oversight of old and vulnerable investments will be impaired and the associated spending could be wasteful. Legacy IT investments across the federal government are becoming increasingly obsolete. Specifically, many use outdated languages and old parts. Numerous old investments are using obsolete programming languages. Several agencies, such as the Department of Justice (Justice), DHS, HHS, Treasury, USDA, and VA, reported using Common Business Oriented Language (COBOL)—a programming language developed in the late 1950s and early 1960s—to program their legacy systems. It is widely known that agencies need to move to more modern, maintainable languages, as appropriate and feasible. For example, the Gartner Group, a leading IT research and advisory company, has reported that organizations using COBOL should consider replacing the language and in 2010 noted that there should be a shift in focus to using more modern languages for new products. In addition, some legacy systems may use parts that are obsolete and more difficult to find. For instance, Defense is still using 8-inch floppy disks in a legacy system that coordinates the operational functions of the United States’ nuclear forces. (See figure 6). Further, in some cases, the vendors no longer provide support for hardware or software, creating security vulnerabilities and additional costs. For example, each of the 12 selected agencies reported using unsupported operating systems and components in their fiscal year 2014 reports pursuant to the Federal Information Security Management Act of 2002. Commerce, Defense, DOT, HHS, and VA reported using 1980s and 1990s Microsoft operating systems that stopped being supported by the vendor more than a decade ago. Lastly, legacy systems may become increasingly more expensive as agencies have to deal with the previously mentioned issues and may pay a premium to hire staff or contractors with the knowledge to maintain outdated systems. For example, one agency (SSA) reported re-hiring retired employees to maintain its COBOL systems. Selected agencies reported that they continue to maintain old investments in O&M. For example, Treasury reported systems that were about 56 years old. Table 6 shows the 10 oldest investments and/or systems, as reported by selected agencies. Agencies reported having plans to modernize or replace each of these investments and systems. However, the plans for five of those were general or tentative in that the agencies did not provide specific time frames, activities to be performed, or functions to be replaced or enhanced. For a full list of the agencies’ reported oldest systems, see appendix IV. Separately, we profiled one system or investment from each of the 12 selected agencies. The selected systems and investments range from 11 to approximately 56 years old, and serve a variety of purposes. For example, Treasury’s Individual Master File was first initiated about 56 years ago and currently is the authoritative data source for individual taxpayer accounts where accounts are updated, taxes are assessed, and refunds are generated during the tax filing period. In addition, DOT’s profiled system was initiated about 46 years ago and allows the agency to maintain comprehensive information on hazardous materials incidents. Of the 12 investments or systems, agencies had plans to replace or modernize 11 of these. However, the plans for 3 of those were general or tentative in that the agencies did not provide specificity on time frames, activities to be performed, or functions to be replaced or enhanced. Further, there were no plans to replace or modernize 1 investment. The profiles of these systems and investments are summarized in table 7 and can be found in appendix V. We have previously provided guidance that organizations should periodically identify, evaluate, and prioritize their investments, including those that are in O&M; at, near, or exceeding their planned life cycles; and/or are based on technology that is now obsolete, to determine whether the investment should be kept as-is, modernized, replaced or retired. This critical process allows the agency to identify and address high-cost or low-value investments in need of update, replacement, or retirement. Agencies are, in part, maintaining obsolete investments because they are not required to identify, evaluate, and prioritize their O&M investments to determine whether they should be kept as-is, modernized, replaced, or retired. According to OMB staff from the Office of E-Government and Information Technology, OMB has created draft guidance that will require agencies to identify and prioritize legacy information systems that are in need of replacement or modernization. Specifically, the guidance is intended to develop criteria through which agencies can identify the highest priority legacy systems, evaluate and prioritize their portfolio of existing IT systems, and develop modernization plans that will guide agencies’ efforts to streamline and improve their IT systems. The draft guidance includes time frames for the efforts regarding developing criteria, identifying and prioritizing systems, and planning for modernization. However, OMB did not commit to a firm time frame for when the policy would be issued. Until OMB’s policy is finalized and carried out, the federal government runs the risk of continuing to maintain investments that have outlived their effectiveness and are consuming resources that outweigh their benefits. Regarding upgrading obsolete investments, in April 2016, the IT Modernization Act was introduced into the U.S. House of Representatives. If enacted, it would establish a revolving fund of $3 billion that could be used to retire, replace, or upgrade legacy IT systems to transition to new, more secure, efficient, modern IT systems. It also would establish processes to evaluate proposals for modernization submitted by agencies and monitor progress and performance in executing approved projects. Of the more than $80 billion that the 26 agencies reported spending for federal IT in fiscal year 2015, the agencies spent about $61 billion on O&M. This O&M spending has steadily increased and as a result, key agencies are devoting a small amount of IT spending to DME activities. To its credit, OMB has identified a performance metric to measure the percent of IT spending on non-provisioned IT spending. However, it has not identified an associated goal with this measure. Until it does so, OMB and agencies will be constrained in their ability to evaluate their progress in adopting cloud and shared services. Several of the 12 selected agencies’ major O&M investments were rated as moderate or high risk in fiscal year 2015. While the agencies had specific plans to retire or modernize some of these investments, most investments did not have specific plans with time frames, activities to be performed, or functions to be replaced or enhanced. Further, agencies did not consistently perform required analysis on at-risk investments. Until agencies fully review at-risk O&M investments, the government’s oversight of such investments will be impaired and its spending could be wasteful. Finally, legacy federal IT investments are becoming obsolete. Several aging investments are using unsupported components, many of which did not have specific plans for modernization or replacement. This is contrary to OMB’s draft initiative, which calls for agencies to analyze and review O&M investments. Until this policy is finalized and implemented, the federal government runs the risk of continuing to maintain investments that have outlived their effectiveness and are consuming resources that outweigh their benefits. To better manage legacy systems and investments, we are making 2 recommendations to OMB and 14 recommendations to federal agencies. Specifically, we recommend that the Director of OMB identify and publish a specific goal associated with its non-provisioned O&M spending measure, and commit to a firm date by which its draft guidance on legacy systems will be issued, and subsequently direct agencies to identify legacy systems and/or investments needing to be modernized or replaced. To monitor whether existing investments are meeting the needs of their agencies, we recommend that the Secretaries of Commerce and the Treasury direct the respective agency CIO to ensure that required analyses are performed on investments in the operations and maintenance phase. Further, to address obsolete IT investments in need of modernization or replacement, we recommend that the Secretaries of Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, State, the Treasury, Transportation, and Veterans Affairs; the Attorney General; and the Commissioner of Social Security direct their respective agency CIOs to identify and plan to modernize or replace legacy systems as needed and consistent with OMB’s draft guidance, including time frames, activities to be performed, and functions to be replaced or enhanced. We received comments on a draft of this report from OMB and the other 12 agencies in our review. Eight agencies (USDA, Commerce, HHS, DHS, State, Transportation, VA, and SSA) and OMB agreed with our recommendations, Defense and Energy partially agreed, and Justice and the Treasury stated they had no comment on the recommendations. Each agency’s comments are discussed in more detail below. In comments provided via e-mail on May 12, 2016, an official from OMB’s Office of E-Government and Technology stated that it concurred with our recommendations. The agency also provided technical comments, which we have incorporated in the report as appropriate. In comments provided via e-mail on May 3, 2016, an official from USDA’s Office of the CIO’s Oversight and Compliance Division stated that the department concurred with our recommendation. In written comments, Commerce concurred with both of its recommendations. Regarding the recommendation that the department ensure that required analyses are performed on investments in the O&M phase, the department concurred and stated that it will reiterate and expand the department’s existing policies requiring such analyses. The department also concurred with the recommendation to identify and plan to modernize or replace legacy systems and stated that it is already appropriately replacing and modernizing systems as needed within budget constraints. Commerce’s comments are reprinted in appendix VI. The department also provided technical comments, which we have incorporated in the report as appropriate. In written comments, Defense partially concurred with our recommendation to address obsolete IT investments in need of modernization or replacement. It stated that the department has modernized, upgraded, or retired hundreds of systems in the last several years through an investment review process. The department stated it plans to continue to identify, prioritize, and manage legacy systems that should be modernized or replaced, based on existing department policies and processes, and consistent to the extent practicable with OMB’s draft guidance. Defense’s plan to be consistent with OMB’s guidance to the extent practicable is consistent with the intent of our recommendation. Defense’s comments are reprinted in appendix VII. In written comments, Energy partially concurred with our recommendation to address obsolete IT investments and stated that the department continues to take steps to modernize its legacy investments and systems, as needed and as funding is available. It further stated that all four of the systems listed in appendix IV have been identified for modernization or replacement and three have been modernized as recently as fiscal year 2015. However, since OMB’s draft guidance has not yet been issued, Energy could not concur with this part of the recommendation, but plans to review and consider implementation of such guidance. Energy’s plan to consider OMB’s guidance when it is finalized is consistent with the intent of our recommendation. Energy’s comments are reprinted in appendix VIII. The department also provided technical comments, which we have incorporated in the report as appropriate. In written comments, HHS stated that it concurred with our recommendation and is working to identify and plan to modernize or replace IT systems. HHS’s comments are reprinted in appendix IX. The department also provided technical comments, which we have incorporated in the report as appropriate. In written comments, DHS stated that it concurred with its recommendation and that the department plans to establish a framework for identifying and replacing or modernizing legacy systems after receipt of the finalized guidance. DHS’s comments are reprinted in appendix X. The department also provided technical comments, which we have incorporated in the report as appropriate. In comments provided via e-mail on May 11, 2016, an official from Justice’s audit liaison group, speaking on behalf of the department, stated that it had no comment on the recommendation but plans to follow OMB’s guidance once it is formally issued. The department also provided technical comments, which we have incorporated in the report as appropriate. In written comments, State agreed with the recommendation and noted that it is currently awaiting final modernization guidance from OMB. Upon publication of OMB’s guidance, it plans to work with OMB to develop detailed plans for modernization. State’s comments are reprinted in appendix XI. The department also provided technical comments, which we have incorporated in the report as appropriate. In comments provided via e-mail on May 12, 2016, an official from Treasury’s Office of the CIO stated that the department had no comments on the draft report. In comments provided via e-mail on May 6, 2016, an official from Transportation’s Office of the Secretary stated that the department concurred with the draft findings and recommendations and had no additional comments on the report. In written comments, VA concurred with our recommendation and stated that it launched a new office in April 2016 that will provide lifecycle management oversight for portfolios of systems. In addition, it stated that the department is planning to retire two high-risk, COBOL- based systems (Personnel and Accounting Integrated Data and Benefits Delivery Network) in 2017 and 2018, respectively. VA’s comments are reprinted in appendix XII. In written comments, SSA stated that it agreed with our recommendation and that it has already initiated numerous activities to modernize or replace legacy systems. SSA’s comments are reprinted in appendix XIII. We are sending copies of this report to interested congressional committees; the Secretaries of Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, State, the Treasury, Transportation, and Veterans Affairs; the U.S. Attorney General of the Department of Justice; the Commissioner of the Social Security Administration; the Director of the Office of Management and Budget and other interested parties. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions on matters discussed in this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XIV. Our objectives were to (1) assess the extent to which federal agencies have invested in operating and maintaining existing information technology (IT), (2) evaluate the oversight of at-risk legacy investments, and (3) assess the age and obsolescence of federal IT. For our first objective, our review included the Office of Management and Budget (OMB) and the 26 agencies that report to OMB’s IT Dashboard. For all three objectives, to identify specific reasons for changes in spending and specific information on individual systems or investments, we focused on the 12 agencies with the highest planned IT spending for fiscal year 2015, given that these agencies make up over 90 percent of reported federal IT spending: Department of Agriculture, Department of Commerce, Department of Defense, Department of Energy, Department of Health and Human Services, Department of Homeland Security, Department of Justice, Department of State, Department of the Treasury, Department of Transportation, Department of Veterans Affairs, and Social Security Administration. To assess the extent to which federal agencies have invested in operating and maintaining existing IT, we reviewed data reported to OMB as part of the budget process to determine operations and maintenance (O&M) spending for fiscal years 2010 through 2017. We analyzed that data to determine the extent to which spending had changed over those years. We also compared OMB’s associated performance measure on driving value in federal IT investments (the percent of IT spending that is on development, modernization, and enhancement (DME) activities or provisioned O&M services) to federal best practices. To assess the cause of the changes in spending, we evaluated OMB budget data and interviewed officials at the 12 selected agencies and OMB. To evaluate the oversight of at-risk legacy investments, we reviewed agency IT Dashboard data from the 12 selected agencies to identify investments in O&M that had been identified as being moderate to high risk. Specifically, we reviewed IT Dashboard data on O&M investments to identify those that were rated as moderate to high risk by the agency chief information officer (CIO). We reviewed agency documentation such as TechStat documentation and operational analyses that had been performed on the investments, as available. In addition, we interviewed agency officials to determine plans for replacing or modernizing the investments. To assess the age and obsolescence of federal IT, we reviewed agency documentation associated with their legacy investments, such as operational analyses and enterprise architecture documents, and interviewed agency officials on the issues related to legacy investments. We also requested that agencies provide a list of their three oldest systems. In some cases, agencies reported that they do not track the ages of individual systems. In those cases, we requested that the agencies provide their three oldest IT investments. Agencies noted that these systems and investments may have components that are newer than their operational age. We also compared OMB and agencies’ current practices with federal guidance, such as OMB’s Circular No. A-11: Preparation, Submission, and Execution of the Budget and its associated supplement on capital assets, to determine whether OMB and agencies are adequately managing the age and obsolescence of federal IT. We then interviewed agency officials to confirm and obtain additional information on the systems or investments. To select systems or investments to profile, we identified agencies’ existing investments in O&M that were rated as medium or high risk by their agencies’ CIO (from the previous objective on oversight). Since not all of our selected agencies had identified an at-risk O&M investment (the Departments of Defense, Justice, State, Transportation, and Veterans Affairs and the Social Security Administration did not), we also used the list of agency-identified oldest systems or investments. From the resulting list of systems and investments, we selected one system or investment per agency using the following factors: investment type (major or non- major), system or investment age, and risk level as of November 2015. In particular, we sought to have a mix of systems and investments that included both major and non-major investment types; a range of ages; and a range of risk ratings. We also reviewed agency documentation and interviewed agency officials on those profiled systems or investments. To assess the reliability of the OMB budget data and IT Dashboard data, we reviewed related documentation, such as OMB guidance on budget preparation, capital planning, and IT Dashboard submissions. In addition, we corroborated with each agency that the data downloaded were accurate and reflected the data it had reported to OMB. We determined that the budget and IT Dashboard data were reliable for our purposes of reporting IT O&M spending and related information on O&M investments. We conducted this performance audit from April 2015 to May 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 8 provides the reported spending by agency on operations and maintenance (O&M) and the percentage of IT spending on O&M for fiscal years 2010 and 2015. Table 9 lists the 51 federal bureaus which reported spending less than 10 percent of their IT funds on development, modernization, and enhancement in fiscal year 2015. As part of this review, we requested that agencies provide a list of their three oldest systems. In some cases, agencies reported that they do not track the ages of individual systems, and as a result, we requested that the agency provide their 3 oldest IT investments and their approximate age. Table 10 provides a listing these systems or investments, as reported by agencies. We selected one system or investment per agency using a combination of factors including investment type (major or non-major), system or investment age, and risk level as of November 2015. In particular, we sought to have a mix of systems and investments that included both major and non-major investment types, a range of ages, and a range of risk ratings. The Contractor Business Financial and Administrative Systems investment is intended to provide business and administrative systems for the Department of Energy’s (Energy) Savannah River Site’s management and operating contractor, liquid waste contractor, and the site security contractor to manage human resources (including payroll, benefits, and retirement for 13,000 employees and pensioners), transparent financial reporting to Energy, supply chain, and project management. The investment is a commercial off-the-shelf system that runs on Windows and Unix servers using Oracle’s PeopleSoft applications. Specifically, the investment uses the PeopleSoft Supply Chain Management and PeopleSoft Financials modules. According to an agency official in Savannah River Operations, the vendors still support all of the hardware and software used by this investment. The agency is not currently planning future modernization activity because the investment has gone through several updates in the past, with the last allowing the retirement of 16 associated legacy applications in 2011 and retired two mainframe systems. The officials stated that there is no projected end of life date, and they plan to continue to maintain and use the system. Department of Homeland Security—U.S. Coast Guard Number of users: 14,000 Coast Guard users and also services the Transportation Security Administration Investment start date: 1998 Age: 18 years Investment anticipated end date: 2018 Fiscal year 2016 funding: $29.8 million Total estimated life-cycle costs: $543.2 million Development costs: $0 Operations and maintenance costs: $543.2 million Plans for retirement or modernization: Agency plans to transition to federal shared services in fiscal year 2018. The Core Accounting System (CAS) Suite is the primary financial management system for the U.S. Coast Guard (USCG) and, as a shared service, the financial management system for the Transportation Security Administration (TSA) and the Domestic Nuclear Detection Office (DNDO). CAS is a set of several applications that assist the agencies in several areas, including accounts receivable, accounts payable, purchasing, asset management, procurement, and document imaging and processing. According to the investment’s operational analysis document, CAS relies on outdated and heavily customized Oracle software and has become expensive to support. Specifically, it uses a version of Oracle Federal Financials software that was first available in 2004 and the extended vendor support for the software ended in November 2013. Further, it relies on Windows 2003 servers and any changes would require recoding of many functions within the CAS suite. The agency plans to pursue using other shared services to provide its financial management services and, therefore, began the Financial Management Service Improvement Initiative to migrate the services from CAS to the Department of the Interior’s shared service offering for financial management. In August 2014, the agencies agreed to a staggered transition of these services, with DNDO transitioning in fiscal year 2016, TSA in fiscal year 2017, and USCG in fiscal year 2018. Until the migration is complete and CAS can be decommissioned, USCG plans to resolve emergent issues and maintain applications. In the meantime, due to the costs associated with implementing a full fix and the impending transition to shared services, USCG has accepted the security risks associated with its legacy software. The Diversity Visa Information System (DVIS) is an electronic case management system used by approximately 30 federal employees and contractor staff working at the Department of State’s (State) Kentucky Consular Center to track and validate application information submitted by foreign nationals under the Diversity Visa immigration program. Department of State Number of users: Approximately 30 to 40 consular center staff and 55,000 applicants annually System start date: early 1990s Age: Approximately 26 years System anticipated end date: 2020 Fiscal year 2016 funding: about $164,000 Total estimated life-cycle costs: $2.4 million Development costs: Not tracked at system level Operations and maintenance costs: Not tracked at system level Plans for retirement or modernization: Plans to replace with ConsularOne at an unknown time. The DVIS interface software, PowerBuilder, is no longer supported by the vendor. According to State officials, the main challenges in maintaining DVIS’s aging technology are related to information security and infrastructure concerns. In 2013, State initiated an effort to replace numerous legacy systems, including DVIS. As a part of this effort, State plans to replace DVIS’s functionality with a project called ConsularOne. According to State officials, the replacement effort is to begin in October 2018 and they plan to retire DVIS when appropriate. In the meantime, the department plans to upgrade the unsupported software to a new version, which is also not supported. Department of Transportation—Pipeline and Hazardous Materials Safety Administration Number of users: 250 federal users, 547,000 active hazardous materials facilities, 10,000 active pipeline operators, and several million potential facilities Investment start date: 1970s Age: about 41 years Investment anticipated end date: 2018 Fiscal year 2016 funding : $6.7 million Total estimated life-cycle costs: $38.0 million Development costs: $22.7 million Operations and maintenance costs: $15.3 million Plans for retirement or modernization: Developing new system to replace legacy modules, and plan to retire the legacy modules by the end of fiscal year 2018. The Department of Transportation’s (DOT) Hazardous Materials Information System maintains and provides access to comprehensive information on hazardous materials incidents, exemptions and approvals, enforcement actions, and other elements that support the regulatory program. The system consists of five modules that register carriers and shippers, document incidents involving hazardous materials, issue special permits, facilitate approvals and exemptions pertaining to safety regulations, and document standards. Officials from Pipeline and Hazardous Material Safety’s Office of the Chief Information Officer stated that software applications and processes used by the system have become outdated and costly to maintain. For example, the system uses Microsoft.NET and Classic Active Server Pages. Officials stated that costs have increased due to maintaining the personnel with the knowledge to use these older applications. In particular, the costly applications include those for scanning, imaging, and documentation management. Further, these applications are compartmentalized, so data is duplicated and not integrated. Finally, the system uses an application that is no longer supported by the manufacturer, which can cause security risks, among other issues. Specifically, the system uses Kofax Indicius software to perform optical character recognition on scanned hazardous materials incident reports; the software was no longer supported by the vendor, as of December 2014. DOT is in the process of updating the functions performed by the system. The new system’s modules are intended to be integrated, automated, and improve efficiency, effectiveness, and data quality. Further, the unsupported application is planned to be eliminated. While DOT does not have dates for when individual legacy modules will be retired, officials stated that they plan to have all the legacy modules retired by the end of fiscal year 2018. Department of the Treasury—Internal Revenue Service Number of users: Approximately 230 million tax accounts Investment start date: 1960s Age: Approximately 56 years Investment anticipated end date: 2019 Fiscal year 2016 funding: $13.6 million Total estimated life-cycle costs: $135.4 million Development costs: $38.8 million Operations and maintenance costs: $96.6 million Plans for retirement or modernization: Will be replaced by Customer Account Data Engine 2 at an unknown date. The Internal Revenue Service’s (IRS), Individual Master File (IMF) is the authoritative data source for individual taxpayer accounts. Within IMF, accounts are updated, taxes are assessed, and refunds are generated as required during each tax filing period. Virtually all IRS information system applications and processes depend on output, directly or indirectly, from this data source. IMF was written in an outdated assembly language code and operates on a 2010 IBM z196/2817-m32 mainframe. This has resulted in difficulty delivering technical capabilities addressing identify theft and refund fraud, among other things. In addition, there is a risk of inaccuracies and system failures due to complexity of managing dozens of systems synchronizing individual taxpayer data across multiple data files and databases, limitations in meeting normal financial requirements and security controls, and keeping pace with modern financial institutions. IRS plans to address these issues by replacing IMF with the Customer Account Data Engine 2 (CADE 2) investment. The CADE 2 investment includes plans to re-engineer the IMF by: (1) applying modern programming languages, (2) establishing CADE 2 as the authoritative data source, and (3) implementing functionality to address the IRS financial material weakness. However, the replacement date is currently unknown. In addition, we have previously reported on IRS’s difficulty in delivering planned capabilities on time and on budget. Further, a key phase of the replacement project was initially to be completed by March 2015, but IRS is currently planning to complete parts of this phase well into 2020. As a result, the agency will continue to maintain two separate systems until the replacement is complete. Department of Health and Human Services – Centers for Medicare and Medicaid Services Number of users: 1,900 system users Investment start date: 2005 Age: 11 years Investment anticipated end date: none Fiscal year 2016 funding: $6.7 million Total estimated life-cycle costs (through fiscal year 2017): $99.6 million Development costs: $20.6 million Operations and maintenance costs: $79.0 million Plans for retirement or modernization: The agency has general plans to continuously update the system. The Centers for Medicare and Medicaid Services’ Medicare Appeals System is a case tracking system that is to facilitate maintenance and transfer of case specific data with regard to Medicare appeals through multiple levels of the appeal process. In addition, the system is to provide the capability to report on appeals data and enable more accurate and expedient responses to Congressional questions. The system runs on a Solaris 10 operating system, last updated in February 2016, and uses commercial off-the-shelf systems for case management and reporting. According to the agency, the software is still supported by the vendors. The system has faced challenges due to the rapid growth in appeals processed each year, expanded use of settlements, and the increased interest in appeals data. This has resulted in an increased need for infrastructure changes, such as more storage, licenses, and processing capacity. Agency officials stated that they do not have any plans to address these gaps and that doing so is contingent on funding. They also noted general plans to continuously update the system, but they too are contingent on receiving funding. Department of Commerce—National Oceanic and Atmospheric Administration Number of users: Thousands of users across the federal, state, and local levels, in addition to those in the international and academic communities Investment start date: 1985 Age: 31 years Investment anticipated end date: 2017 Fiscal year 2016 funding: $12.7 million Total estimated life-cycle costs: $282.8 million Development costs: $35.4 million Operations and maintenance costs: $247.4 million Plans for retirement or modernization: Agency plans to retire the system in fiscal year 2017 and replace it with a new system. The National Weather Service Telecommunication Gateway (NWSTG) system is operated by the National Oceanic and Atmospheric Administration, a component of the Department of Commerce. It is the nation’s hub for the collection and distribution of weather data and products and provides national and global real-time exchange services using automated communications resources to collect and distribute a wide variety of environmental data such as observations, analysis, and forecast products. Thousands of customers worldwide use data distributed by the NWSTG and these data affect a wide range of economic and emergency management decisions. Concerns with the system had been increasing because the investment faced risks and challenges associated with an aging and unsupportable infrastructure, limited backup capability, and un-scalable architecture to support future data volume collection and dissemination. In 2013, the agency upgraded its hardware and software to Power7 IBM servers and Unix operating systems (as depicted in the figure); however, NWSTG still lacks full backup capability for 26 percent of its functions. In fiscal year 2013, a major rearchitecture and redesign effort began which, according to Department of Commerce officials, will result in an entirely new dissemination architecture which will replace the NWSTG with an integrated system that is more capable, more reliable, and have 100 percent backup capability. According to officials, a detailed project plan to rearchitecture NWSTG is now being carried out and is scheduled to replace the NWSTG in early fiscal year 2017. The Personnel and Accounting Integrated Data (PAID) system automates time and attendance for employees, timekeepers, payroll, and supervisors in the Department of Veterans Affairs (VA). The PAID software has three major modules: Time and Attendance, Employee Master Record Downloads, and Education Tracking. Department of Veterans Affairs Number of users: 2,900 system users across 200 human resources offices System start date: 1963 Age: 53 years System anticipated end date: 2017 Fiscal year 2016 funding: $6.7 million Total estimated life-cycle costs: n/a, not tracked by system Development costs: n/a, not tracked by system Operations and maintenance costs: $6.6 million yearly Plans for retirement or modernization: The system will mostly be replaced by the Human Resources Information System Shared Service Center, which will consolidate several IT services to provide core human resources- related functions. According to VA officials, PAID is a 50-year old COBOL-based system at the end of its life span. The system runs on IBM mainframes and uses an IBM database. Officials stated the system is not user friendly and requires extensive training in order to use the system successfully. As a result, the cost of maintaining the personnel to manage the system is high. VA officials stated that PAID is intended to be mostly replaced by Human Resources Information System Shared Service Center in 2017, which is to consolidate human resources IT functions and services to provide core human resources-related functions, such as benefits and compensation. However, the target solution is experiencing cost overruns of $14.8 million and VA officials stated that they will not be able to replace all of PAID’s functions. The agency is currently working on a transition plan and will determine whether VA should find another solution for the missing functionality or continue to keep PAID running indefinitely. The U.S. Department of Agriculture’s (USDA) U.S. Forest Service’s Resource Ordering and Status System (ROSS) is used to mobilize and deploy a multitude of resources, including qualified individuals, teams, aircraft, equipment, and supplies to fight wildland fires and respond to all hazard incidents. The system supports the basic needs of the first responders and support personnel at an incident location by processing orders and replenishing supplies. According to the U.S Forest Service, the technology used by ROSS is on the verge of technical obsolescence. Specifically, one of the applications ROSS uses is no longer supported by the vendor, creating vulnerability issues. In addition, in order to use the system, users must download client software onto their local computers, as opposed to accessing the system through the web. In September 2015, the U.S. Forest Service issued a request for information for services to develop ROSS’s replacement—Interagency Resources Ordering Capability. Additionally, in January 2016, Forest Service officials signed a charter to begin this project. Agency officials estimated that this effort will cost $14 million through fiscal year 2019 and the solution will go live in 2018. Department of Justice—Bureau of Prisons Number of users: 38,000 Bureau of Prisons staff, private institution staff, and other federal agencies Investment start date: 1981 Age: 35 years Investment anticipated end date: None Fiscal year 2016 funding: $40.4 million Total estimated life-cycle costs: $571.5 million Development costs: $9.8 million Operations and maintenance costs: $561.7 million Plans for retirement or modernization: Plans to update the user interface and integrate system data through September 2016. Plans for continuous modernization. The Bureau of Prisons Sentry is a real-time information system comprised of various modules that are to enable the agency to maintain proper custody of persons committed to their custody. It provides information regarding security and custody levels, inmate program and work assignments, and other pertinent information about the inmate population. Sentry is used to process inmates at all phases of incarceration, including release, transfer, and sentence computation. When Sentry was first deployed over 30 years ago, it was comprised of approximately 700 program routines written in COBOL and ran on a mainframe platform with an Integrated Database Management System database. It became increasingly more difficult and expensive to maintain complex, highly-customized systems written in older programming languages. Sentry’s entire platform—its mainframe operating system, transaction processing software, the system software, and the database software and system were recently updated in 2012 and uses Java and a new database. As part of this, the bureau migrated the older database, merged the legacy data into the newer database platform, and modified the COBOL programs to ensure compatibility with the new software and database. In addition, the legacy Sentry programs are now accessible via a web browser and use a relational database and both COBOL and Java programming languages. The bureau has plans for updating the user interface and integrating the data through September 2016. According to agency officials, there are no plans to replace Sentry, as the system is the main system used by the bureau. Department of Defense—Air Force Number of users: 175 users across command functions for intercontinental ballistic missiles, bombers, tankers, munitions sites, intelligence, surveillance, and reconnaissance platforms Investment start date: 1963 Age: 53 years Investment anticipated end date: 2030 Fiscal year 2016 funding: $5.6 million Total estimated life-cycle costs: $135 million through 2032 Development costs: Approximately $60 million Operations and maintenance costs: $75 million Plans for retirement or modernization: Defense is initiating a $60 million full system replacement which is scheduled to be completed in fiscal year 2020. The Strategic Automated Command and Control System is the Department of Defense’s (Defense) dedicated high-speed data transmission, processing, and display system. The system coordinates the operational functions of the United States’ nuclear forces, such as intercontinental ballistic missiles, nuclear bombers, and tanker support aircrafts, among others. For those in the nuclear command area, the system’s primary function is to send and receive emergency action messages to nuclear forces. According to Defense officials, the system is made up of technologies and equipment that are at the end of their useful lives. For example, the system is still running on an IBM Series/1 Computer, which is a 1970s computing system, and written in assembly language code. It also uses 8-inch floppy disks, which are a 1970s-era storage device; and assembly programming code typically used in mainframes. Replacement parts for the system are difficult to find because they are now obsolete. As of March 2016, Defense is initiating a $60 million full system replacement which is scheduled to be completed in fiscal year 2020. In addition, Defense is also replacing some legacy functions in the near term—according to officials, there is a plan underway to replace the floppy disks with secure digital cards. This effort is underway and is expected to be completed in the fourth quarter of fiscal year 2017. Social Security Administration Number of users: Services general public, 1,300+ field offices with 50,000 to 60,000 employees, as well as other federal agencies System start date: 1985 Age: 31 years Investment anticipated end date: None Fiscal year 2016 funding: $9.6 million Total estimated life-cycle costs (through fiscal year 2017): $519.8 million Development costs: $235.7 million Operations and maintenance costs: $284.1 million Plans for retirement or modernization: Agency has ongoing modernization efforts. The Social Security Administration’s (SSA) Title II investment includes the Title II system which determines retirement benefits eligibility and amounts, 162 subsystems, as well as several smaller IT improvement initiatives and projects. According to SSA officials, the Title II investment accomplished its goal to improve service delivery by eliminating antiquated Title II programs, reducing compartmentalized systems across the agency, and reducing maintenance costs through integration. SSA officials stated that Title II is comprised of 162 subsystems and some are still written in COBOL. These systems were also built in a compartmentalized structure by SSA, rather than contractors, because the agency determined that there were not commercial programs that could satisfy the agency’s business needs and the volume of data needed. SSA officials stated that most of the employees who developed these systems are ready to retire and the agency will lose their collective knowledge. Officials further stated that training new employees to maintain the older systems takes a lot of time. SSA does not have plans to retire the Title II system. Rather, the agency plans to continue to eliminate and replace Title II’s older and more costly subsystems. Specifically, SSA currently is planning to retire four Title II subsystems, including a claims control system, and one that processes changes in earnings transactions. In addition, SSA has other efforts to modernize or consolidate Title II systems, such as its database management systems. To address the issues associated with losing knowledgeable employees, SSA officials stated that the agency has rehired retirees to work on the legacy systems. In addition to the contact name above, individuals making contributions to this report included Gary Mountjoy (assistant director), Kevin Walsh (assistant director), Scott Borre, Rebecca Eyler, Bradley Roach, Tina Torabi, and Jessica Waselkow. | The federal government invests more than $80 billion on IT annually, with much of this amount reportedly spent on operating and maintaining existing (legacy) IT systems. Given the magnitude of these investments, it is important that agencies effectively manage their O&M. GAO's objectives were to (1) assess federal agencies' IT O&M spending, (2) evaluate the oversight of at-risk legacy investments, and (3) assess the age and obsolescence of federal IT. To do so, GAO reviewed OMB and 26 agencies' IT O&M spending for fiscal years 2010 through 2017. GAO further reviewed the 12 agencies that reported the highest planned IT spending for fiscal year 2015 to provide specifics on agency spending and individual investments. The federal government spent about 75 percent of the total amount budgeted for information technology (IT) for fiscal year 2015 on operations and maintenance (O&M) investments. Such spending has increased over the past 7 fiscal years, which has resulted in a $7.3 billion decline from fiscal years 2010 to 2017 in development, modernization, and enhancement activities. Specifically, 5,233 of the government's approximately 7,000 IT investments are spending all of their funds on O&M activities. Moreover, the Office of Management and Budget (OMB) has directed agencies to identify IT O&M expenditures known as non-provisioned services that do not use solutions often viewed as more efficient, such as cloud computing and shared services. Agencies reported planned spending of nearly $55 billion on such non-provisioned IT in fiscal year 2015. OMB has developed a metric for agencies to measure their spending on services such as cloud computing and shared services, but has not identified an associated goal. Thus, agencies may be limited in their ability to evaluate progress. Many O&M investments in GAO's review were identified as moderate to high risk by agency CIOs, and agencies did not consistently perform required analysis of these at-risk investments. Further, several of the at-risk investments did not have plans to be retired or modernized. Until agencies fully review their at-risk investments, the government's oversight of such investments will be limited and its spending could be wasteful. Federal legacy IT investments are becoming increasingly obsolete: many use outdated software languages and hardware parts that are unsupported. Agencies reported using several systems that have components that are, in some cases, at least 50 years old. For example, Department of Defense uses 8-inch floppy disks in a legacy system that coordinates the operational functions of the nation's nuclear forces. In addition, Department of the Treasury uses assembly language code—a computer language initially used in the 1950s and typically tied to the hardware for which it was developed. OMB recently began an initiative to modernize, retire, and replace the federal government's legacy IT systems. As part of this, OMB drafted guidance requiring agencies to identify, prioritize, and plan to modernize legacy systems. However, until this policy is finalized and fully executed, the government runs the risk of maintaining systems that have outlived their effectiveness. The following table provides examples of legacy systems across the federal government that agencies report are 30 years or older and use obsolete software or hardware, and identifies those that do not have specific plans with time frames to modernize or replace these investments. GAO is making 16 recommendations, one of which is for OMB to develop a goal for its spending measure and finalize draft guidance to identify and prioritize legacy IT needing to be modernized or replaced. GAO is also recommending that selected agencies address at-risk and obsolete legacy O&M investments. Nine agencies agreed with GAO's recommendations, two agencies partially agreed, and two agencies stated they had no comment. The two agencies that partially agreed, Defense and Energy, outlined plans that were consistent with the intent of our recommendations. |
Social Security is largely a pay-as-you-go, defined benefit system under which taxes collected from current workers are used to pay the benefits of current retirees. Social Security is financed primarily by a payroll tax of 12.4 percent on annual wages up to $72,600 (in 1999) split evenly between employees and employers or paid in full by the self-employed. Since 1940, Social Security has been providing benefits to the nation’s eligible retired workers, their dependents, and the survivors of deceased workers. In addition, since 1956, the program has provided income protection for disabled workers and their eligible dependents. Today, the Social Security program covers over 145 million working Americans—96 percent of the workforce. It is the foundation of the nation’s retirement income system and an important provider of disability benefits. Currently, 44 million individuals receive Social Security benefits. Social Security retirement benefits are calculated using the worker’s 35 years of highest earnings in covered employment. However, benefits are not strictly proportional to earnings. A progressive benefit formula is applied so that low-wage workers receive, as a monthly benefit, a larger percentage of their average monthly lifetime earnings than do high-wage workers. The benefit is adjusted for the age at which the worker first begins to draw benefits. To receive Social Security retirement benefits, employees must be at least 62 years old and have earned a certain number of credits for work covered by Social Security. Retirees are eligible for full benefits at age 65—the normal retirement age—and those retiring at 62 currently receive 80 percent of their full benefit. The age for full benefit eligibility is scheduled to incrementally increase to age 67 for those born between 1938 and 1960. Since 1975, benefits have been automatically adjusted each year to compensate for increases in the cost of living. Additionally, benefits are adjusted when recipients aged 62 through 69 have earnings above a certain threshold. Individuals may be eligible for Social Security benefits on the basis of their spouses’ earnings. For example, a married person who does not qualify for Social Security retirement benefits may be eligible for a spousal benefit that is worth up to 50 percent of the primary earner’s retirement benefit. Spouses who do qualify for their own Social Security retirement benefit but whose retirement benefit is worth less than 50 percent of the primary earner’s benefit are eligible for both their own retirement and certain spousal benefits. Specifically, benefits for such dually eligible individuals are calculated so that their retirement benefit and their spousal benefit could add up to 50 percent of the primary earner’s benefit. In practice, spouses receive either the value of their individual benefit or the value equivalent to 50 percent of the primary earner’s benefit, whichever is higher. Under Social Security, retirement benefits can be paid to ex-spouses if they were married to the worker for at least 10 years, are not remarried, and are at least 62 years old. A deceased worker’s survivors are eligible for benefits if the survivor is a spouse at least 60 years old or a disabled spouse at least age 50, a parent caring for an eligible child under age 16, an eligible child under the age of 18, or a dependent parent. Ex-spouses are eligible for survivor benefits if they do not remarry before age 60 and meet other qualifications for surviving spouses. Social Security’s Disability Insurance program provides cash benefits to disabled workers and their dependents. To qualify for disability benefits, the worker must be unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or to last for a continuous period of at least 12 months. Disability benefits are available after a 5-month waiting period beginning at the onset of the disability. To be eligible, the employee, if over age 30, must have worked in Social Security-covered employment for at least 20 of the 40 quarters immediately preceding the disability’s onset. If under 31, the disabled worker must have had earnings in at least one-half the quarters worked after he or she reached age 21, with a minimum of six quarters. Disabled worker benefits are automatically converted to retired worker benefits when the disabled worker reaches the normal retirement age. Workers for state and local governments were originally excluded from Social Security because many were already covered by a state or local government pension plan, and the federal government’s constitutional right to impose a tax on state and local governments was uncertain. In the 1950s, the Social Security Act was amended to allow state and local governments the option of covering their employees. Those state and local governments that elected coverage were allowed to opt out later if certain conditions were met. However, the Congress amended the Social Security Act in 1983 to prohibit state and local governments from opting out of the program once they joined. In 1981, Galveston County officials, citing expected future increases in the Social Security tax rate and wage base, notified the Social Security Administration of the County’s intent to withdraw from the program. County employees voted two to one in support of withdrawal. The neighboring counties of Brazoria and Matagorda followed Galveston’s lead and also withdrew from Social Security. Rather than simply eliminate the Social Security payroll taxes and the coverage provided, the three Texas counties continued to collect these amounts to create the Alternate Plans—deferred compensation plans that include retirement, disability, and survivor insurance benefits. The Alternate Plans are designed to replicate many of the features found in the Social Security program. Creators of the Alternate Plans, however, wanted to replace Social Security’s benefits package with one that offered potentially higher returns, while still providing a high level of benefit security. Today, about 3,000 employees of the three Texas counties are covered by these plans. While Social Security and the Alternate Plans offer a similar package of benefits, there are a number of important differences between the two approaches in the calculation of benefits and scope of coverage. The Alternate Plans’ benefits are advance funded, while Social Security’s promised benefits are not. As a defined benefit plan, Social Security calculates benefits by formula, whereas the Alternate Plans—defined contribution plans—determine benefits largely by the accumulations in the beneficiary’s retirement account. Retirement benefits under the Alternate Plans are thus based on contributions and investment returns and are not adjusted to provide proportionately larger benefits to low-income workers, as is the case with Social Security. Survivor benefits under the Alternate Plans are not lifetime benefits, but a one-time life insurance payment made to the worker’s designated beneficiaries, along with the worker’s account balance; there are no additional benefits for dependents. Disability benefits under the Alternate Plans are equal to 60 percent of the employee’s wage at the time of disability, up to a maximum benefit of $5,000 a month. Workers are eligible to receive the value of the employee’s account at the time he or she becomes disabled. At that time, a new retirement account is established that pays an amount equivalent to the employee and employer’s contributions at that time. The Alternate Plans’ disability benefits make no allowances for dependents. Social Security’s disability benefits are based on a modified benefit formula and include additional benefits for the dependents of disabled workers. As is the case with Social Security, the Alternate Plans are funded by payroll taxes collected from employers and employees. Galveston County employees, for example, contribute 6.13 percent of their gross earnings toward their deferred compensation account. The County contributes 7.785 percent of a worker’s gross compensation. Total contributions to the Alternate Plans in Galveston County today are 13.915 percent—somewhat higher than the 12.4 percent contributed by employers and employees to Social Security. A portion of the County’s contribution goes to pay for the employee’s life and disability insurance premiums (4.178 percent in 1998). The Alternate Plans were designed to give the employees a guaranteed nominal annual return on their contributions of at least 4 percent. Therefore, the Alternate Plans’ managers contracted with an insurance company to purchase an annuity that guaranteed the minimum return. The portfolios holding the plans’ contributions are invested only in fixed-rate marketable securities (government bonds, corporate bonds, and preferred stocks) and bank certificates of deposit. Rates of return on the portfolios for all of the Alternate Plans have ranged widely over the years but currently are around 6 percent in nominal terms. Social Security, on the other hand, is mostly a pay-as-you-go program, but when revenues exceed outlays, as they currently do, the surplus is credited to the Trust Funds in the form of nonmarketable Treasury securities. The funds earn interest but, unlike the Alternate Plans, the interest income does not influence the amount of Social Security benefits paid to retirees. Because virtually all work in the United States is covered by Social Security, benefits are fully portable if the worker changes jobs. If participants in the Alternate Plans leave county employment, they can either take their account balances with them or leave the account, which will continue to earn the portfolio’s rate of return. The Alternate Plans are tax-deferred plans, so if the employee elects to cash out the account, he or she must pay income taxes on the proceeds, although there is no penalty involved. All distributions of deferred compensation accounts are taxed at the employee’s marginal tax rate at the time of distribution. Social Security income is not taxed as long as an individual’s income does not exceed certain thresholds. There are also a number of significant differences in how retirement income benefits are determined under the two approaches. Because Social Security is a defined benefit plan, it calculates benefits by formula. The Alternate Plans are defined contribution plans, so benefits are directly related to the capital accumulations in the beneficiaries’ retirement accounts. In addition, retirement benefits are available at younger ages under the Alternate Plans than under Social Security. Moreover, unlike Social Security retirement benefits, which are based on the 35 years of highest covered earnings and weighted to replace a larger share of a low earner’s wages, retirement income benefits under the Alternate Plans depend solely on contributions to the individual’s account and the earnings on the plans’ investments. Also, Social Security provides a separate spousal benefit, and the Alternate Plans do not. (See table 1.) The Alternate Plans do not ensure the preservation of retirement benefits. While Social Security provides retirees with a lifetime annuity, the Alternate Plans allow retiring employees to choose between taking a lump sum payout or purchasing an annuity with one of several different payout options. If the worker chooses to receive income from the plan over his or her remaining lifetime or over that of a spouse, he or she must purchase either an individual annuity or a “joint and survivor” annuity. But annuities generally are not inflation-protected as they are under Social Security, so the purchasing power of this retirement income could decline over time. To protect against future inflation, the retiree can arrange to schedule the annuity payouts so that they are higher in the later years, but this means accepting smaller benefits in the early years. In 1998, the plan for Brazoria County was modified to allow employees to place their share of the contributions in equity funds. It is too soon to judge how this change would affect our comparisons. Unlike Social Security, the Alternate Plans’ survivor benefits can be a one-time payment or a series of payments over a finite period of time. Under the Alternate Plans, if an employee dies, the surviving beneficiary (anyone named as beneficiary by the worker) receives the value of the employee’s account at the time of death, plus a life insurance benefit. The life insurance benefit for a beneficiary of an employee who dies while under age 70 is 300 percent of the deceased worker’s salary, with a minimum benefit of $50,000 and a maximum of $150,000. Beneficiaries of employees who die between the ages of 70 and 74 are entitled to insurance proceeds up to 200 percent of the covered employee’s annual earnings, with a minimum of $33,330 and a maximum of $100,000. Beneficiaries of employees who die at age 75 or older are entitled to 130 percent of the employee’s annual earnings, with a minimum of $21,665 and a maximum of $65,000. These lump sum payments can be used by the beneficiary to purchase a lifetime annuity. Social Security survivor benefits, on the other hand, are based on the worker’s benefit at the time of death, adjusted for the number of beneficiaries. The benefit is paid as an annuity, not a lump sum distribution, and is paid generally to surviving spouses who are 60 years old or older or who have dependent children. (See table 2.) Under the Alternate Plans, workers are considered to be disabled if they cannot work in their occupation for at least 24 months. Social Security, in contrast, requires that the individual not be able to perform any substantial gainful activity because of a physical or mental impairment for at least 12 months to qualify for benefits. After an initial 180-day waiting period, the Alternate Plans’ disability insurance pays 60 percent of an individual’s base salary until age 65 or until the individual returns to work. The amounts provided by Social Security’s disability insurance vary, but they follow the same formula as retirement benefits. Of the first $505 of monthly earnings, 90 percent is replaced, but the replacement rate falls off rapidly after that. Only 32 percent of monthly earnings between $505 and $3,043 are replaced, and only 15 percent of earnings above $3,043 are replaced. Few disabled workers who do not have dependents, therefore, would receive as much as 60 percent of their wage or salary. A totally disabled employee can receive a minimum monthly benefit payment of $100 under the Alternate Plans, up to a maximum benefit of $5,000 a month. At the time the worker ceases employment because of a disability, he or she can purchase an annuity with the account balance. A separate account is then set up by the disability insurance provider, and the insurer pays an amount into that account equivalent to the employer and employee contributions at the time the employee stopped working. Payments are made until the employee reaches age 65. Unlike Social Security, the Alternate Plans provide no dependent benefits. (See table 3.) Our comparisons of retirement, survivor, and disability benefits under the two approaches show that outcomes generally depend on individual circumstances and conditions. For example, certain features of Social Security, such as the tilt in the benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and those with dependents. The Social Security benefit formula replaces a larger share of the wages of a low earner than of a high earner. As a result, low-wage earners with relatively shorter careers in the three Texas counties would have received larger initial benefits from Social Security than from the Alternate Plans. Social Security benefits also are adjusted for inflation so their purchasing power is stable over time. Thus, the longer the period of retirement, the more likely it is that Social Security will provide higher monthly benefits than a fixed annuity purchased with the proceeds from the Alternate Plans. The Social Security spousal benefit also can significantly raise the retirement incomes of couples when one partner had little or no earnings. Under the Alternate Plans, workers have assets that they may pass on to designated beneficiaries. Conversely, a worker has no assets from Social Security to bequeath to his or her heirs. Finally, the fact that Social Security takes into account the number of dependents in calculating survivor and disability benefits means that individual family circumstances will be important in determining whether Social Security or the Alternate Plans provides larger benefits. Our simulations comparing the retirement benefits for employees of the three Texas counties show that the benefits from Social Security and the Alternate Plans depend on the employee’s earnings, the number of years in the program, the presence of a spouse, the length of time in retirement, and the year the worker retires. In general, low-wage workers and, to a lesser extent, median-wage earners would fare better under Social Security. High-wage earners can generally expect to do better under the Alternate Plans, although if spousal benefits are included, even high-wage workers could eventually receive higher retirement income benefits from Social Security. Low-wage workers retiring at 65 today after a 35-year career in county employment would receive a higher initial monthly benefit under Social Security. If the family is eligible for a Social Security spousal benefit or if a joint and survivor annuity is elected under the Alternate Plans, the gap increases. Social Security provides a spousal benefit of up to 50 percent of a worker’s benefit (for a spouse with a record of little or no earnings of his or her own), while the Alternate Plans’ spousal coverage through the purchase of a joint and survivor annuity actually reduces the couple’s monthly income. Low-wage earners with 35-year careers retiring in 2016 are projected to receive roughly the same individual initial monthly benefits under Social Security and the Alternate Plans. The Alternate Plans’ benefits are relatively better for those retiring in the future than for those retiring today because earnings on the plans’ investments were relatively low in the ’60s and early ’70s as compared with the ’90s. (See table 4.) Nevertheless, because Social Security benefits are indexed for inflation, they would grow larger over time and would eventually exceed the retirement benefits from the Alternate Plans, as the latter remained constant. (See figs. 1 and 2). The picture for low-wage workers changes somewhat if a 45-year career is assumed. Because all contributions and the investment earnings on them determine the size of an Alternate Plan account, more years of earnings in jobs covered by Alternate Plans lead to higher account balances and, therefore, higher monthly benefits from the annuity. Social Security benefits, by contrast, are based on a formula using the 35 years of highest earnings from all jobs. With the longer work history, initial individual benefits for low-wage workers would be higher under the Alternate Plans than under Social Security, although, if spousal benefits and joint and survivor annuities were considered, Social Security benefits would again be larger. (See table 5.) Even the higher individual benefits would not be permanent, as indexation would ultimately close the gap. For low-wage workers retiring in 2008, however, the gap would be closed in 4 years, while for those retiring in 2026, the gap would be closed in 9 years. Thereafter, Social Security monthly benefits would be higher. (See figs. 3 and 4.) For median-wage earners, Social Security initial benefits are higher when spousal benefits are included. Individual benefits—even when they start out lower—eventually catch up to the Alternate Plans’ benefits, but it does take longer for median-wage earners than for low-wage earners. After 7 years of retirement Social Security benefits would catch up to Alternate Plan benefits for median-wage earners retiring in 2008 after a 45-year career with the county assuming Social Security was indexed at 3.5 percent. For those with 45-year careers retiring in 2026, it would take about 13 years for Social Security individual retirement benefits to overtake those of the Alternate Plans. High-income workers, in general, would probably do better under the Alternate Plans, although consideration of spousal benefits or coverage also could lead to higher benefits under Social Security through indexation of benefits—at least for those with 35-year careers. We used 35- and 45-year work histories to approximate working careers. We recognize that many people have shorter or less continuous careers. For example, in 1993 the average 62-year-old woman spent only 25 years in the workforce, compared with 36 years for the average 62-year-old man. Both men and women leave the workforce temporarily for a variety of reasons, such as to return to school or to raise children. Fewer years and less continuity would influence the pattern of benefits under both plans. We simulated outcomes for workers who left the labor force for either 5 or 10 years early in their careers (at age 25). Under both Social Security and the Alternate Plans, retirement benefits were reduced. However, the reduction was larger under the Alternate Plans because the size of the accounts at retirement is sensitive to when the contributions are made. Monies not contributed early in the worker’s career lose the benefits from compounding, leading to a significantly lower account balance at retirement. Social Security benefits are also reduced, but because they are based on the earners’ 35 years of highest income and are not affected by compounding, the impact on retirement income is less. This simulation shows that the relative “superiority” of the two approaches depends on individual circumstances. These simulations are not meant to portray a “typical” worker, but rather to demonstrate the importance of particular factors in determining relative benefits from the two approaches. For example, currently only about 7 percent of Social Security benefits are spousal benefits, and that percentage is expected to decline over time as more women become eligible for benefits on the basis of their own earnings. It is also true that Social Security benefits are reduced on the death of the retired worker, while the joint and survivor annuity under the Alternate Plans could be structured to provide constant benefits. Nonetheless, for some county workers Social Security retirement benefits would probably have exceeded those available from the Alternate Plans. With respect to survivor benefits, our simulations indicated that, in cases in which the surviving spouse was left with two dependent children under age 16, benefits would usually be higher under Social Security because Social Security takes the number of dependents into account when computing the total family monthly benefit. For example, if a low-wage worker died at age 45, our simulations indicate a surviving spouse with two dependent children would receive $1,602 per month, while under the Alternate Plans, the family would receive only $831 per month on the basis of annuitizing lump sum benefits. (See table 6.) On the other hand, if there were no dependent children, the surviving spouse would not be eligible for survivor benefits under Social Security until age 60, whereas under the Alternate Plans, the surviving spouse would immediately be eligible to receive three times the worker’s salary plus any dollar amounts in the worker’s retirement income account. The Alternate Plans’ survivor benefits would also be higher in cases in which the worker died late in his or her career. The survivor of a low-wage worker who died at age 60 with no dependents would receive $1,013 per month under Social Security, whereas the survivor could receive a lifetime monthly benefit of $1,494 under the Alternate Plans if he or she chose to use the proceeds to buy an annuity. Again, in about a dozen years, increases in benefits due to cost-of-living adjustments would lead to larger monthly benefits under Social Security than under the Alternate Plans. In those cases in which the worker died before working enough quarters to qualify for Social Security benefits, the surviving spouse would not be eligible for survivor benefits. Under the Alternate Plans, however, the survivor is immediately eligible to receive three times the employee’s wage and any account accumulations regardless of how long the employee worked. Because the Alternate Plans replace 60 percent of a disabled worker’s wage or salary and because disabled workers can also annuitize their account balances at the time of disability, the Alternate Plans often provide substantially better disability benefits than Social Security. This is especially true when no dependents are involved. Indexation of Social Security benefits for inflation can eventually close the gap, but it could take over 20 years to do so. For example, a 26-year-old low-income worker with no dependents would receive $711 monthly under Social Security, but $1,086 from the Alternate Plans. It would take a dozen years for indexation (at 3.5 percent per year) to raise the Social Security initial benefit to that received under the Alternate Plans. For a high-income 26-year-old, it would take more than 25 years to close the gap. Although the Alternate Plans still provide a larger initial monthly benefit in all the cases we simulated, the differences were narrowed when dependents were involved. Nevertheless, for high earners, even those with dependents, the Alternate Plans provided larger benefits, and indexation would not close the gap for 15 to 20 years. (See table 7.) The type of disability a worker has also influences how he or she fares under the two systems. Benefits for workers with “mental or nervous disorders” are limited to 12 months under the Alternate Plans. Workers with such disabilities would receive higher benefits under Social Security if their condition lasted over 12 months because Social Security does not limit benefits on the basis of impairment. Given the inherent differences between the two systems, our results suggest that benefits primarily depend on individual circumstances. Social Security was designed, in part, to protect low earners and their families, and indeed low-wage earners generally would do better under Social Security. Moreover, while individual circumstances play a role, particular features of Social Security, such as the spousal benefit and automatic cost-of-living adjustments, often result in larger Social Security benefits to recipients than the benefits available under the Alternate Plans. In addition, when dependent children are involved, survivor benefits can be higher under Social Security. Because the Alternate Plans do not tilt benefits in favor of low-wage earners, they can provide better benefits for high-wage workers. In terms of disability benefits, the Alternate Plans generally provide higher initial monthly benefits, especially for high-income workers. It is important to keep the results of our analysis in perspective. Our results reflect the specific features and conditions of the Alternate Plans and should not be construed as an analysis of the potential for individual accounts in general. For example, in an effort to mirror the “safety” of Social Security, the Alternate Plans have followed a conservative investment strategy wherein investments in common stocks are avoided. As a result, the Alternate Plans’ investments have had low returns—especially relative to those from the equities markets. Also, our projections of future Social Security benefits assume the benefits available today will be available in the future. Social Security benefits in the future could certainly be less than those we simulate depending on the reforms that are implemented to address the system’s long-term shortfall. Finally, many of the proposals for individual accounts do not call for the complete replacement of Social Security but rather provide for a two-tier system that combines the safety net, social insurance aspect of Social Security with the promise of higher returns from individual accounts. Overall, our analysis suggests that several of Social Security’s features make an important difference to the relatively less well-off, to single-earner married couples, and to families with dependent children. How these features are treated in any changes to Social Security could have important implications for these groups. We shared a draft of this report with Social Security personnel familiar with the program’s benefit structure, outside retirement income specialists, and individuals responsible for administering the Alternate Plans. We received technical comments from several reviewers and incorporated the comments as appropriate. Administrators for the Alternate Plans also provided us with updated figures, which we used in calculating benefits. In addition, these administrators pointed out that we should use the annuitized values of the accounts at the time of the disability to calculate the Alternate Plans disability benefits. We incorporated those changes. The administrators also noted that they were in the process of introducing a number of changes to the Alternate Plans that would improve benefits. They told us that they were introducing an annuity that provided for a 2- to 3-percent annual adjustment to protect against inflation. The administrators also said they were in the process of adding new benefits for surviving spouses and dependent children. The spouse would receive a lifetime benefit of 30 percent of the deceased worker’s income, and dependent children would receive an additional 30 percent. How much these benefits would cost had not been determined, and it was not clear how they would affect our comparisons. Finally, the Alternate Plans administrators told us that, in their view, we should have used the average returns that the plans’ investments made in the past 17 years in projecting future returns. We disagree. Returns on fixed income portfolios have declined significantly since the 1980s, and forecasts of future returns on the assets in fixed income portfolios do not envision a return to those higher levels. The projections we employed were for an asset whose performance has closely mirrored the performance of the Alternate Plans’ investments. We believe that is a more accurate estimate. We are providing copies of this report to the Commissioner of Social Security, officials of organizations and state and local governments that we worked with, and other interested congressional parties. Copies will also be made available to others upon request. Please contact me at (202) 512-7215 if you have any questions about this report. Other major contributors to this report are listed in appendix III. In order to compare potential retirement, survivor, and disability benefits under the Alternate Plans and Social Security, we simulated the work histories of county employees who had relatively low, median, or high earnings. We classified employees as low earners if they were at the 10th percentile of the wage distribution and as high earners if they were at the 90th percentile. Median earners are in the middle of the distribution (half earn more and half earn less). We used the 1998 wage distribution of Galveston County employees nearing retirement to determine low, median, and high earnings: $17,124, $25,596, and $51,263, respectively. Nationally, low, median, and high earnings were $13,000, $31,200 and $75,000. Low earners in Galveston County, therefore, had wages nearly one-third higher than those in the 10th percentile nationally, but the wages of high earners in Galveston were about 68 percent of those of the 90th percentile earners nationally; median wages of the Galveston County workers were 82 percent of the national median. In order to calculate Alternate Plans and Social Security benefits for our illustrative employees, we created earnings and contributions histories for these workers. We used a model of earnings growth over workers’ careers to reflect the fact that wage income does not grow linearly over a working lifetime, but rather that wage growth resembles an “s”-shaped curve. This curve reflects more rapid growth during the years when an individual’s productivity grows fastest and slower wage increases as the worker nears the end of his or her career. We used the earnings for workers nearing retirement in 1998 to project the nominal wages of such workers back to the beginning of their careers. We also used the model to project earnings experiences for those retiring in the future. We projected earnings at age 65 for workers retiring in the future in the three income classes by taking the wage distribution for 1998 earnings and inflating the earnings by nominal wage growth to the future retirement years, using the Social Security Trustees’ Intermediate Cost Assumptions (see app. II). We applied the model to create the wage histories. The coefficients used to create the earnings histories were developed and reported in T. Hungerford and G. Solon, “Sheepskin Effects in the Returns to Education,” Review of Economics and Statistics, 69(1), 1987. While actual earnings histories may have greater diversity over time than the wages produced by this model, this methodology allowed us to provide illustrative earnings patterns. To compute expected retirement, survivor, and disability benefits under the Alternate Plans, we calculated the expected balances in the accounts at the time of retirement, death, or onset of disability. Account balances depend on earnings, contributions, and investment income. We used the actual contribution rates that were in effect when the Alternate Plans began (Social Security payroll tax rates at the time) and adjusted the rates as they changed over time. Similarly, in projecting what the contributions would have been if the Alternate Plans had been in effect before 1981, we used the corresponding Social Security payroll tax rate. The contribution rates for the three counties differ only slightly, so we used the Galveston County contribution rates in generating our estimates. For future years, we assumed that current contribution rates would remain in effect. To arrive at the investment income, we obtained data on the interest rates earned on assets purchased by the Alternate Plans since 1981. To calculate the potential account balances for workers who entered county employment before 1981 or for future periods, we had to make some extrapolations. For the period 1963 to 1980, the funds’ portfolio manager was able to provide us with the investment income on similar types of investment vehicles offered by the firm. In projecting future earnings, we found that Social Security special Treasury securities were another fixed income asset whose earnings closely paralleled the experience of the Alternate Plans’ portfolios. The special Treasury securities issued to the Social Security Trust Funds closely mirrored the Alternate Plans’ investment earnings history. We used Intermediate Assumptions’ interest rate forecasts for the special Treasury securities developed for the Social Security Trustees 1998 Annual Report. To calculate Social Security benefits, we employed the Social Security Benefit Estimate Program for Personal Computers, known as the ANYPIA program, which is available on-line at www.ssa.gov. Finally, to calculate retirement and survivor benefits under the Alternate Plans, we calculated the monthly benefits that retirees or survivors would receive if they took their lump sum distributions and purchased either an individual life or a joint and survivor annuity. To estimate the monthly benefits, we obtained the annuity factors from the Alternate Plans’ insurance and annuity providers. We also received annuity factors from the Social Security Administration to calculate the lifetime monthly retirement benefits. Our simulations made a number of simplifying assumptions. We do not represent the simulations we undertook to be “typical,” but rather as illustrative of how workers and their families might fare under a range of circumstances. We assumed that individuals work continuously at one job for their entire working lives. We simulated 35-year and 45-year working lives and assumed that people retire at the normal Social Security retirement age. In reality, many individuals have very discontinuous work histories, work at many different places, and retire before the normal retirement age. Many people elect to take Social Security benefits when they first become eligible at age 62. We also assumed that Alternate Plan beneficiaries annuitized their lump sums, although currently very few elect life annuities. We made this assumption in order to put the two systems on an equal footing for benefit comparability. Average annual percentage in labor force(continued) Average annual percentage in labor force(continued) The real gross domestic product (GDP) is the value of total output of goods and services expressed in 1992 dollars. Francis P. Mulvey, Assistant Director, (202) 512-3592 Hans Bredfeldt James Lawson Christy Bonstelle Muldoon Barbara Smith Ken Stockbridge Bill Williams The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on three Texas counties' employee retirement plans, known as Alternate Plans, focusing on: (1) comparing the principal features and benefits of these plans with those of social security; and (2) simulating the retirement, survivor, and disability benefits that individuals in varying circumstances might receive under the Alternate Plans and under social security. GAO noted that: (1) while social security and the Alternate Plans offer retirement, disability, and survivor benefits to qualified workers, there are fundamental differences in the purpose and structure of the two approaches; (2) Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, disabled workers, and their dependents and survivors stay out of poverty; (3) Social Security benefits are tilted to provide relatively higher benefits to low-wage earners, and the benefits are fully indexed to protect against inflation; (4) social security is a pay-as-you-go system that is projected to produce a negative cash flow in 2013 and become insolvent by 2032; (5) the Alternate Plans are advance funded plans; the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings made on those invested contributions are used to fund retirement benefits; (6) the Alternate Plans' benefits are directly linked to contributions, so that retirement income is based on accumulated contributions and the earnings thereon; (7) at retirement, the worker can take the money in the account as a lump sum or select from a number of monthly payout options, including the purchase of a lifetime annuity; (8) GAO found that certain features of social security, such as the progressive benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and individuals with dependents; (9) many median-wage earners, while initially receiving higher benefits under the Alternate Plans, would also have received larger benefits under social security after 4 and 12 years after retirement, because social security benefits are indexed for inflation; (10) the Alternate Plans provide larger benefits for higher-wage workers than social security would, but in some cases, such as when spousal benefits are involved, social security benefits could also exceed those of the Alternate Plans; (11) survivor benefits often would be greater under social security than under the Alternate Plans, especially when a worker died at a relatively young age and had dependant children; (12) with regard to disability benefits, all workers in GAO's simulations would receive higher initial benefits under the Alternate Plans; and (13) it is important to note that the Alternate Plans performance is not necessarily indicative of how well a proposed system of individual accounts with social security might perform. |
SEC oversees mutual funds primarily through its Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement. OCIE examines mutual funds to evaluate their compliance with the federal securities laws, to determine if they are operating in accordance with disclosures made to investors, and to assess the effectiveness of their compliance control systems. The Division of Investment Management administers the securities laws affecting funds and advisers. It reviews disclosure documents that mutual funds are required to file with SEC and engages in other regulatory activities, such as rulemaking, responding to requests for exemptions from federal securities laws, and providing interpretation of those laws. Finally, SEC’s Division of Enforcement investigates and prosecutes violations of securities laws related to mutual funds. SEC regulates mutual funds under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934. The Investment Company Act was passed specifically to regulate mutual funds and other types of investment companies. Under the act, mutual funds are required to register with SEC, subjecting their activities to SEC regulation. The act also imposes requirements on the operation and structure of mutual funds. Its core objectives are to ensure that investors receive adequate and accurate information about mutual funds, protect the integrity of fund assets, prohibit abusive forms of self-dealing, prevent the issuance of securities that have inequitable or ensure the fair valuation of investor purchases and redemptions. The Investment Advisers Act requires mutual fund advisers to register with SEC, imposes reporting requirements on them, and prohibits them from engaging in fraudulent, deceptive, or manipulative practices. The Securities Act requires fund shares offered to the public to be registered with SEC and regulates mutual fund advertising. Under the Securities Act and Investment Company Act, SEC has adopted rules to require mutual funds to make extensive disclosures in their prospectuses. The Securities Exchange Act, among other things, regulates how funds are sold and requires persons distributing funds or executing fund transactions to be registered with SEC as broker-dealers. SEC, NASD, and NYSE regulate broker-dealers, including their mutual fund sales practices, by examining their operations and reviewing customer complaints. Broker-dealers that are members of NYSE and do business with the public are typically also required to be members of NASD. Historically, NASD has conducted the mutual fund sales practice portions of examinations for firms that are dually registered with it and NYSE. As a result, NYSE generally plays a lesser role in examining broker-dealers for mutual fund sales practices. NASD has established specific rules of conduct for its members that provide, among other things, standards for advertising and sales literature, including filing requirements, review procedures, approval and recordkeeping obligations, and general standards. NASD also tests members to certify their qualifications as registered representatives. SEC evaluates the quality of NASD and NYSE oversight in enforcing their member compliance with federal securities laws through SRO oversight inspections and broker-dealer oversight examinations. SROs are private organizations with statutory responsibility to regulate their own members through the adoption and enforcement of rules of conduct for fair, ethical, and efficient practices. As part of this responsibility, they conduct examinations of the sales practices of their broker-dealer members. SEC’s SRO oversight inspections cover all aspects of an SRO’s compliance, examination, and enforcement programs. The inspections determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. Under its broker-dealer oversight examinations, SEC examines some of the broker-dealers that SROs recently examined. SEC conducts these examinations to assess the adequacy of the SRO examination programs. In addition to its oversight examinations, SEC conducts cause, special, and surveillance examinations of broker-dealers, but these examinations do not serve to assess the quality of SRO examinations. Since the detection of the mutual fund trading abuses in the summer of 2003, SEC has made significant changes to its traditional examination approach, which generally focused on conducting routine examinations of all funds on an established schedule. To better detect potential violations, SEC has reallocated or plans to reallocate its staff to conducting targeted examinations focusing on specific risks and monitoring larger funds on a continuous basis. SEC’s revised examination approach offers the potential for the agency to more quickly identify emerging risks and better understand the operations of large and complex funds, although it is too soon to reach definitive judgments. However, due to the limited number of SEC’s examination staff relative to the number of mutual funds and advisers for which the agency has oversight responsibility, the decision to focus examination resources on particular areas involved tradeoffs that raise regulatory challenges. In particular, SEC’s capacity to examine lower risk advisers and funds within a reasonable time period and develop industry risk ratings has been limited. Historically, routine examinations of mutual fund complexes—groups or families of funds sharing the same adviser or underwriter—have served as the cornerstone of SEC’s mutual fund oversight, accounting for 85 percent of the total fund examinations done from 1998 through 2003. During that period, SEC generally tried to examine each complex at least once every 5 years. Due to resource constraints, SEC examinations typically focused on discrete areas that staff viewed as representing the highest risks of presenting compliance problems that could harm investors. Major areas of review have included portfolio management, order execution, allocation of trades, and advertising returns. In late 2002, SEC implemented a revised approach to conducting routine examinations that included a systematic process for documenting and assessing risks and controls for managing those risks in a range of areas related to the asset management function. Besides routine examinations, SEC conducts sweep examinations to probe specific activities of a sample of funds identified through tips, complaints, the media, or other information. The agency also conducts cause examinations when it has reason to believe something is wrong at a particular fund. Sweep and cause examinations accounted for about 5 and 10 percent, respectively, of the total examinations done during 1998 through 2003. After the detection of the market timing and late trading abuses in the summer of 2003, SEC officials concluded that the agency’s traditional focus on routine examinations had limitations. In particular, SEC staff said that routine examinations were not the best tool for broadly identifying emerging compliance problems, since funds were selected for examination based largely on the passage of time, not based on their particular risk characteristics. In addition, SEC officials stated that they concluded the growth in the number of mutual fund companies and the breadth of their operations, combined with the need to perform more in-depth examinations of discrete areas, did not allow SEC to maintain its existing routine examination cycle. To focus its resources on issues and funds presenting the greatest risk of having compliance problems that may harm investors, SEC has made significant revisions to its examination priorities and oversight processes as described below: First, SEC is placing a higher priority on sweep and cause examinations and a lower priority on routine examinations. SEC has directed its 10 field offices that conduct fund examinations to give priority to initiating, as warranted, sweep examinations of funds or advisers, focusing particularly on operational or compliance issues. To address the market timing and late trading abuses surfacing in late 2003, SEC shifted resources away from routine examinations to support sweep and cause examinations, according to SEC officials. As a result, sweep and cause examinations accounted for 87 percent of the 690 fund examinations completed in fiscal year 2004. SEC officials said that about 17 percent of these examinations resulted in referrals to the agency’s Division of Enforcement for potential violations of securities laws and regulations. (We note that the large increase in the number of sweep and cause examinations in fiscal year 2004 as well as the number of referrals was likely due to SEC’s focusing a substantial amount of resources on detecting market timing and late trading abuses.) Second, SEC no longer will routinely examine all funds and advisers on a regular basis, but it will conduct routine examinations of funds and advisers perceived to be high risk, once every 2 to 3 years. In addition, SEC will randomly select a sample of advisers and their affiliated funds perceived to be low risk for routine examination each year. Because these firms will be selected randomly, each firm will have an equal chance of being examined each year. According to SEC officials, the random selection process will enable agency staff to project the examination findings to the population of firms deemed low risk and assess the possible existence of problems within the population. Third, SEC plans to provide more continuous and in-depth oversight of the largest mutual funds. Specifically, SEC is creating teams of examiners dedicated to regularly interacting with and closely monitoring and examining the activities of firms in the largest and most complex groups of affiliated advisers and mutual funds. SEC initially plans to form teams under a pilot program to monitor 10 large advisory groups. Any decision to form additional monitoring teams will depend on how the pilot program develops, according to an SEC official. SEC officials said that the monitoring teams are loosely modeled on the federal bank regulators’ use of on-site teams to continuously monitor operations of large banks. However, unlike the bank regulator approach, SEC staff said the monitoring teams would not be located on-site at large mutual fund companies. Fourth, an SEC task force is considering the development of a surveillance program to support the agency’s oversight of all funds and advisers. The purpose of this program is to obtain from firms information that would enable examiners to identify aberrant patterns in fund and adviser activities and the possible existence of fraud or abusive schemes that require follow-up through examinations. In its fiscal 2006 budget request, SEC reported that the agency expects the surveillance system to begin operations during the second half of 2006. Fifth, SEC has promulgated rules that require investment advisers and investment companies to appoint independent chief compliance officers (CCO) who are responsible for ensuring that their companies adopt policies and procedures designed to prevent violations of federal securities laws and regulations. Fund CCOs are also responsible for preparing annual reports that must, among other things, identify any material compliance matter at the company since the date of the last report. SEC staff said that they plan to review such annual compliance reports while conducting examinations to assist in identifying problems at mutual funds and determine whether the funds have taken corrective actions. (As described later in this report, SEC is missing opportunities to take full advantage of CCO compliance reports to detect potential violations in the mutual fund industry.) Finally, SEC has established the Office of Risk Assessment (ORA) to assist the agency in carrying out its overall oversight responsibilities, including mutual fund oversight. ORA’s director reports directly to the SEC Chairman. According to SEC staff, ORA will enable the agency to analyze risk across divisional boundaries, focusing on new or resurgent forms of fraudulent, illegal, or questionable behavior or products. ORA’s duties include (1) gathering and maintaining data on new trends and risks from external experts, domestic and foreign agencies, surveys, focus groups, and other market data; (2) analyzing data to identify and assess new areas of concern across professions, industries, and markets; and (3) preparing assessments of the agency’s risk environment. ORA is to work in coordination with internal risk teams established in each of the agency’s major program areas—including OCIE—and a Risk Management Committee responsible for reviewing implications of identified risks and recommending appropriate courses of action. As we recently reported, the market timing and late trading abuses that surfaced in 2003 revealed weaknesses in SEC’s mutual fund oversight approach. We noted in the report that lessons can be learned from SEC not having detected market timing arrangements at an earlier stage. The key initiatives that SEC is taking to strengthen its mutual fund oversight program are largely intended to focus the agency’s resources on the largest and highest risk funds and activities. Although it is too soon to assess the effectiveness of the initiatives in light of their recent or planned implementation, the initiatives are consistent with some of the lessons learned concerning the importance of (1) conducting independent assessments of the adequacy of controls over areas such as market timing, (2) developing the institutional capability to identify and analyze evidence of potential risks, and (3) ensuring the independence and effectiveness of company compliance staff and potentially using their work to benefit the agency’s oversight program. By placing greater priority on sweep examinations, SEC may be better positioned to independently assess, as needed, the adequacy of fund controls designed to prevent and detect abusive practices. As we reported, SEC staff did not examine mutual funds for market timing abuses before late 2003, because they viewed market timing as a relatively lower risk area since agency staff believed that funds had adequate financial incentives to establish effective controls for it. In that regard, we noted the importance for SEC to conduct independent assessments of controls at a sample of funds, at a minimum, to verify that areas viewed as low risk, such as market timing, are in fact low risk and effective controls are in place. SEC’s revised examination priorities, particularly their emphasis on initiating sweep examinations that focus on operational or compliance issues, may provide the agency with greater opportunity to conduct independent assessments of controls for emerging risks, in part to validate critical assumptions about such risks and confirm the adequacy of controls in place to address those risks. By forming examiner teams dedicated to monitoring the largest and most complex groups of affiliated advisers and funds, SEC may have the opportunity to more efficiently or effectively use its resources and help ensure the independence and effectiveness of the monitored firms’ compliance staff. SEC estimates that the 100 largest advisory groups of affiliate advisers and funds accounted for about $7.1 trillion, or 85 percent, of the fund assets under management as of the end of September 2004. Thus, focusing on the largest advisory groups may enable SEC to attain the greatest dollar coverage with its limited examination resources. Focusing on the largest advisory groups may also be appropriate due to the control deficiencies that have been found at such companies. For example, SEC determined that nearly 50 percent of the 80 largest mutual funds had entered into undisclosed arrangements permitting certain shareholders to engage in market timing that appeared to be inconsistent with the funds’ policies, prospectus disclosures, or fiduciary obligations. In our earlier mutual fund work, we also found that compliance staff at some funds identified market timing but lacked the independence or authority necessary to control it. This finding suggested that routine communications with fund compliance staff could enhance SEC’s capacity to detect potential violations at an earlier stage, if compliance staff are effective and forthcoming about the problems they detect. SEC’s monitoring teams will provide agency staff with the opportunity to be in routine communication with fund compliance staff, including CCOs. Furthermore, such communications, combined with examinations, could help SEC ensure that fund CCOs, as required under SEC’s compliance rules, are in a position of authority to compel others to adhere to applicable compliance policies and procedures. By creating ORA, SEC is laying an important part of the foundation for developing the institutional capability to identify and analyze evidence of potential risks. SEC staff said that ORA will seek to ensure that SEC will have the information necessary to make better, more informed decisions on regulation. Working with other SEC offices, ORA staff expect to identify new technologies, such as data mining systems, that can help agency staff detect and track risks. SEC’s compliance rules create opportunities for ORA to leverage the knowledge of fund CCOs, including their annual compliance reports. Although ORA may help SEC be more proactive and better identify emerging risks, it is too soon to assess its effectiveness. In this regard, we note that as of February 2005, ORA had established an executive team of 5 individuals but still planned to hire an additional 10 staff to assist in carrying out its responsibilities. Finally, SEC’s fund and adviser surveillance system is in the exploratory stage but, if properly designed and implemented, may help the agency to leverage its limited resources to augment its examinations and oversee funds and advisers. Federal bank and other regulators use off-site surveillance programs to complement their on-site examinations. Each federal bank regulator has an off-site surveillance program to monitor the financial condition of banks between examinations. Information from off- site monitoring is used in setting bank examination schedules and determining the allocation of examiner resources for higher risk banks. Similarly, a recently deployed NASD surveillance program is used to analyze trends in broker-dealer activities and identify unusual patterns that indicate potential problems. NASD uses surveillance analyses to initiate cause examinations and to help its examiners focus on high-risk areas during their routine broker-dealers examinations. SEC’s planned changes to its mutual fund examination program offer potential advantages, but they also involve significant tradeoffs that raise important regulatory challenges for the agency. In comparison to federal bank regulators, SEC has significantly less examiners relative to the number of entities it regulates (see fig. 1), although bank and mutual fund regulatory regimes, including their examinations, differ from each other. As reflected in SEC’s revised oversight approach, any decision by SEC to focus additional examination resources on one or more fund areas involves tradeoffs that could result in less oversight of, or create a regulatory gap in, other areas. We are particularly concerned about SEC’s capacity going forward to review the operations of firms considered to be lower risk, conduct risk assessments of the industry, and potentially oversee the hedge fund industry. By shifting examination resources to targeted sweep and cause examinations as well as monitoring teams for larger funds, SEC may be limiting its capacity to examine the operations of funds perceived to pose lower risk (generally smaller funds) within a reasonable period. As stated previously, between 1998 and 2003, SEC generally sought to conduct routine examinations of all funds once every 5 years and shortened the cycle to 2 or 4 years in fiscal year 2004 following an increase in resources. However, under SEC’s revised examination program, some mutual funds may not be examined within a 10-year period. This is because SEC plans to annually review the operations of 10 percent of the funds deemed lower risk on a random basis. While reviewing funds on a random basis means each firm will have an equal chance of being reviewed annually, it is not clear that this approach will have more of an effect in deterring abuses than if each fund was assured of being examined every 5 years or less. Moreover, if SEC lacks sufficient resources to annually examine 10 percent of the funds deemed lower risk, its approach would have less of a deterrent effect. We recognize that through sweep examinations, SEC may review particular facets of funds deemed lower risk much more frequently than every 10 years or more. At the same time, sweep examinations are much more narrowly scoped than routine examinations and may exclude other potential areas of noncompliance at individual firms. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period may limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively conduct routine examinations of higher risk funds. Between late 2002 and October 2004, SEC routinely examined 297, or 30 percent, of the existing fund complexes and used its revised examination guidelines to assess the effectiveness of the funds’ compliance controls in deterring and preventing abuses and to assign the funds risk ratings of low, medium, or high. Had SEC not decided in late 2003 and 2004 to shift examination resources to sweep and cause examinations, it might have been able to assign risk ratings to all 982 fund complexes within the following 3 years in accordance with its routine examination cycle. Completing risk ratings for all fund complexes would have provided SEC with an additional basis for allocating resources to the highest risk firms. Over time, SEC’s risk ratings can become outdated, or stale, raising the possibility for funds deemed lower risk to become higher risk. For example, changes in a fund’s management, such as CCO, could lead to changes that weaken the fund’s compliance culture and controls. However, because SEC may not examine all fund complexes within a 10-year period under its revised examination program, its ability to assign risk ratings to all fund complexes and routinely examine all higher risk funds may be limited. In a previous report, we found that SEC may be missing opportunities to obtain useful information about the compliance controls of mutual funds, including those perceived to represent lower risks and may not be examined within a reasonable period of time. While SEC plans to review investment company CCO annual compliance reports during examinations, the agency has not developed a plan to receive and review the reports on an ongoing basis. Obtaining access to such annual reports and reviewing them on an annual basis could provide SEC examiners with insights into the operations of all mutual funds, including those perceived to represent lower risks, and could serve as a basis for initiating examinations to correct potential deficiencies or violations. SEC noted that it is considering how best to utilize the annual reports but noted any required filing of the reports with SEC would require rulemaking by SEC. A final oversight challenge facing SEC’s mutual fund examination program involves a new rule requiring hedge fund advisers to register with the agency. Issued in December 2004, the new rule requires hedge fund advisers to register with SEC as investment advisers by February 2006. The rule is designed, in part, to enhance SEC’s ability to deter or detect fraud by unregistered hedge fund advisers, some of which were involved in the recent mutual fund abuses. Once hedge fund advisers register, SEC will have the authority to examine their activities. The rule is expected to increase SEC’s examination workload, but because of data limitations the precise extent will not be known until hedge fund advisers actually register. Currently, comprehensive information on the number of hedge funds and advisers is not available, but SEC estimates that from 690 to 1,260 additional hedge fund advisers may be required to register under the new rule, increasing the pool of registered advisers by 8 to 15 percent. SEC officials estimate that at least 1,000 hedge fund advisers have previously registered as investment advisers with SEC to meet client needs or requirements. Under its examination program, SEC has examined these hedge fund advisers in the same way it has examined all other registered advisers. According to SEC officials, it is anticipated that the additional hedge fund advisers that register with SEC will be treated the same as all other registered advisers under SEC’s examination program. SEC has recognized that providing oversight of the additional registered hedge fund advisers will pose a resource challenge and has identified options for addressing the challenge. It could require fewer hedge fund advisers to register with SEC by raising the threshold level of assets under management required for adviser registration. It also has the option of seeking additional resources from Congress for the increased workload resulting from an increased number of registered advisers. Whatever approach is ultimately taken, SEC will have to consider the potential resource implications of the new rule for its oversight of mutual funds. SEC has integrated quality controls into its routine examinations but could benefit from additional controls to ensure that policies and procedures are being implemented effectively and consistently throughout SEC field offices. Under its new initiatives, SEC’s routine examinations will continue to be the primary regulatory tool for determining whether all funds and advisers are complying with the federal securities laws. Examination quality controls provide, among other things, assurances that important documents are provided supervisory review, and examinations are conducted according to agency policies, procedures, and individual examination plans. SEC could improve its quality control measures in three areas: supervisory review of risk scorecards, preparation of written examination plans, and review of completed examinations and work papers. Bank and other financial regulators have quality control measures that provide assurances above and beyond those measures used by SEC. The risk scorecards prepared by SEC during each mutual fund examination are critical work papers, providing the basis for determining areas to review in depth and an overall risk rating for a fund. A set of individual scorecards has been developed to assist examiners in assessing and documenting a fund’s compliance controls in 13 strategic areas and to determine the amount of additional testing examiners will do. (See table 1.) If controls in an area are strong, examiners may do limited or no additional testing to detect potential abuses, but if weak, additional testing is expected to be performed. Collectively, the 13 areas reviewed with the set of individual scorecards provides the basis for determining a mutual fund’s overall risk rating, which OCIE uses to determine how frequently the fund will be examined. While the risk scorecards currently cover 13 areas, SEC officials stated that each scorecard serves, in concept, as a model for assessing controls in a particular area of a firm’s activities. As such, SEC staff could create additional scorecards to assist them in their review of areas not covered by existing scorecards or modify existing scorecards not suitable for reviewing the controls used by a firm in a critical area. OCIE and field office officials told us that all applicable risk scorecards generally should be completed during routine examinations, but if there are time constraints due to extenuating factors, all scorecards may not be completed. Even though risk scorecards are important work papers for documenting and assessing fund compliance controls, SEC standards do not expressly require that they receive supervisory review. Current OCIE standards for preparing examination work papers, including scorecards, specify that they should be prepared in an organized manner facilitating supervisory review and examination reporting. The standards do not provide further supervisory review requirements such as who should do the review, how, or when. While the review of scorecards is not expressly required, OCIE headquarters and SEC field office officials stated that supervisors do review scorecards and other examination work papers but typically do not sign or initial them to document that they have been reviewed. In addition, we were told that lead examiners and branch chiefs review work papers throughout the examination process. These officials also review risk scorecards and other work papers when reviewing final examination reports, making sure that all findings are adequately supported and summaries of the scorecard findings included in the examination reports are accurate. After completing their review of examination reports, branch chiefs sign a form to document their review. In contrast to OCIE, federal bank and other regulators have standards requiring supervisors to document that they have reviewed examination work papers. Examples of the work paper standards include: Federal Reserve guidance requires examiners-in-charge or other experienced examiners to review all work papers as soon as practicable and to sign or initial the applicable documents to evidence their review. OCC guidance requires examiners-in-charge or other experienced examiners to sign or initial work paper cover sheets to evidence their review. The guidance allows reviewers to tailor the thoroughness of their review based on the experience of the examiner preparing the work paper. According to NYSE and NFA officials, the organizations require senior staff to review and sign work papers. NFA officials said that their work papers are electronic, so staff mark a checkbox to evidence their work paper review. While SEC officials stated that the review of the scorecards is documented indirectly by the supervisor’s signature on the examination report, without the supervisor’s signature or initials on the scorecards themselves, there is no way to readily verify that the scorecards were reviewed. Our review of 546 scorecards from 66 routine examinations of funds completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO) disclosed a number of deficiencies potentially stemming from quality control weaknesses. Most of the scorecards did not contain evidence of supervisory review as expected, based on statements by SEC officials, but 34 scorecards, or about 6 percent, were signed or initialed as evidence of review. Regardless of whether the completed scorecards were signed or initialed, we found deficiencies in four areas that raise questions about the adequacy or completeness of supervisory review. First, each scorecard should be marked as to whether examiners rated the compliance controls in the area as highly effective, effective, or ineffective. We found 32, or about 6 percent, of the total scorecards where the control rating was not marked. Second, copies of scorecards should be included with the work papers to facilitate supervisory review, but we found 11, or about 17 percent, of the 66 examinations lacked any scorecards and 15, or about 23 percent, were missing one or more scorecards. Third, documentary evidence should be cited on scorecards to support effective and highly effective ratings, but we found 25, or about 5 percent, of the total scorecards did not cite documentary evidence supporting such ratings. Fourth, scorecard ratings are included in examination reports, but we found the ratings marked on 21, or about 4 percent, of the total scorecards had ratings that differed from the ones in the examination reports. SEC supervisors document their review of examination reports, which include a summary of the risk scorecard findings. Nonetheless, without documenting that the scorecards themselves were reviewed, SEC does not know if deficiencies resulted from a lack of or inadequate supervisory review. The systematic supervisory review of work papers, particularly risk scorecards, is essential for ensuring examination quality. Such reviews help to ensure that the work is adequate and complete to support the assessment of fund compliance controls as well as report findings and conclusions. Likewise, documentation of the review is important to ensure that all critical areas are reviewed. The reviewer’s initials or signature are written verification that a specific employee checked the work. Written examination plans that document the scope and objectives of routine examinations are not required by OCIE. Instead, OCIE officials stated that written examination plans are optional. OCIE allows branch chiefs and lead examiners to decide whether to prepare written plans, with branch chiefs typically meeting with examination teams to discuss the preliminary scope of examinations. Each routine examination is somewhat different because of the risk-based approach used by OCIE. Under this approach, all areas of compliance or fund business activities are not reviewed and instead review areas are judgmentally selected based on their degree of risk to shareholders. As a result, each examination is customized to the activities of the particular fund under examination, with the success of routine examinations depending, in part, on proper planning. The documentation of this planning is important for tracking agreements reached on examination scope and objectives and can be used as a guide for the examination team. Furthermore, the plan can be used to determine whether the examination was completed in accordance with the planned scope. According to OCIE officials, written plans may be helpful in planning examinations of large fund complexes, but many of the examinations conducted are of small firms that have five or fewer employees. For these small firms, the officials said that it may not be necessary to prepare a written examination plan, especially if the examination team conducting the work consists of one or two persons. While OCIE does not require the preparation of written examination plans, we found that SEC’s NERO requires examiners to prepare a planning memorandum to document examination scope and objectives, including firms to be examined within a fund complex, areas considered high risk, and areas to be reviewed. NERO branch chiefs approve the memorandums before the on-site work begins, and the memorandums effectively serve as examination plans. In contrast, SEC’s MRO and PDO do not require planning memorandums or examination plans. Instead, branch chiefs in these two offices meet with the examination teams to discuss the scope of examinations and then let the staff decide whether to prepare a written plan, according to MRO and PDO officials. MRO officials said that some branch chiefs will recommend that for large funds, teams prepare written examination plans since it helps coordinate the work. For 66 routine examinations we reviewed at these three offices, about half, or 53 percent, had written planning memorandums or examination plans. Examinations of the larger fund complexes that were managing more than $1 billion in assets also had examination plans for about half, or 54 percent. In contrast to OCIE, federal bank and other regulators require their staff to prepare written examination plans before conducting examinations. Examples of examination plan requirements include: FDIC guidance requires the examiner-in-charge to prepare a scope memorandum to document, among other things, the preliminary examination scope; areas to be reviewed, including the reasons why; and areas not to be included in the examination scope, including the reasons why. Federal Reserve guidance requires that a comprehensive risk-focused supervisory plan be prepared annually for each banking organization. The guidance also requires the examiner-in-charge, before going on-site, to prepare a scope memorandum to document, among other things, the objectives of the examination and activities and risks to be evaluated; level of reliance on internal risk management systems and internal and external audit findings; and the procedures that are to be performed. To ensure consistency, the guidance requires the scope memorandum to be reviewed and approved by Reserve Bank management. OCC guidance requires the examiner-in-charge or portfolio manager to develop and document a supervisory strategy for the bank that integrates all examination areas and is tailored to the bank’s complexity and risk profile. The strategy includes an estimate of resources that will be needed to effectively supervise the bank and outlines the specific strategy and examination activities that are planned for that supervisory cycle. The strategies are reviewed and approved by the examiner-in- charge’s or portfolio manager’s supervisor. NYSE and NFA officials told us that staff are required to prepare written examination or audit plans. NYSE officials said that staff meet with examination directors to reach agreement on the scope of their examination plans. NFA officials said that staff complete a planning module that includes a series of questions that staff answer to determine the scope of the audit, and the completed planning module serves as the audit plan. Examination planning meetings between SEC branch chiefs and examination teams are important for providing the opportunity to discuss and reach decisions about critical areas of examination scope and objectives. These discussions by themselves, however, do not provide a record of the agreements reached and may not result in a clear and complete understanding for examiners about the scope and objectives of a particular examination. A written examination plan would provide such a record—potentially enabling branch chiefs to better supervise examinations and assisting lead examiners to better communicate the examination strategy to the examination team. Such quality control is especially important given that staff must exercise considerable judgment for examination scope under SEC’s risk-based approach. SEC uses several methods to ensure the quality of its examinations but does not review completed examinations and work papers as done by other regulators to determine whether the examinations were conducted according to procedures or done consistently across field offices. OCIE has issued various policies and procedures to promote examination quality and consistency across the 10 SEC field offices that conduct the majority of its examinations. To help ensure that these policies and procedures are followed, SEC relies on experienced supervisors in its field offices to oversee all stages of routine examinations. Specifically, branch chiefs meet with examination staff to discuss the preliminary scope of examinations, advise staff during the fieldwork, and review all examination reports. Assistant directors in SEC field offices also assist in overseeing examinations and review all examination reports. Also, associate directors and regional or district administrators in SEC field offices may review examination reports. In addition, SEC field offices send each report and deficiency letter, if any, to an OCIE liaison, who reviews them. Finally, OCIE annually evaluates each field office examination program based on factors such as the overall quality of the office’s examination selection and findings; new initiatives and special projects; use of novel or effective risk assessment approaches; and overall productivity, including achievement of numerical examination goals. In contrast to OCIE, we were told that federal bank and other regulators have quality assurance programs that include reviews of completed examinations or other activities. Examples of such reviews include: FDIC guidance states that the agency reviews each regional office’s compliance examination program every 2 years, in part, to evaluate the consistency of supervision across the regions and compliance with policies and procedures. According to the guidance, evaluations include a review of examination reports and work papers. Federal Reserve officials said that the agency conducts on-site operations reviews of the banking supervision function of individual Reserve Banks at least every 3 years. The review targets each Reserve Bank’s risk-focused supervision program and includes a review of a sample of examination reports, work papers, and other supporting documentation. It also encompasses the bank’s ongoing quality management function, or the processes, procedures, and activities the bank uses to ensure that examination reports and related documents are of high quality and comply with established policy. OCC officials told us that the agency reviews its large bank examination program, including specific examination procedures. It conducts reviews to determine whether lead examiners are supervising banks according to plans. It also assesses specific examination procedures across samples of banks. Agency officials said that teams periodically review how examiners are conducting certain procedures to ensure that they are being implemented consistently throughout all field offices. NASD conducts quality and peer reviews to improve the quality, consistency, and effectiveness of its examination program. Under quality reviews, each NASD district office annually evaluates its performance in two or three areas. Under peer reviews, staff go on-site to district offices to evaluate particular program areas. NFA officials told us that the organization randomly selects completed audits for review on a quarterly basis and, as part of the review, supervisory teams review work papers to determine whether the audits complied with established policies and procedures. While OCIE staff evaluate all completed examinations by reviewing the final examination report, they do not review a sample of completed examinations and work papers to periodically assess examination quality and consistency across SEC’s field offices. SEC officials stated that after- the-fact reviews of underlying work papers may not be a cost-effective use of resources, given that key findings and evidentiary materials should be discussed and described in the examination report itself, which is reviewed by OCIE staff. Further, it would be difficult to second-guess decisions made by examiners when on-site, since reviewers would not have access to the same information. Finally, agency officials said that OCIE resources are limited, and time spent reviewing completed examination work papers would result in less time spent on conducting examinations. While reviewing completed examination work papers involves resource tradeoffs, it may yield important benefits. OCIE may be able to better determine whether its examiners are complying with established policies and procedures and whether its built-in quality controls are working. A review of underlying work papers also may allow OCIE to better assess the consistency of examination quality within and across SEC’s field offices as well as the extent to which existing quality controls are helping to ensure that quality is maintained. According to SEC officials, the agency is implementing a computer-based document management system. Under this system, it is anticipated that most, if not all, of the work papers created during examinations will be converted into electronic files, and these files will be maintained in a consistent manner online for a number of years. SEC officials said that when the system is fully operational, estimated to be some time in 2006, all work papers created during an examination will be available electronically to OCIE staff. At that point, OCIE liaisons could review electronic examination work papers on a sample basis in conjunction with their review of examination reports. In addition, electronic work papers would eliminate the need to be on-site to review underlying examination documentation and work papers across SEC’s examination program. Importantly, deficiencies we found during our review of risk scorecards highlight the need for OCIE to periodically assess the consistency of examination staff’s use of scorecards and other steps being taken during examinations. While the requirement to complete risk scorecards became effective in October 2002, SEC has not yet evaluated, for instance, whether the risk scorecards are being completed according to the guidance provided, whether changes to the design of the scorecards are needed, and whether additional guidance or training is needed. In March 2003, OCIE provided one training course on the scorecards, which was attended by 98 examiners, or about 20 percent of the SEC examiners devoted to fund and adviser examinations. According to SEC officials, two senior OCIE staff visited each field office during the spring and summer of 2003 and provided a full day of training on the scorecards to all examination staff. Nevertheless, the scorecard deficiencies we found during our review may indicate that additional training is needed. In addition, the scorecards may have design weaknesses that result in inconsistencies across SEC field offices. For example, field office officials stated that scorecards are designed for investment companies organized as mutual funds and do not readily apply to investment companies organized as unit investment trusts. NERO examiners did not complete scorecards for unit investment trusts, but MRO examiners did by modifying the scorecards as needed. Similarly, SEC field office officials stated that while the scorecards are designed to cover a broad range of fund compliance controls, fund controls for detecting and preventing market timing do not fall squarely under any of the 13 areas covered by the scorecards. As a result, staff have used work papers other than the risk scorecards to document their assessment of market timing controls. SEC officials said that the scorecards are models created to assist examiners in assessing fund controls. As such, scorecards are not intended to exist necessarily for every conceivable control and examiners have the flexibility to modify the scorecards as necessary. Moreover, the officials said that some inconsistencies in the preparation of risk scorecards are expected because not all funds and advisers are the same. In that regard, SEC officials told us that the approach taken by MRO staff in modifying a scorecard to fit the circumstances of an examination appears to be consistent with the approach to scorecard use expected by OCIE. To assess SRO oversight of broker-dealers, including their mutual fund sales practices, SEC conducts examinations of broker-dealers shortly after they have been examined by SROs. However, these SEC broker-dealer examinations, which involve a significant commitment of agency examination resources, provide limited information on the adequacy of SRO oversight and impose duplicative regulatory costs on the securities industry. SEC and SROs’ broker-dealer examinations often cover different time periods, and generally employ different sampling methodologies and use different examination guidelines. Consequently, SEC cannot reliably determine whether its examination findings are due to weaknesses in SRO examination procedures or some other factor. Another deficiency we found regarding SEC’s SRO oversight of broker-dealer mutual fund sales practices is that the agency does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations and, therefore, cannot readily and reliably track useful examination information. SEC performs two types of activities to review the quality of SRO oversight of broker-dealers, including their sales of mutual funds. First, SEC conducts inspections of NASD and NYSE on a 3-year cycle that cover various aspects of their compliance, examination, and enforcement programs. These SRO oversight inspections are designed to determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. When conducting these inspections, SEC reviews a sample of the SRO’s examination reports and work papers to identify problems in examination scope or methods. As a result of these inspections, SEC has identified deficiencies in SRO examinations, including ones related to the SROs’ examinations of mutual fund sales practices, and communicated those to the SRO to remedy the problem. Second, SEC conducts broker-dealer oversight examinations, during which it examines some broker-dealers from 6 to 12 months after an SRO examines the firms. The purpose of broker-dealer oversight examinations is to help the SROs improve their examination programs by identifying violations that the SROs did not find and also by assisting them in evaluating improvements in how SRO examiners perform their work. SEC officials told us that a secondary goal of these examinations is to supplement the SROs’ enforcement of broker-dealer compliance with federal securities laws and regulations. SEC’s broker-dealer oversight examinations involve a significant commitment of agency resources and expose firms to duplicative examinations and costs. In addition to conducting broker-dealer examinations for the purposes of assessing SRO oversight (including for mutual fund sales practices), SEC conducts cause, special, and surveillance examinations of broker-dealers to directly assess broker-dealer compliance with federal securities laws and regulations, including those related to mutual fund sales. SEC currently has an internal goal of having oversight examinations account for 40 percent of all broker-dealer examinations each year. In 2004, 250, or 34 percent, of its 736 broker-dealer examinations were oversight examinations. Broker-dealers that are subject to similar SEC and SRO examinations that may take place within a 6 to 12 month period incur the costs associated with assigning staff to respond to examiner inquiries and to make available relevant records as requested. Although SEC broker-dealer oversight examinations involve a significant commitment of agency examination resources and impose costs on securities firms, our past work questioned their cost-effectiveness. In a 1991 report, we found that the way SEC conducted oversight examinations of broker-dealers provided limited information to help SROs improve the quality of their broker-dealer examination programs. Specifically, during its oversight examinations of broker-dealers, SEC often found violations not identified by SROs and frequently could not attribute the violations it found to weaknesses in SRO examination programs. Because SEC and SROs used different examination procedures or covered different time periods of broker-dealer activity, SEC examiners often could not determine whether the violations they found resulted from the improper implementation of procedures by SRO examiners or differences between the procedures used or the activity period covered. We previously recommended that SEC directly test SRO examination methods and results. However, based on its efforts to replicate some examinations conducted by SROs, the agency concluded that this was unproductive because it only confirmed findings identified by SROs during their examinations. Our current review has shown that despite our 1991 findings, SEC continues to conduct oversight examinations in a similar manner—by using different examination guidelines and time periods. First, SEC continues to review firm activities during the time between the completion of the SRO examination and its own examination. Next, when SEC is reviewing a firm’s transactions or customer accounts to identify potential abuses, it generally does not duplicate the sampling technique used by the SRO, but instead selects its own sample of transactions or customer accounts based on its own procedures. Finally, SEC examiners ask different questions to identify potential abuses. For example, although SEC and NASD both direct their examiners to ask questions to assess potential weaknesses in a firm’s internal controls to prevent market timing and late trading, their procedures call for examiners to ask about different potential internal control weaknesses. According to SEC officials, its examiners do not use the same procedures as SROs because using different procedures allows them to find violations that would not otherwise be found if they just duplicated the SRO procedures. Also, SEC officials stated that SEC has an obligation to review the broker-dealer’s activities at the time of the SEC examination to ensure compliance with securities laws at that time. However, as a result, SEC often cannot determine the specific reason why the SRO did not find the violations, limiting its ability to suggest improvements to SRO programs. SEC routinely provides SROs copies of deficiency letters it sends to broker- dealers as a result of oversight examinations. These deficiency letters sometimes include oversight comments that include steps the SRO can take to enhance its program. SRO officials stated they can often identify the reasons why SEC found the violations, but in many cases the reason is due to SEC’s use of different procedures, such as different review periods or samples. Consequently, SEC often cannot attribute a violation it finds to a problem with the SRO’s examination program. SEC officials said in some cases when SEC identifies a violation, it is able to determine whether the violation was occurring at the time of the original examination and should have been detected by the SRO. For example, in some cases when SEC finds an error in a broker-dealer’s net capital calculation, it is able to trace the error to previous calculations and determine whether it existed during the SRO examination. Even in cases when SEC can attribute a violation it found to a weakness in the SRO examination, it does not track this information in its automated examination tracking system and, as a result, cannot use it to identify trends in SRO problems it discovered during oversight examinations. SEC officials stated that they have a staff committee conducting a comprehensive review of oversight examination procedures and plan to add a feature to SEC’s examination tracking system to allow it to more systematically track identified weaknesses in SROs’ examination programs. Although SEC’s oversight examinations continue to find violations at broker-dealers and, thus, provide investor protection benefits, the violations provide limited information for assessing the quality of the SRO program. This information is particularly important given that the number of violations that SEC has found during its oversight examinations and determined as not found by NASD has increased in recent years. As shown in figure 2, the number of these violations that SEC found but has categorized as not found by NASD more than doubled between fiscal years 2002 and 2004. Despite this significant increase, SEC officials could not explain why the number of these violations increased but stated that the increase did not necessarily represent a decrease in the quality of NASD’s examination program. They said some of the increase is due to a significant increase in the number of rules applicable to broker-dealers. SEC officials told us that SRO officials have noted, and they agree, that the number of these violations, alone, is not always an appropriate measure of the quality of SRO examination programs. Accordingly, SEC officials told us that the agency recently began tracking findings deemed to be significant to allow it to better assess the materiality of an increase in the number of missed violations. If SEC had tested NASD’s examination methods or better tracked the reasons why NASD did not find a violation, SEC would have more information to assess the quality of NASD’s examination program. Another deficiency we found regarding SEC’s SRO oversight is that the agency cannot readily and reliably track key examination information. In assessing the quality of SEC’s oversight of broker-dealer sales of mutual funds, we asked SEC to provide data on which of its broker-dealer oversight examinations in recent years included reviews of mutual fund sales practices. The data would help determine the extent that SEC has reviewed mutual fund sales practices. SEC was not able to provide this information because it does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations. SEC maintains a broad range of automated information about its examinations in its Super Tracking and Reporting System (STARS), including basic information about the firm, SEC staff assigned to conduct the examination, and the deficiencies and violations found during the examination. STARS identifies examinations that reviewed specific areas of special interest to SEC, called “focus areas,” as identified by senior SEC staff in headquarters, and new areas are added in part based on the emergence of new abuses. For example, SEC added breakpoints as a focus area in January 2003 and market timing and late trading in 2004. Although focus area designations provide useful information about how often SEC reviews some areas, focus areas do not cover all areas potentially reviewed by SEC during its examinations. Without methodically tracking the full scope of work performed during oversight examinations, SEC lacks information for determining how effective its oversight is in two important areas. First, because SEC does not know how often it has reviewed particular areas such as mutual fund sales practices during its oversight examinations, it cannot ensure that it has adequately reviewed all areas it considers important. When SEC reviews particular areas, its examiners generally refer to a set of written procedures, known as examination modules that provide information to guide examiners’ work. STARS does not include data fields to track whether staff use the module on mutual funds during an examination. Therefore, the extent of coverage of mutual funds is unknown. As a result, SEC officials could not determine how many of the approximately 1,400 broker-dealer oversight examinations conducted between 2000 and 2004 included a review of mutual fund sales practices. SEC officials stated that they have a separate database containing examination reports that can be electronically searched to identify relevant examinations containing a search term such as “mutual fund,” which would yield an estimate of the number of examinations that reviewed broker-dealer mutual fund sales practices. However, according to an official, not all examinations covering mutual fund sales practices would be captured because some examination reports that included reviews of mutual fund sales practices would not necessarily include any mention of mutual funds, especially if SEC identified no deficiencies or violations in that area. In contrast to SEC, both NASD and NYSE have systems with capability to track the full scope of examinations including the use of mutual fund and other examination modules. For NASD, some of its offices are able to track which of its broker-dealer examinations were followed by an SEC oversight examination. At 8 of its 15 district offices, which account for 55 percent of its examinations, NASD tracked this information and SEC conducted oversight examinations of approximately 5 percent of the 2,602 NASD examinations conducted between January 1999 and August 2004 that reviewed mutual fund sales practices. The remaining seven offices were not able to track this information because, according to an NASD official, the SEC field office conducting oversight examinations did not always provide a letter informing them that an oversight examination was conducted. With mutual fund sales practices being a regulatory priority, the percentage of SEC examinations reviewing these practices would be a useful measure for ensuring that the agency is addressing this priority. Second, because SEC does not track the full scope of work performed during its oversight examinations, it is limited in its ability to assess the significance of deficiencies and violations it finds. Because SEC does not know how often it has reviewed a particular area, the data it tracks on the number of deficiencies and violations it finds in a particular area are less meaningful. For example, it would be less significant if SEC found violations in a particular area during 5 out of 100 examinations as opposed to finding violations during 5 out of 5 examinations during which it reviewed the area. Without knowing the full scope of each oversight examination and therefore the number of times a particular area was reviewed, data tracked by SEC on the number of deficiencies and violations it finds are less meaningful. In addition to conducting broker-dealer oversight examinations to evaluate the adequacy of SRO activities, SEC conducts other types of examinations, including cause and sweep examinations, which are designed to directly assess broker-dealer compliance with the law. SEC tracks the number of firms it targets during its examination sweeps along with the number of violations and deficiencies it finds. SEC officials told us that the agency tracks the number of findings from these examinations as a percentage of the number of firms examined, and that tracking such information helps SEC assess the prevalence of the findings relative to the number of firms. However, without tracking the scope of work performed during its oversight examinations, SEC is unable to make similar assessments about the prevalence of violations and deficiencies identified during those reviews. Appendix II provides information you requested about (1) how SEC, NASD, and NYSE share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to broker-dealer examiners on mutual funds and other topics and how it tracks and assesses such training. In the wake of the market timing and late trading abuses, SEC staff implemented significant changes to the agency’s mutual fund examination program in the view that doing so would help ensure the earlier detection and correction of violations. These changes—including conducting additional sweep examinations and continuously monitoring large companies—reflect a practical approach designed to focus SEC’s limited resources on higher risk funds and activities and have the potential to strengthen SEC’s oversight practices in certain regards. Nonetheless, the changes also involve tradeoffs, such as limiting the agency’s capacity to review funds perceived to be lower risk and conduct risk assessments of all funds in a timely manner. Moreover, SEC’s capacity to effectively monitor the hedge fund industry is open to question, given the tradeoffs that the agency has had to make in overseeing the mutual fund industry. While we recognize that SEC at some point may need to request additional resources from Congress to carryout its mutual fund and other oversight responsibilities, such requests should only occur after the agency has explored and achieved all available efficiencies within its existing resource limitations. Whether SEC’s utilization of resources under its revised examination program will provide effective oversight remains to be seen. Future adjustments by SEC to resources devoted to various oversight activities, such as sweep examinations and randomly selected lower risk fund examinations, are likely to occur as the agency gains experience through conducting these oversight activities and changing conditions in the mutual fund industry. However, SEC has had extensive experience with its broker-dealer oversight examinations, and the effectiveness of these examinations for improving the quality of SRO oversight remains unclear. This situation raises concern, particularly in light of the significant level of resources devoted to oversight examinations and the resource challenges faced by SEC’s fund and adviser examination program. We also identified basic weaknesses in SEC’s approaches to conducting mutual fund and broker-dealer examinations. For mutual fund examinations, SEC does not require staff to document their examination plans to facilitate supervisory review. Second, SEC has issued work paper standards but lacks guidance on their supervisory review. Moreover, despite the importance of risk scorecards in determining the depth of work done during examinations, SEC has not yet assessed whether they are prepared according to standards since implementing the scorecards in 2002. For broker-dealer examinations, SEC has not developed an automated system to track the full scope of work completed during examinations and therefore lacks useful information about SRO oversight. Without addressing these deficiencies, SEC’s capacity to effectively oversee the mutual fund industry and SROs is reduced. To improve SEC’s oversight of mutual funds and SRO oversight of broker- dealers that sell mutual funds, we are making four recommendations to the SEC Chairman. First, we recommend that SEC periodically assess the level of resources allocated to the various types of examinations in light of their regulatory benefits to help ensure that the agency is using its resources efficiently and effectively to oversee the mutual fund industry, including broker-dealers that offer mutual funds. As part of this assessment, SEC should seek to ensure that it allocates sufficient resources to mitigate any regulatory gaps that may currently exist concerning the timely examination of mutual funds perceived to represent lower risk, complete mutual fund risk assessments within a more reasonable period, and fulfill its new oversight responsibilities for the hedge fund industry. Second, in so doing, we recommend that the agency assess its methodology for conducting broker-dealer oversight examinations and whether some portion of the resources currently devoted to these examinations could be better utilized to perform mutual fund examinations. Third, to strengthen SEC’s approach to mutual fund examinations, we recommend that SEC establish a policy or procedure for supervisory review of work papers prepared during routine examinations and for documenting such reviews; establish a policy or procedure for preparing a written plan for each routine examination, documenting at a minimum the preliminary objectives and scope of the examination; and consider reviewing on a sample basis completed routine examinations and work papers to assess the quality and consistency of work within and across the field offices conducting examinations. Fourth, to assess and improve the effectiveness of SEC’s oversight of SRO broker-dealer examination programs, we recommend that the Chairman, SEC, electronically track information about the full scope of work performed during broker-dealer oversight examinations, including all major areas reviewed, to determine whether areas are receiving adequate review and to more fully assess the significance of deficiencies and violations found. SEC provided written comments on a draft of this report, which are reprinted in appendix III. SEC also provided technical comments that we incorporated into the final report, as appropriate. SEC focused most of its comments on providing further elaboration on the potential benefits of its examination strategy for overseeing mutual funds and investment advisers and on the benefits obtained from its broker-dealer oversight examinations. In addition, SEC briefly commented that it will consider our recommendation directed at improving its quality controls for routine fund examinations and that it has formed a working group to explore ways to enhance the value of its broker-dealer oversight examinations, including their ability to identify the reasons that violations may have been missed by SRO examinations. First, SEC stated that it is not possible for the agency to conduct timely, comprehensive routine examinations of every mutual fund and adviser, given the size of the industry and agency resources. Further, it expects its risk-targeted examinations to provide an effective means of addressing risks in the securities industry. Specifically, it believes that looking at the same type of risk at a number of different firms is a better approach than examining a single firm in depth. According to SEC, this approach will provide benefits by promptly identifying emerging trends and compliance problems, and individual firms can be compared to their industry peers. The agency believes this approach has already yielded benefits in identifying and addressing significant compliance problems before becoming major crises. In addition, SEC stated that the program it is developing to randomly select a sample of lower risk firms for routine examination will address our concern that such firms may not be given sufficient attention under its revised oversight strategy. According to SEC, this approach will provide a deterrent effect, enable the agency to test assumptions and techniques used throughout its examination program, and allow the agency to draw inferences about compliance in the adviser community, based on statistically valid sampling techniques. We recognize that SEC’s revised examination strategy for mutual funds and advisers offers potential benefits, including focusing its limited resources on firms and activities that are perceived to pose higher risks. Nonetheless, we continue to be concerned about SEC’s ability to examine all mutual funds within a reasonable period and accurately assess the relative risk of each fund on a timely basis. Unlike broker-dealers, mutual funds are regulated and examined solely by SEC. Under SEC’s current plans to randomly sample 10 percent of the firms perceived to be lower risk for routine examination each year, it is possible that up to a third of the total number of firms would not be selected for examination within a 10-year period. We believe that this is a lengthy time period for firms to conduct business without being examined. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period will limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively target its limited examination resources on those funds posing the highest risks. Therefore, we continue to believe that, as recommended, SEC should periodically assess the level of resources allocated to its various types of examinations and in so doing ensure that it allocates sufficient resources to mitigate any regulatory gaps that currently exist in the timely examination of funds perceived to represent lower risks and to ensure that it completes mutual fund risk assessments within a more reasonable time period. Second, SEC stated that its broker-dealer oversight examinations provide quality control over SRO examinations and serve other important goals. For example, SEC stated that oversight examinations allow it to detect violations that otherwise might not be detected, conduct routine examinations of new products or services, and test and validate assumptions and techniques used throughout the broker-dealer examination program. In addition, SEC expressed concern about our suggestion that it should reproduce SRO examinations if its oversight examinations are to provide accurate quality control information. SEC stated that this suggested approach would result in redundancies for broker-dealers being examined and limit the agency’s ability to reach conclusions about SRO examination programs. By conducting its examinations as independent compliance reviews, SEC stated that it can assess whether SRO procedures were followed and whether SRO procedures need to be modified or enhanced. The agency stated that through its oversight program it has identified SRO procedures that need to be modified or enhanced and its examiners meet regularly with SRO examiners to review the results of oversight examinations. Finally, SEC commented that it has formed a working group to explore ways to gain additional value from its broker-dealer oversight examinations, such as by better identifying the reasons that a violation may not have been detected by an SRO examination, aiding the SRO in improving its program, and minimizing burden on the firm examined. We recognize that SEC’s oversight examinations serve more than one goal and provide investor protection benefits. While such examinations serve a variety of purposes, one of their primary purposes is to assess the quality of SRO examinations. In fulfilling this purpose, we remain concerned that SEC’s approach provides limited ability to identify the reasons why an SRO did not find violations that SEC found and, in turn, provide suggestions for improving SRO examinations. SEC is responsible for overseeing SROs that examine broker-dealers on a regular basis, and it conducts oversight examinations of only a small percentage of the total number of broker- dealers. Thus, it is critical for SEC to ensure that SROs conduct effective examinations. As discussed, SEC has formed a working group to evaluate its oversight examinations. We believe this is a step in the right direction and also provides the agency with the opportunity to evaluate its approach and level of resources devoted to broker-dealer oversight examinations. Finally, regarding our recommendation that SEC strengthen three aspects of its quality control framework for routine fund examinations, the agency stated it will fully consider the recommendation. Specifically, in 2006, the agency plans to deploy an electronic system for work papers. In preparation for this effort, it plans to review how new technology can be used to improve the quality of examinations and it will consider our recommendation in its review. While SEC did not directly comment on our recommendation that it electronically track information about the full scope of work performed during its broker-dealer oversight examinations, we believe that this would provide SEC important information to determine whether areas are receiving adequate review and the relative significance of violations found in each area. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will provide copies of this report to the Chairman of the House Committee on Financial Services; the Chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, House Committee on Financial Services; and the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs. We also will provide copies of the report to SEC, FDIC, the Federal Reserve Board of Governors, NASD, NYSE, and OCC and will make copies available to others upon request. In addition, the report will be available at no cost 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) 512-8678 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 identify and assess the changes SEC has made to or is planning for its mutual fund examination program, we reviewed SEC testimony, speeches, reports, and other documents related to the agency’s mutual fund examination program. We also reviewed federal securities laws and regulations applicable to mutual funds and analyzed SEC data on the number, types, and results of its fund and adviser examinations. We also interviewed officials from SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Office of Risk Assessment and representatives from the Investment Company Institute to obtain information on the significance of planned changes. In addition, we interviewed federal bank regulatory officials from the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System, and Office of the Comptroller of the Currency (OCC) and self-regulatory organization (SRO) officials from NASD, the New York Stock Exchange (NYSE), and the National Futures Association (NFA) to discuss their examination programs and supervisory tools. To assess key aspects of the quality control framework of SEC’s routine mutual fund examinations, we reviewed policies, procedures, and other guidance applicable to those examinations. We also reviewed routine fund examinations completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO). We selected these field offices because they were the three largest in the number of completed routine fund examinations in fiscal year 2004. The three offices completed 66 routine fund examinations, accounting for about 72 percent of all routine fund examinations completed in fiscal year 2004. Where appropriate, we also reviewed examinations of advisers to the funds we reviewed. We used a standardized data collection instrument to document the methods examiners used to conduct examinations and areas examiners reviewed during examinations. In addition, we interviewed officials from OCIE and three SEC field offices—MRO, NERO, and PDO—about their examination policies and procedures and representatives from a mutual fund company and consulting firm about fund examinations. To gather information and compare SEC examinations with those of other regulators, we interviewed officials from FDIC, the Board of Governors of the Federal Reserve System, OCC, NYSE, and NFA about their quality controls and reviewed some of their quality control policies and procedures. To determine the adequacy of SEC’s oversight of NASD and NYSE in protecting shareholders from mutual fund sales practice abuses, we reviewed SEC policies, procedures, and other guidance related to its broker-dealer oversight examinations and inspections and interviewed officials from SEC’s OCIE and Boston District Office, NASD, and NYSE. We also reviewed judgmentally selected SEC broker-dealer oversight examinations conducted by SEC’s Boston District Office in 2003 and 2004, and reviewed all reports of SRO inspections conducted of NASD and NYSE between 2001 and 2003. To gather information on SEC’s automated tracking system, Super Tracking and Reporting System, we interviewed SEC staff responsible for the system in headquarters and received an overview of the system and its capabilities at the Boston District Office. In addition, we reviewed reports generated from the system and training documents for the system. To help assess the extent to which SEC, NASD, and NYSE have shared written guidance, we compared and contrasted the examination modules they used to examine for certain mutual fund sales practice abuses. As part of our assessment of the training received by broker-dealer examiners, we obtained and analyzed SEC’s training attendance rosters and list of examiners employed by SEC since 1999. To ensure that data provided about the number, nature, and results of examinations conducted by SEC, NASD, and NYSE were reliable, we reviewed written materials describing these systems and reviewed the data provided to check for missing or inaccurate entries. We also interviewed agency staff responsible for maintaining the information systems that track such data. We determined that the data were sufficiently reliable for use in this report. We performed our work in Boston, Massachusetts; Chicago, Illinois; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C. We conducted our work between February 2004 and July 2005 in accordance with generally accepted government auditing standards. You asked us to provide information about aspects of SEC’s oversight of the broker-dealer industry, including (1) how SEC, NASD, and the New York Stock Exchange (NYSE) share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to its broker-dealer examiners on mutual funds and other topics, and how it tracks and assesses such training. SEC, NASD, and NYSE have developed guidance for examiners to use in assessing compliance by broker-dealers with mutual fund sales practice rules. Each regulator has developed its own examination module, or set of procedures, covering various topics related to mutual fund sales. Moreover, all three regulators recently revised their modules to include procedures to detect market timing and late trading abuses. In addition, the regulators periodically have provided their staff with other written guidance related to mutual fund sales. For example, SEC issued internal memorandums in 1997 and 2001 to inform staff about abuses related to breakpoints and other mutual fund sales practices and provide them with procedures for detecting such abuses. Through its oversight role, SEC reviews aspects of the self-regulatory organization (SRO) examination modules, including the mutual fund sales practice module. First, SEC officials told us that NYSE and NASD e-mail SEC copies of their examination modules when they make material changes to them. Second, during SEC’s on-site inspections of SRO examination programs, staff generally review SRO examination modules in connection with their review of completed SRO broker-dealer examinations and work papers. Third, as part of their broker-dealer oversight examinations, SEC staff generally review the SRO broker-dealer examinations and applicable examination modules before going on-site to conduct examinations of such broker-dealers. SEC and the SRO officials meet at least semiannually to discuss significant examination findings, customer complaints, trends in the industry, enforcement cases, and examination guidance. SEC officials told us that agency staff have met with NASD and NYSE officials semiannually and quarterly, respectively, to discuss, among other things, examination findings and guidance. The officials also said that they hold frequent telephone conversations to coordinate their examination efforts. For example, SEC, NASD, and NYSE staff talked with each other immediately following NASD’s discovery of breakpoint abuses in 2002, and established a joint task force to determine the extent of the abuses by conducting examinations of firms designed to identify failures to provide breakpoint discounts. Similarly, SEC, NASD, and NYSE staff talked with each other in their efforts to respond to the late trading and market timing abuses uncovered in 2003. In addition, SEC and SRO staff jointly attended conferences and training that included examination guidance as a topic of discussion. Finally, SEC, NASD, and NYSE have jointly developed a number of examination modules to enforce recent changes in laws and rules applicable to broker-dealers. Although SEC, NASD, and NYSE coordinate in these ways to oversee broker-dealers, they generally do not provide copies of their written examination materials to each other. That is, SEC typically does not provide copies of its modules or other internal written guidance to the SROs, nor do NASD and NYSE generally provide copies of such guidance to each other. Officials at these agencies shared benefits and drawbacks of providing written copies of examination materials to each other. The regulators agreed that sharing information about their examination approaches and outcomes is overall a positive way to more effectively oversee the broker-dealer industry. They cautioned, however, that certain drawbacks should be considered regarding the sharing of written examination materials. SEC officials said that sharing SEC examination modules could compromise its supervision of the SROs. According to the officials, if SEC shared its modules, the SROs may be less innovative and motivated to improve their methods. They said, for example, that the SROs may view SEC’s procedures as the most that they would need to do. NASD officials strongly disagreed with SEC’s assertions about the sharing of examination modules, saying they always seek the most effective examination procedures, regardless of those used by SEC; and an NYSE official said that while NYSE understands the SEC’s position in this regard, the sharing of SEC’s examination module would only enhance NYSE’s pre- existing examination procedures related to mutual funds. NASD and NYSE officials said it would be helpful if SEC shared copies of its modules and other guidance it shares with its own examiners. However, SEC and NASD officials said that NASD and NYSE may not want to share their examination modules with each other because of competitive reasons. For example, if one SRO shared its modules with another SRO, it would run the risk that its competitor could be able to adopt similar procedures without the cost of developing them. Finally, NASD officials told us that differences exist between NASD’s and NYSE’s membership, culture, priorities, and strategies that can lead to differences in examination procedures, and the same is true for financial institutions overseen by the banking regulators. SEC’s Office of Compliance Inspections and Examinations (OCIE) oversees and directs SEC’s broker-dealer examination program, but SEC’s 11 field offices conduct the vast majority of the broker-dealer examinations. Among other things, OCIE creates and updates broker- dealer examination modules, or policies and procedures; issues other examination guidance; and reviews broker-dealer examination reports. Currently, when OCIE develops and issues policy changes and examination guidance, it typically distributes such guidance to the field offices by e-mail. In turn, each field office separately stores the guidance on one of its shared computer drives or in some other way to provide its examiners access to the information. Field office examiners generally are responsible for keeping abreast of changes in guidance and reviewing it as needed in performing examinations. To better ensure that SEC examiners across all field offices have access to current and complete broker-dealer examination guidance, OCIE is developing an internal Web site to serve as a central repository for all broker-dealer examination guidance. According to agency officials, OCIE launched its internal Web site in April 2005 on a pilot basis to select broker- dealer examiners nationwide to obtain their comments about its organization and comprehensiveness. Subsequently, SEC made the Web site available to all examiners in July 2005. According to SEC officials, the Web site will allow broker-dealer examiners to access not only all guidance at one location but also links to databases and numerous other examiner tools. SEC’s OCIE has a training branch that provides routine and specialized training to its broker-dealer examiners, with some of the training related to mutual funds. More specifically, OCIE’s training branch provides a two- phased training program for broker-dealer examiners that is designed to teach examiners how to handle increasingly complex examination issues. According to an SEC official, the phase-one course is designed for new examiners and includes some training on mutual fund operations and mutual fund sales practices of broker-dealers. OCIE’s training branch also offers a range of specialized training delivered in a variety of formats. For example, it offers classroom training sessions and videoconferences taught by senior examiners or vendors, such as NASD, as well as training videos that examiners can view when convenient. An SEC official told us that since 1999 the training branch has offered over 25 training sessions that have included mutual fund topics, such as breakpoints. In addition, SEC periodically has coordinated its training efforts with SROs, including NASD and NYSE. For example, examiners representing SEC, NASD, NYSE, and other SROs, as well as state regulators have met annually for a 3-day joint regulatory seminar to receive training about emerging and recurring regulatory issues. In 2003 and 2004, the seminars provided training on mutual fund sales practice abuses, including late trading, market timing, and failure to provide breakpoint discounts. Finally, SEC examiners attend or participate in external training, such as industry conferences. Separate from OCIE’s training branch, SEC has a central training center called SEC University that oversees the agency’s training programs. SEC University uses an electronic database to track training received by SEC staff. According to SEC officials, the database has a number of weaknesses that limits its usefulness in helping SEC to track and assess the training received by examiners. For example, the database cannot be used to generate reports on which examiners have taken or not taken a particular course. Also, the database is not directly accessible to examiners or their supervisors and, thus, does not allow them to review their training records or enter external training they may have taken. Because of these weaknesses, OCIE’s training branch uses training rosters as needed to manually track which examiners have taken particular courses. SEC training staff said that they are requesting that the agency purchase a learning management system that would better enable it, including OCIE, to track and assess all training and other developmental opportunities. According to one of the officials, the initiative is currently tabled and may or may not receive funding this year. Despite challenges in its ability to track training in an automated way, OCIE takes some steps to evaluate the training needs of its examiners. It gathers and evaluates training participants’ reactions to and satisfaction with training programs and uses that information to decide on what training to offer in the future. Training branch staff told us that at the end of each course, they hand out course evaluation forms to participants. These forms include closed-ended questions about the extent to which participants found the course helpful and open-ended questions about what additional training needs they have. The training branch uses the information to improve individual classes and the program as a whole. In addition, training staff attend monthly meetings with management and staff from all field offices, in part, to identify training needs and opportunities, and they also attend yearly meetings with examination program managers to discuss the examiners’ training needs. In addition to the contact named above, John Wanska, Randall Fasnacht, Joel Grossman, Christine Houle, Marc Molino, Wesley Phillips, David Pittman, Paul Thompson, Richard Tsuhara, and Mijo Vodopic made key contributions to this report. | As the frontline regulator of mutual funds, the Securities and Exchange Commission (SEC) plays a key role in protecting the nearly half of all U.S. households owning mutual funds, valued around $8 trillion in 2005. Mutual fund abuses raised questions about the integrity of the industry and quality of oversight provided by SEC and self-regulatory organizations (SRO) that regulate broker-dealers selling funds. This report assesses (1) changes SEC has made to, or is planning for, its mutual fund exam program; (2) key aspects of SEC's quality control framework for routine fund exams; and (3) the adequacy of SEC's oversight of NASD and the New York Stock Exchange in protecting shareholders from mutual fund sales abuses. SEC is initiating several changes intended to strengthen its mutual fund exam program but faces challenges overseeing the fund industry. In the wake of the fund abuses, SEC has revised its past approach of primarily conducting routine exams of all funds on a regular schedule. It concluded these exams were not the best tool for identifying emerging problems, since funds were not selected for examination based on risk. To quickly identify problems, SEC is shifting resources away from routine exams to targeted exams that focus on specific risks. It will conduct routine exams on a regular schedule but only of funds deemed high risk. SEC also is forming teams to monitor some of the largest groups of advisers and funds. Although SEC is seeking to focus its resources on higher risk funds and activities, the resource tradeoffs it made in revising its oversight approach raise significant challenges. The tradeoffs may limit SEC's capacity not only to examine funds considered lower risk within a 10-year period but also to accurately identify which funds pose higher risk and effectively target them for routine examination. Potentially taxing its resources further, SEC recently adopted a rule to require advisers to hedge funds (investment vehicles generally not widely available to the public) to register with it. This rule is expected to increase SEC's exam workload, but the precise extent is not yet known. SEC has integrated some quality controls into its routine exams, but certain aspects of its framework could be improved. It relies on experienced staff to oversee all exam stages but does not expressly require supervisors to review work papers or document their review. GAO found deficiencies in key SEC exam work papers, raising questions about the quality of supervisory review. SEC also does not require examiners to prepare written exam plans, though they use considerable judgment in customizing each exam. Written plans could serve as a guide for conducting exams and reviewing whether exams were completed as planned. As done by other regulators, SEC also could review a sample of work papers to test compliance with its standards. A primary tool that SEC uses to assess the adequacy of SRO oversight of broker-dealers offering mutual funds provides limited information for achieving its objective and imposes duplicative costs on firms. To assess SRO oversight, SEC reviews SRO exam programs and conducts oversight exams of broker-dealers, including their mutual fund sales practices. SEC's oversight exams take place 6 to 12 months after SROs conduct their exams and serve to assess the quality of SRO exams. However, GAO reported in 1991 that SEC's oversight exams provided limited information in helping SROs to improve their exam quality, because SEC and the SROs used different exam guidelines and their exams often covered different periods. GAO found that these problems remain, raising questions about the considerable resources SEC devotes to oversight exams. GAO also found that SEC has not developed an automated system to track the full scope of work done during its oversight exams. Thus, SEC cannot readily determine the extent to which these exams assess mutual fund sales practices. |
About one-third of all land in the United States is federally owned and consists largely of forests, grasslands, and other vegetated lands. Over the years, underbrush has grown substantially on these lands, and along with recent drought conditions and disease infestation, has fueled larger and more intense wildfires. Further, there has been an increase in the number and size of communities that border these areasin what is known as the wildland urban interface. Suppressing wildfires that threaten these areas costs significantly more because protecting homes and other structures is costly. In 2000 and 2002, wildfires burned nearly 8.5 million and 7 million acres, respectively; and in 2003, wildfires burned about another 4 million acres. In both 2000 and 2002, suppression costs were over $1.4 billion each year; in 2003, suppression costs nearly reached that amount. Because suppression costs have exceeded appropriated funds, the agencies have had to transfer funds from other programs to supplement their suppression funds. Two years in advance of when funds are appropriated, the Forest Service and Interior develop budget requests by estimating the annual costs to suppress wildfires. Estimating these costs is inherently difficult because of the unpredictable nature of wildfires, including where they will occur, how intense they will be, and how quickly they will spread. As a result, these estimates, at times, result in funding for wildfire suppression that is insufficient to cover actual suppression costs. Historically, the Forest Service and Interior have used a 10-year rolling average of suppression expenditures as the foundation for their suppression budget requests. During each year’s fire season, the Forest Service and Interior also develop monthly forecasts to update the overall suppression costs estimate and determine how much additional funding, if any, will be needed. When it becomes apparent that annual appropriated funds are insufficient to support forecasted suppression needs, the Forest Service and Interior are authorized to use funds from other programs within their agency to pay for emergency firefighting activities. From 1999 through 2003, the Forest Service and Interior transferred over $2.7 billion from various agency programs to help fund wildfire suppression when appropriated funds were insufficient. The Forest Service transferred monies from numerous programs supporting the breadth of its activities, while Interior transferred funds primarily from two programsconstruction and land acquisition. To determine the amount of funds to transfer, the agencies used similar monthly forecasting models to determine suppression funding needs during the fire seasons. Agency officials acknowledged, however, that the models produced widely varying forecasts of suppression costs that substantially underestimated actual costs. Also, in determining the programs from which to transfer funds, the agencies attempted to select programs with projects that would not be significantly impacted by transfers because a portion of their funds would not be needed until subsequent years. Between 1999 and 2003, the Congress reimbursed the agencies for about 80 percent of the funds that were transferred on average. However, the Congress did not always reimburse the programs in amounts proportionate to the transfers. In addition, the Forest Service and Interior had some discretion in distributing the reimbursements among various projects, depending on their priorities at the time of reimbursement. For each of the last 5 years, wildfire suppression costs have been substantially greater than the amount of funds appropriated for suppression, necessitating the Forest Service and Interior to transfer over $2.7 billion from other agency programs to help fund wildfire suppression activities. Of this amount, the Forest Service transferred the majority— almost $2.2 billion—while Interior transferred over $500 million. Nearly half of the total amount was transferred in 1 year alone, 2002, but substantial transfers were needed for other recent severe fire seasons as well. For example, during the 2000 and 2003 fire seasons, almost $400 million and about $870 million were transferred, respectively. As illustrated in figure 1, suppression costs have exceeded suppression appropriations almost every year since 1990. To determine the amount of funds to transfer each year, the agencies used monthly forecasting models to estimate likely wildfire suppression costs during the wildfire season. Agency officials acknowledged, however, that the models produced forecasts of suppression costs that varied by hundreds of millions of dollars when compared with actual, year-end suppression costs. For example, in June 2003, Interior’s forecasting model predicted that suppression costs for the year would exceed suppression appropriations by about $72 million. A month later, the model predicted costs would exceed appropriations by about $56 million; by late August, the model predicted that costs would exceed appropriations by more than $100 million. By the end of the fiscal year, Interior had transferred over $175 million to cover actual suppression costs. Forest Service forecasts also were well short of year-end suppression costs during 2003. The agency’s forecasting model predicted that annual suppression costs would reach nearly $800 million, indicating that current year funds would be about $375 million less than projected needs. By the end of the fiscal year, however, the Forest Service had transferred nearly $700 million to cover suppression costs of over $1 billion. Both Forest Service and Interior officials indicated there is a high degree of uncertainty in trying to estimate the current year’s suppression costs, primarily because weather conditions are difficult to predicteven over the short term. Despite the discrepancies between agency forecasts and actual suppression costs, the agencies have performed no formal assessments of their forecasting models’ accuracy. Agency officials acknowledged that such assessments would be useful for monitoring and improving the reliability of their models and enhancing their ability to predict when transfers will be needed and how much to transfer. The agencies also acknowledged that the forecasts have not been accurate and are revising the models in an effort to improve the forecasts. In deciding the programs from which to transfer funds, Interior and Forest Service officials primarily selected programs with projects that would not be significantly impacted by transfers because a portion of their funds would not be needed until subsequent years. Interior transferred funds mostly from its construction and land acquisition programs, with about two-thirds of the funds coming from construction. These two programs are used to construct and maintain facilities, roads, and trails on Interior lands, among other things, and to acquire additional public lands. In 2002 and 2003, Interior also transferred some funds from fire-related preparedness, postfire rehabilitation, and hazardous fuels reduction projects in order to support suppression activities. Within Interior, the National Park Service transferred substantially more funds than the other three agencies over the last 5 years, transferring about 60 percent of the $540 million transferred. Unlike Interior, the Forest Service transferred monies from numerous programs supporting the breadth of its activities. These programs included its construction; land acquisition; national forest system, which among other things conducts postwildfire rehabilitation and restoration work; and state and private forestry programs, which support activities such as grants to states, tribes, communities, and private landowners for fire management, urban forestry, and natural resource education as well as insect suppression. Before 2001, the Forest Service had transferred funds solely from its Knutson-Vandenberg Fund (K-V Fund), because historically this restoration program had large amounts of money that could not be used by the end of the fiscal year. Since the mid-1980s, the Forest Service has transferred more than $2.3 billion from this program; however, more than $400 million has not been reimbursed. As a result, the Forest Service became concerned about the viability of the K-V Fund as a source of transfers and in 2001 began transferring funds from other major Forest Service programs. The Forest Service and Interior programs from which funds were transferred and the amount of funds transferred and reimbursed from 1999 through 2003 are outlined in table 1. Additional details on these matters are included in appendixes II and III. Over the last 5 years, the Congress reimbursed, on average, about 80 percent of the funds that the Forest Service and Interior transferred for wildfire suppression expenses. Although the agencies received nearly full reimbursement for funds transferred in 2000 and 2001, the Forest Service and Interior were reimbursed about 74 percent and about 81 percent, respectively, of the funds transferred in 2002 and 2003. For these later 2 years, individual Forest Service programs were reimbursed at varying rates. For example, the Congress reimbursed the Forest Service’s state and private forestry program for nearly 100 percent and its national forest system program for 40 percent of the funds transferred in 2002. In contrast, the Congress reimbursed Interior’s construction and land acquisition programs at about 81 percent each. Congressional appropriators and Office of Management and Budget (OMB) officials worked with Forest Service and Interior officials to determine the amount of funds to reimburse to the numerous agency programs impacted by funding transfers in order to help the agencies meet their current program needs. For example, according to Forest Service officials, state and private forestry projects, such as community assistance grants and forest legacy project grants, were important priorities when the Forest Service received reimbursements in 2003 for funds transferred in 2002. As a result, the state and private forestry program received full reimbursement. In contrast, the national forest system had a large amount of funds transferred in 2002 that was dedicated for the salaries of staff diverted from their normal duties to fight wildfires. OMB officials indicated that since these employees had been paid—albeit out of the wildfire suppression account—the transferred salaries required no reimbursement. Therefore, the national forest system program was reimbursed for a much smaller amount—about 40 percent. When the Forest Service and Interior received less than full reimbursement for funds transferred in 2002 and 2003, the agencies used different procedures to distribute the reimbursed funds within their programs. Forest Service officials distributed the funds to projects reflecting current priorities within individual programs, which were not necessarily the same projects from which funds were transferred. For example, Forest Service officials in California targeted the funds to projects within the San Bernardino National Forest to help address the increased wildfire risk created by insect infestation, even though no funds had been transferred from these projects. Similarly, officials in Colorado directed the reimbursed funds to high-priority rehabilitation efforts in the aftermath of the Hayman fire that had occurred in the Pike-San Isabel National Forest in June 2002. In contrast to the Forest Service’s approach, Interior reimbursed funds solely to projects from which funds were transferred; however, the four agencies within Interior did this in varying ways. For example, the Fish and Wildlife Service fully repaid its high-priority construction projects for transfers made in 2002, although it did not repay lower priority construction projects that also transferred funds, such as the restoration of a visitors center. The Bureau of Indian Affairs, on the other hand, fully repaid all projects from which funds were transferred in 2002, except one—a school renovation project that agency officials believed could be delayed pending future additional funding. In contrast, the Bureau of Land Management repaid all construction projects at the same percentage, while the National Park Service repaid construction projects at widely varying amounts depending on their perceived priorities. Table I provides information on the amount of funds reimbursed to the various Forest Service and Interior programs. Additional details on reimbursements are provided in appendix II. The Forest Service and Interior canceled or delayed numerous projects, failed to fulfill certain commitments to partners, and faced difficulties in managing their programs when funds were transferred for fire suppression. The agencies canceled or delayed contracts, grants, and other activities, which in some cases increased the costs and time needed to complete projects. Further, agency relationships with state agencies, nonprofit organizations, and communities became strained when the agencies could not fulfill commitments, such as awarding grants on time. In addition, transfers disrupted agency efforts to effectively manage programs, causing planned activities to go unfunded and, in some cases, causing program funds to be depleted or overspent. If transfers continue, the impacts on projects, relationships, and program management will likely continue and increase. Although Forest Service and Interior local units generally are aware of these impacts, the agencies have no systems in place to track the impacts at a national level. (Dollars noted in the remaining text of this section are not adjusted for inflation.) Projects in a variety of Forest Service and Interior programs were delayed or canceled as a result of funding transfers, thereby affecting agency firefighting capabilities, construction and land acquisition goals, state and community programs, and other resource management programs. Furthermore, officials often had to duplicate their efforts because of transfers, which prolonged delays and added costs. For example, officials had to revise budgets and construction plans, update cost estimates, and rewrite land acquisition documents when delays caused them to become outdated, all of which further compounded project delays. In some cases, preparation of such documents added substantial costs. For example, appraisal and legal fees for certain land acquisition efforts added thousands of dollars to project costs. In addition, when delays were prolonged, supply costs increased, land prices rose, and impacts to natural resources spread, which also increased projects’ costs. Although funding transfers were intended to aid fire suppression, in some cases, the Forest Service and Interior delayed projects that were intended to reduce fire risk or improve agency firefighting capabilities. Following are examples of such projects: Fuels reduction projects, New Mexico: In 2003, $191,000 was transferred from three fuels reduction projects covering 480 acres of Forest Service land in the wildland urban interface. All three thinning projects were near communities, affecting about 325 homes. The projects are scheduled to be completed in 2004. National Park Service fire facilities projects, nationwide: In 2002, about $3.4 million was transferred from 13 fire facilities projects at 10 different parks. The projectsincluding construction of facilities for fire equipment storage; a crew dormitory; and fire engine storage buildings, among otherswere delayed for several months. Four of these projects—in Big Bend National Park (Texas); Yellowstone National Park (Idaho, Montana, and Wyoming); Sequoia and Kings Canyon National Parks (California); and Shenandoah National Park (Virginia)were again delayed in 2003 when about $1.9 million was transferred. Forest Service fire facilities projects, California: In 2003, the Forest Service deferred construction of two engine bays, one fire station, and three fire barracks in California because of funding transfers. Consequently, fire crews at one forest must live in housing that, according to agency officials, is substandard and has required recurring maintenance to address roof leaks, plumbing malfunctions, and electrical failures caused by rodents damaging the wires. Additionally, officials told us that such conditions make it difficult to recruit and retain fire crews. Wildfire management courses, southern region: In 2003, the Forest Service canceled two required training courses for officials who approve wildfire management decisions and expenses. About 80 officials who represent national forests in at least 12 states had planned to attend. One course emphasized cost containment, and the other covered a wide range of fire management issues, including safety. Both courses were rescheduled and held in 2004. Fire research projects, Montana: When funds were transferred in 2002, the LANDFIRE project—a multiagency effort to collect comprehensive data on fire risk—was delayed about 3 months, the collection of data critical for modeling fire behavior was delayed about 6 months, and data on smoke levels were lost because an instrument was not purchased in time to use it during the 2002 fire season. In addition, temporary staff were released early in 2002, further reducing the amount of research that could be performed. Agency officials also targeted construction and land acquisition programs for funding transfers because these projects are often funded one year, with the expectation that the project will be implemented—and the funds spent—over several years. Consequently, these programs often have large unused fund balances, and transfers can sometimes be made with minimal impact as long as the funds are reimbursed before they are needed. Accordingly, some officials, especially in the Interior agencies, told us that impacts to projects had been relatively limited. Nevertheless, many construction and land acquisition projects were delayed or canceled, particularly in the Forest Service. Some construction projects that were delayed due to funding transfers were delayed for 1 year or more because of seasonal requirements, even when funds were reimbursed after only a few months. For example, a project to replace three backcountry bridges at the Inyo National Forest in California was planned for late summer when stream flows would be low and conditions would be safe for workers. According to a Forest Service official, the project was important for public safety because one bridge was completely washed out and the other two bridges were at risk of failing while people were crossing them. Figure 2 shows one of these bridges before—when handrails were sagging or missing and support logs were decayingand after it was replaced. Project funds were transferred in 2002, so the project was deferred to late summer 2003; however, funds were once again transferred, and the project was not completed until 2004. In other cases, additional adverse effects resulted when projects with seasonal requirements were delayed. For example, according to a Forest Service official, a popular campground in Arizona may be closed during the 2004 operating season while improvements are made because seasonal requirements combined with fire transfers resulted in extended delays. In 2003, $450,000 was transferred from this project, delaying it 2 months into the winter. Because of the weather construction crews could not work on the project, thus it was delayed several additional months. Further, this campground was already closed during the 2003 operating season because funding transfers in 2002 had delayed planned improvements. In some cases, construction projects that were initially delayed were canceled when supply costs rose and the Forest Service no longer had sufficient funds to pay for the projects. For example, a 2003 project to rehabilitate a historic residence at the Sierra National Forest in California was delayed when funds were transferred for wildfire suppression. According to an agency official, the project, which would have converted the residence into a public information facility, was intended to attract tourists and help diversify the local economy in an area where a 1994 lumber mill closure contributed to a deteriorating economy. The lowest bid that the Forest Service received for the project was about $186,000. However, before the funds were reimbursed, the contractorciting a 300 percent increase in lumber pricesrescinded the bid and estimated the new cost of the project at $280,000, an increase of nearly $100,000. Consequently, the Forest Service canceled the project and resubmitted it in its 2005 budget, with a higher cost estimate. Land acquisition costs can also increase when projects are delayed. For example, figure 3 shows a portion of a 65-acre property in Arizona that the Forest Service intended to purchase for approximately $3.2 million in 2002, but had to defer due to funding transfers. About a year later, the Forest Service purchased the property, but the value had increased, costing about $195,000 more than it had a year earlier. A nonprofit organization also incurred additional costs of about $3,000 because it paid for the updated appraisal. In addition, the agencies sometimes risked losing the opportunity to purchase land when funds were transferred from land acquisition programs. For example, in 2003, the Fish and Wildlife Service planned to purchase property in Alabama that contains habitat for the gopher tortoise, which is a species of concern in Alabama. However, because of funding transfers and only partial reimbursement, the service no longer had sufficient funds. Agency officials were concerned that the property would be sold privately. To prevent a sale to private owners, a nonprofit organization agreed to buy the property and hold it until the Fish and Wildlife Service could purchase it from them. When funds were transferred for fire suppression, many Forest Service grants were delayed or canceled, which affected states, communities, nonprofit organizations, and others. Examples of such projects are discussed below: Urban and community forestry grants in seven states, southern region: The Forest Service did not fund eight urban and community forestry grants totaling $993,000 due to 2003 funding transfers. State forestry departments planned to “subgrant” about 80 percent of the funds to local communities for more than 75 projects, such as planting trees, developing local land use plans, and holding several workshops and conferences on topics such as urban forestry. Community assistance grant, New Mexico: A 2002 grant to a small business owner was delayed about 6 months because of funding transfers. The business processes small-diameter wood to make signs and other marketable products, and the grant would have paid for a wood chipper essential to the process. When the grant was delayed, the business owner could not purchase the chipper and process the wood. As a result, he closed his business for a year, laid off some staff, and reported estimated revenue losses of millions of dollars. Watershed education grant, New Mexico: A 2003 economic action grant for $32,000 was canceled and will not be funded. The grant would have paid for a nonprofit organization to conduct an education project about sustainable grazing in a severely degraded watershed where the intended audience included ranchers, community members, public officials, and others. The nonprofit organization reported investing about $5,250 in preparation for the project. When resource management projects were delayed and canceled, natural resources were affected (e.g., soils eroded, insects infested forests, and encroaching plants spread and threatened newly planted trees). Further, prolonged delays sometimes compounded these effects because additional time allowed the damage to spread. For example, at the Lincoln National Forest in New Mexico, a project to repair a washout in a road was deferred when funds were transferred in 2002. During a 2-year delay that was partially caused by funding transfers, the washout grew dramatically. Consequently, a more significant structure is now needed to prevent erosion, which will result in additional costs of between $9,000 and $15,000, according to an agency official. Additionally, at the White River National Forest in Colorado in 2003, $111,000 was transferred from a project to remove about 150 acres of trees infested with spruce beetlethereby deferring the project. As a result, the infestation grew to about 230 acres, killing additional trees and raising the cost of the project about $24,000 more than previously estimated, according to an agency official. Further, there is a chance that the beetle population will spread to the point where it cannot be contained at any cost and where tree mortality will increase dramatically—affecting up to 6,000 acres. If this further infestation occurs, an agency official said the project would be canceled. According to an official at the Bitterroot National Forest in Montana, a project to stabilize 9 miles of a dirt road was delayed when about $1.2 million was transferred in 2002. As shown in figure 4, the road was collapsing. As a result, sediment was running into a creek, jeopardizing the habitat of two species of fish, one of which is a threatened species. Two years after the transfer, $430,000 was reimbursed to the project, and officials expect to stabilize about 2 of the 9 miles of road. Because of the prolonged delay, however, additional sediment has run into the stream and further compromised the fish habitat. Furthermore, agency officials do not expect to receive any additional reimbursement to complete the remaining stabilization, and they are concerned about the increasing sedimentation and continuing decline of the fish habitat. In addition, sometimes canceling one project affects the success of others. For example, at the Hiawatha National Forest in Michigan, a project intended to ensure the success of reforestation efforts—by removing encroaching plants—will be canceled in 2004. The encroaching plants are crowding newly planted trees, as shown in the photograph on the left in figure 5, and threatening their survival, according to agency officials. As a result, one official estimated that 20 to 25 percent of the newly planted trees will die, and that it will cost about $24,000 to remove the dead trees and reforest the area. In contrast, the photograph on the right shows a site where young trees were protected by removing encroaching plants, and, consequently, the trees survived. Examples such as these were widespread in the six regions we visited. For example, because of funding transfers in 2002 and 2003, the Forest Service’s northern region deferred reforestation on 5,900 acres, weed control on 74,000 acres, maintenance on 1,500 miles of road, replacement of 150 culverts to improve fish habitat, repair of five damaged bridges, and award of 11 stewardship contracts. When the Forest Service and Interior transferred funds for fire suppression, they sometimes failed to fulfill commitments to partners, which caused relationships to be strained. Federal agencies rely on partnerships and other forms of collaboration with each other, state and local governments, nonprofit organizations, and others to accomplish their work. For example, federal land acquisitions are often facilitated by nonprofit organizations and involve private landowners, agency recreation programs depend on volunteers, and some research projects are joint efforts between the Forest Service and Interior and may involve university participants as well. In addition, communities, state forestry programs, and others depend on federal grant programs for financial support. When funds were transferred for fire suppression, not only were federal programs impacted, but nonprofit organizations, states, and communities were also affected. In transferring funds from land acquisition programs, agency relationships with nonprofit organizations were affected. Nonprofit organizations often facilitate agency land acquisitions by negotiating with landowners and by sometimes purchasing the land, then selling it to the agency. When agencies delayed land acquisitions, nonprofit organizations sometimes incurred interest costs of thousands of dollars on loans they took out for the purchase of the land. These costs were generally absorbed by the nonprofit organization and not passed on to the federal agencies. For example, one organization bought a parcel of land in South Carolina with the intent of selling it to the Forest Service in 2002; however, the funds to purchase the land were transferred for wildfire suppression. The Forest Service eventually purchased the land in 2003, but in the meantime, the nonprofit organization had incurred about $300,000 in interest costs. One nonprofit organization reported that 22 land acquisition projects were delayed in 2002, and 21 projects in 2003, due to transfers. A representative from the organization said that if funds are again transferred in 2004, the organization will view this practice as a trend, rather than an anomaly, and will likely invest its funds elsewhere rather than work with the Forest Service and Interior. Agency relationships with landowners were affected as well. For example, the Forest Service has been working for several years with state officials and others to obtain a conservation easement in Hawaii. According to a Forest Service official, it “has been a major effort to build a high enough level of trust with the private landowner.” The official is concerned that transfers—which depleted the necessary funds for this project in both 2002 and 2003—may jeopardize their relationship with the landowner, who may choose to develop the property rather than wait for the Forest Service to secure the necessary funds. If the land is developed, an important habitat for two endangered bird species will be lost. Community groups and volunteer or nonprofit organizations also invest considerable time and money to prepare projects and grant proposals. When the Forest Service and Interior did not fulfill their commitments, some of these investments were lost. For example, a 2002 Collaborative Forest Restoration Program grant in New Mexico would have paid for thinning treatments to be conducted by a local workforce, with the resulting wood chips to be processed into marketable products. A nonprofit organization that was a partner in the project conducted a $30,000 training program to prepare the local workforce. However, the grant was delayed for about 6 months because of 2002 funding transfers, and when funds became available, the trainees were employed elsewhere and unavailable. Another example involves a nonprofit organization that works collaboratively with communities and Forest Service and Interior agencies to design and implement large-scale fire restoration projects across the country. The collaborative teams collectively review the outcomes of projects, such as controlled burns, and share their knowledge and experience with one another. Of the 30 projects that were to receive federal funding, 12 have been delayed as a result of funding transfers. According to a representative of this organization, the practice of transferring funds for wildfire suppression “hurts the credibility of agencies,” and has led two of the project teams to not apply for further funding because of the uncertainty caused by the possibility of transfers. The fire transfers also affect state forestry departments, which depend on Forest Service grants to support their programs. In recent years, state budgets have been strained, making it difficult for state governments to compensate for the loss of federal funding. When the Forest Service began transferring funds for fire suppression in 2002, some states were concerned about the viability of their forestry programs. For example, Forest Service grants supply nearly 60 percent of Nebraska’s annual State Forest Service budget, without which the state would have to significantly reduce its operation—including laying off staff. According to the Nebraska State Forester, when funds were transferred in 2002, the state had already spent over $1 million beyond its existing budget because it anticipated receiving a Forest Service grant. After a period of uncertainty, the grant was awarded. However, the State Forester said that, partly as a result of ongoing budget uncertainties, one staff member left the agency and two candidates declined job offers, leaving another position vacant. States were also affected when, in 2003, $50 million was transferred from the 5-year, $100 million Forest Land Enhancement Program, and only $10 million was reimbursed. This program, which is managed by states, helps private landowners improve the health of their forestlands through activities such as timber improvement, wildlife habitat management, and fuels reduction. The $100 million was intended to last for 5 years. In the first year, the Forest Service allocated $20 million to the states, leaving an $80 million balance in the program. When only $10 million of the $50 million transfer was reimbursed, the program was left with a balance of $40 million—or half of the expected budget—for the remaining 4 years. Foresters are concerned about the viability of the program, which provides an economically feasible alternative to landowners who might otherwise sell their land for development. Further, foresters believe that by preventing development of such land, the program helps avoid habitat fragmentation, which was identified by the Forest Service Chief as one of the four largest threats to the nation’s forests. Nonetheless, with so much of the program’s budget lost to funding transfers and its viability in question, agency officials did not expect to receive any funding for the program in 2004 and did not request any funding for 2005. According to agency officials, the Forest Service will not be able to continue the program unless the Congress appropriates funds for fiscal year 2005 or subsequent years of the authorization period. When funds were transferred for fire suppression, the agencies’ efforts to manage their programs—including budgeting and planning for annual and long-term programs of work—were disrupted. Some programs, such as the Forest Service K-V and Working Capital Funds, are managed like savings accounts, accumulating funds over multiple years to be spent according to a specific schedule for activities such as forest improvement and vehicle maintenance and replacement. When transfers were made from these programs without subsequent reimbursement, agencies had to begin accumulating the funds again or cancel the planned expenses. For other programs, such as construction and land acquisition, transfers interfered with agency and congressional priorities. In some cases, Forest Service programs went into deficit because transfers disrupted planned budgets and officials overspent program funds in order to pay for essential expenses. Actions taken by the agencies may have mitigated some of these impacts, but compounded others. Funding transfers have left the Forest Service with insufficient funds to pay for all of the K-V projects it planned at the time the funds were collected. Over the past 5 years, about $640 million has been transferred from the K-V Fund for wildfire suppression, while only $540 million has been reimbursed. Moreover, transfers have been made from the K-V Fund for decades with only partial reimbursement. Since the mid-1980s, about $2.3 billion has been transferred from the K-V Fund, and only $1.9 billion has been reimbursed. According to agency officials, there have been sufficient funds to fully implement the K-V reforestation projects in any given year. However, there have not always been sufficient funds over the years to implement other programs that rely on the K-V Fund. For example, before reimbursements were received for 2003 transfers, Forest Service officials said they would only be able to fund about $60 million of $96 million in K-V projects for 2004 dealing with activities such as habitat improvement. Even though reimbursements for 2003 transfers were later received, Forest Service officials indicated that many of the habitat improvement projects that had been deferred to absorb the shortfall will not be accomplished in 2004 due to the shortened period of work. Faced with unpredictable information about funding transfers and reimbursements, it has been difficult for the Forest Service to reliably estimate how much will be deposited into and withdrawn from the K-V Fund and, therefore, to effectively manage the fund and the programs it supports. Similarly, transferring funds from the Working Capital Fund disrupted the Forest Service’s efforts to carry out long-term expense planning, making it difficult for agency officials to effectively manage programs. For example, the Forest Service no longer has enough funds to pay for its planned vehicle and computer replacements because of funding transfers. Each program that uses vehicles or computers allocates a portion of its budget to pay monthly charges into the Working Capital Fund, which accrues these deposits over a period of years to spend on vehicle and computer purchases and maintenance. Vehicles and computers are then maintained as needed and replaced according to a schedule designed to maximize cost effectiveness. In 2002 and 2003, however, some of the funds that agency officials had been accumulating for years were transferred and no longer available for maintenance and planned replacements. As a result, maintenance and replacement schedules were disrupted, and purchases had to be delayed. For example, in 2002, the Forest Service postponed planned purchases of fire engines, helitack trucks, fire crew carriers, and patrol rigs when funds were transferred in California. Since more than 90 percent of these transfers were not reimbursed, agency officials had to either continue using older vehicles or reduce their fleet size and will have to make additional payments to accrue enough savings for the planned purchases. Forest Service efforts to prioritize projects were also disrupted. In an attempt to avoid project delays and cancellations after having lost funds to transfers in 2002, agency officials awarded contracts and grants earlier in the year in 2003. Although such efforts mitigated some impacts of funding transfers, they also interfered with agency attempts to implement high- priority projects. When officials expected funds to be transferred, they implemented projects that could be completed quickly and early in the year, although they were not necessarily their highest priority projects. On the other hand, the Forest Service was able to implement some of its high- priority projects later by redirecting reimbursements to them. For example, in California, agency officials targeted funds to the San Bernardino National Forest, where insect infestation had caused widespread tree mortality and elevated fire risk. In Colorado, officials directed reimbursements to high-priority rehabilitation efforts in the aftermath of the Hayman fire, shown in figure 6. The redirection of funds was authorized by the Congress and may have helped preserve agency priorities. However, under some programs, such as construction and land acquisition, appropriations committee reports direct the agencies to fund specific projects (which agency officials refer to as “congressionally directed” projects). In some cases, officials paid for congressionally directed projects by shifting funds from projects that the committee reports had not specifically identified, or projects that were less expensive than anticipated, and therefore had “savings.” However, one National Park Service official expressed concern about these unfunded projects, suggesting that if transfers continue without complete reimbursement, the construction program may no longer have sufficient funds to pay for all congressionally directed projects, even though funds were already appropriated for them. Funding transfers also disrupted annual budgeting efforts, contributing to numerous individual Forest Service programs going into deficit in 2003 when agency officials overspent funds internally set aside for the programs. Forest Service officials attributed the deficits in part to actions they took to execute the transfer of funds—specifically, the combination of spending early and transferring late. In 2002, the fire season began unusually early, and the Forest Service ordered an agencywide spending freeze on all nonessential expenses beginning in early July. By doing so, the Forest Service ensured that enough funds were available to pay for suppression costs. However, at the end of the fiscal year, there were substantial funds left in some programs, and officials believed that more projects could have been completed. In an effort to avoid this situation and to complete more projects while still providing for suppression costs in 2003, the Forest Service did not start transferring funds until mid-August and, even then, did not order a spending freeze. In addition, agency officials focused on spending money earlier in the year, so that they could complete more projects before funds were transferred for suppression. After funds were transferred, some programs had nearly depleted their financial resources. Nevertheless, agency officials said they continued spending in a number of cases because they had made commitments to contractors or others, or because expenses such as vehicle maintenance were essential. At year-end, some programs were in deficit. For example, all 11 forests in the Forest Service’s southwestern region ended 2003 with deficits in at least 30 percent of the programs from which transfers were made. Seven of the 11 forests had deficits in 50 percent or more of these programs. Another factor that contributed to 2003 program deficits was that the Forest Service used unreliable estimates to determine the amount of money available for transfers. Specifically, when the Forest Service made transfers in 2003, its headquarters officials estimated the minimum balance necessary for each program by projecting salary needs for the remainder of the fiscal year and adding a small amount for contingencies. The estimate was based on two pay periods in July, and, in most cases, headquarters transferred all of the balance above this estimated amount. However, headquarters officials made this transfer without adequately consulting the regions or local forest units to obtain information on their specific salary needs for the remainder of the fiscal year. As such, in some cases, the salary estimates were understated because some staff were on suppression duty during the two pay periods and the suppression program was paying their salaries. Consequently, when these staff returned from suppression duty before the end of the fiscal year, the balance remaining was not always sufficient to cover their salary costs. According to headquarters officials, they used rough salary estimates because suppression program funds were nearly depleted and they needed to make transfers immediately, leaving inadequate time for forest-level officials—who have access to detailed payroll information—to estimate salary costs. Nevertheless, officials in the Washington Office directed regional and forest-level officials to ensure that all full-time staff continued to be paid in full. In order to do so, in some cases, staff worked in alternate programs so that they could be paid through those programs. In other cases, agency officials continued to draw salaries from depleted programs, and, as a result, the programs went into deficit. Further, to avoid this situation, some officials said their managers encouraged them to go on fire suppression detail where there was a need, so that their salaries would be paid from the suppression program. Forest Service officials indicated they used the following year’s appropriation to replenish the programs that went into deficit; however, this practice reduced the amount of funds available for that year’s program of work. Finally, if transfers to pay for wildfire suppression continue, project cancellations and delays, strained relationships, and management difficulties will likely continue and be compounded. According to agency officials, some impacts have yet to become apparent. For example, some projects are funded in one year with the expectation that the funds will be spent over several years as the project is implemented. For such projects, the impacts of transfers may only become apparent as the project nears its completion. Additionally, when projects are deferred to the next year, agency officials often must use resources originally dedicated to other projects. The result is a domino effect: deferring one year’s projects displaces the next year’s projects, which must in turn be deferred to the following year. Furthermore, because of 2003 program deficits, the impacts of funding transfers will continue into 2004. For programs that were in deficit at the end of 2003, officials had to first pay off the deficit at the beginning of 2004, effectively reducing their annual budget and the number of projects they will be able to fund. If funding transfers continue, the agencies and the Congress will repeatedly confront difficult decisions in determining how much funding to transfer from which programs and how much to reimburse. In making such decisions, the Forest Service and Interior have attempted to minimize impacts to programs and projects, but neither agency systematically tracks such impacts at a national level. To identify the impacts of funding transfers on its programs in 2003, Forest Service officials collected some information about impacts from regional offices. However, the information was neither consistent nor comprehensive because not every region provided it, and those that did, provided it in different forms with varying degrees of detail. Enhancing their understanding of how funding transfers affect programs could improve the ability of the agencies and the Congress to minimize negative impacts to programs and projects. In 2003, the Forest Service added a feature to its accomplishment reporting system to track the impacts of funding transfers. The feature allows agency officials to identify which national performance goals are affected by transfers and to what extent. For example, officials can identify how many acres of land were not acquired because of funding transfers. However, there are several agency programs that do not use this system to track their accomplishments. If more programs used this system and tracked accomplishment shortfalls caused by funding transfers, the Forest Service and the Congress would have more comprehensive information and could make more informed decisions about wildfire suppression funding, transfers, and reimbursements. Interior similarly could refine its existing accomplishment tracking systems to collect nationwide information about the impacts of transfers on their programs. Because accomplishment information is compiled at the end of the fiscal year, it would be of limited value in determining potential effects of current year transfers before they are made. Nevertheless, nationwide information on impacts from prior years could help agency officials and the Congress make informed decisions about current year transfers and reimbursements. To help mitigate the negative impacts of funding transfers, the Forest Service and Interior should improve their method for estimating annual suppression costs and the Congress could consider alternative approaches for funding wildfire suppression. The agencies’ use of a 10-year average of wildfire suppression costs to estimate and budget for annual suppression costs has substantially underestimated actual costs during the last several years. While uncertainties about the number of wildfires and their location, size, and intensity make it difficult to estimate wildfire suppression costs, alternative methods that more effectively account for these uncertainties and annual changes in firefighting costs should be considered for improving the information provided to agency and congressional decision makers. Additionally, to further mitigate the impacts of funding transfers, the Congress could consider several alternative approaches to funding wildfire suppression, such as establishing a governmentwide or agency- specific reserve account dedicated to funding wildfire suppression activities. Each alternative has advantages and disadvantages with respect to, among other things, reducing the need to transfer funds, creating incentives for agencies to contain suppression costs, and allowing for congressional review. Thus, selecting any alternative would require the Congress to make difficult decisions, including taking into consideration the effect on the federal budget deficit. For the past several years, the Forest Service, Interior, and the Congress have made annual wildfire suppression budget and appropriations decisions based on estimates of suppression costs that frequently have substantially understated actual costs. In developing their annual suppression budgets, the Forest Service and Interior use a 10-year average of suppression costs to estimate annual suppression costs. The agencies calculate this estimate up to 2 years in advance of when suppression funds are actually needed. The Congress also uses this estimate in deciding how much to appropriate for wildfire suppression activities. However, since 1990, these annual estimates frequently have understated actual suppression costs by hundreds of millions of dollars, as illustrated in figure 7. In fact, over the last 5 years, the estimates have understated actual suppression costs by about $1.8 billion. This shortfall in funding to cover actual suppression costs has occurred, in part, because the agencies and the Congress developed annual budget requests and made appropriation decisions for suppression activities on the basis of these estimates. In funding suppression activities based on these estimates, the Congress was able to fund, and the agencies were able to address, other program priorities without negatively affecting the federal budget deficit. However, in doing so, the agencies have had insufficient funds to pay for all suppression activities in recent years because of the increase in the number and intensity of wildfires and the costs to suppress them. As a result, the agencies have had to transfer hundreds of millions of dollars from other programs. Alternative methods should be considered for improving the suppression cost estimates that are provided to agency and congressional decision makers for use in estimating and funding wildfire suppression costs. Agency officials acknowledged that the 10-year average has substantially understated actual suppression costs in recent years. Although agency officials indicated they have considered alternative methods for improving the forecasts, they believe that the 10-year average is a reasonable and inexpensive way to estimate wildfire suppression costs. However, the usefulness of a 10-year average is limited when actual costs change rapidly from year to year, as they have recently. Furthermore, because the average is presented as a “point estimate” of likely costs instead of in conjunction with a range of cost estimates reflecting the uncertainties of wildfires, it may convey an unwarranted sense of precision to decision makers. For example, as shown in figure 7, recent actual suppression costs have been higher than earlier levels. Agency officials believe that recent abnormal drought conditions have contributed to unusually large and catastrophic wildfires that are much more expensive to suppress than typical fires prevalent for most of the previous 10 years. In addition, over the last few years, the cost of fighting wildfires in the wildland urban interface has risen significantly due to the number of homes built in these areas and the increased resources needed to protect them from wildfires. Also, costs related to the use of aircraft to fight wildfires, especially insurance rates, have increased significantly since September 11, 2001. Alternative methods that more effectively account for annual changes in expenditures and that convey the uncertainties associated with making the forecasts should be considered for improving the information provided to agency and congressional decision makers. For example, an estimate based on a weighted 10-year average, in which more weight in the average is given to recent expenditures relative to older ones, may be more effective in accounting for annual changes in expenditures. This information could provide agency and congressional decision makers with more useful data to develop budget requests and fund suppression activities at a level that reduces the need for funding transfers and subsequent reimbursements. However, in doing so, higher estimated costs for suppression could result, at least in the near term. In this context, the Congress would have to make difficult decisions about whether to increase funding for wildfire suppression to more closely reflect estimated costs, and, if so, whether to reduce appropriations to other government programs in order to avoid adding to the federal budget deficit. In addition to the agencies refining their estimates of suppression costs, the Congress also could consider alternative funding approaches to further mitigate the effects of funding transfers on agency programs and reduce the need to provide supplemental appropriations. For example, the Congress might consider creating an emergency reserve account that is governmentwide or agency-specific, and that provides a specific amount of funds when the reserve is created or allows for as much funding as is necessary. Each alternative has advantages and disadvantages related to influencing the need for transferring funds, creating incentives for the agencies to contain suppression costs, and allowing for congressional review. We previously issued two reports, and the Congressional Budget Office issued testimony, that presented various alternatives for funding wildfire suppression and other emergency needs. Some of the alternatives presented in these reports and testimony are summarized in table 2 and described below: Reserve accounts provide early recognition that there will likely be a demand on federal resources for natural disastersthus providing greater transparency in the budget process. The greater the amount of funds in the reserve account, the less likely agencies would need to transfer funds from other programs. Reducing the need to transfer funds would mitigate the need for supplemental appropriations that have added hundreds of millions of dollars to the federal budget deficit. However, the greater the amount of funds in the reserve account, the more difficult it would be for the Congress to limit total government spending. On the other hand, if the Congress limited the amount of funds appropriated for wildfire suppression, including the amount in the reserve account, there would be a greater chance that the agencies would need to transfer funds, and the Congress would need to reimburse the transfers through supplemental appropriations. The amount and accessibility of funds in the reserve account also may affect the agencies’ incentives to contain the costs of suppression activities. However, the effect of such incentives would likely be limited, given that many unpredictable and uncontrollable factors affect the costs of fire suppression activities. The Congress could create a governmentwide reserve account into which funds normally appropriated to agencies having responsibility for addressing unforeseen situations and emergencies would be appropriated. These agencies would include not only the Forest Service and Interior, but also the Federal Emergency Management Agency and the Department of Defense, among others. Combining the emergency funds of all these agencies into one account might alleviate the need for supplemental appropriations, because in any given year an increase in spending for one agency may be offset by a lower than usual spending by another agency. Without supplemental appropriations, there would be no increase in the budget deficit. A possible disadvantage of using a governmentwide reserve that is funded annually is that it could produce the expectation that the entire fund should be spent each year and, as the year progresses, claims on the fund might increase. Similarly, a governmentwide reserve might not provide incentives for agencies to contain the costs of wildfire suppression. A governmentwide reserve account could be created using funds designated as no-year money, so that funds not spent in a given year remain in the account for use in following years. Under such an account, there would be no incentive to spend the entire fund each year. To further control the use of the reserve account, the agencies’ access to the fund could be tied to specific criteria. Criteria could parallel those previously offered by OMB in designating funds as an emergency requirement; namely, that the emergency (1) require a necessary expenditurean essential or vital expenditure, not one that is merely useful or beneficial; (2) occur suddenlyquickly coming into being, not building up over time; (3) be urgenta pressing and compelling need requiring immediate action; (4) be unforeseennot predictable or anticipated as a coming need; and (5) not be permanentthe need to fund is temporary. Nevertheless, whether the funds are designated as no-year or not, additional funding could still be needed at year-end. If so, the agencies would need to transfer funds from other program accounts, and the Congress would have to choose between providing supplemental appropriations to reimburse the funding transfers—which would add to the federal budget deficit—or providing no reimbursements. In such cases, even if the agencies did need to transfer funds, the amount transferred would be less than it would have been without the reserve. Another approach for funding wildfire suppression activities cited in one of our earlier reports is to establish agency-specific reserve accounts for those agencies that regularly respond to federal emergencies and require those agencies to satisfy criteria similar to the OMB criteria previously described, before the funds are released. Agency-specific reserve accounts could be funded through a permanent, indefinite appropriation, which would provide as much funding as needed for specific purposes and would always be available for those purposes without any further action by the Congress. A permanent, indefinite appropriation would eliminate the need to transfer funds from other programs and to provide supplemental appropriations to reimburse funding transfers. A disadvantage of an indefinite appropriation is that if actual expenditures exceed the estimates, the federal budget deficit will be greater than anticipated. A disadvantage of a permanent appropriation is that it would lessen the opportunity for the Congress to regularly review the efficiency and effectiveness of fire suppression activities, because such reviews are typically conducted during the annual appropriations process. Alternatively, funding for agency-specific reserve accounts could be provided through a current, indefinite appropriation, which provides as much funding as needed for the current fiscal year. Funding wildfire suppression using a current, indefinite appropriation would allow the Congress to periodically review suppression activities through the annual appropriations process since the Congress would appropriate reserve funds each year. However, an indefinite appropriation could still result in higher than estimated costs and a higher than anticipated federal budget deficit. Additionally, any indefinite appropriation would have no inherent incentives for the agencies to contain suppression costs because the funding level would be unlimited. Agency-specific reserve accounts also could be funded by a definite appropriation with a specific amount of funds, not to be exceeded in a given year. With such limits, there would be an incentive for the agencies to contain suppression costs. As with a current, indefinite appropriation, the Congress could review suppression activities each year during its annual appropriations process. This alternative also could avoid increasing the federal budget deficit if appropriations to other agency program accounts were reduced by an amount corresponding to the amount in the reserve. However, should suppression costs be higher than the amount provided in the reserve account for the current year, a decision would need to be made on whether to transfer funds from other agency programs and, if so, whether to reimburse the funding transfers with a supplemental appropriation that would increase the federal budget deficit. Recently, the Senate Committee on the Budget has proposed an option for funding wildfire suppression activities in its resolution on the budget for fiscal year 2005. The resolution would provide for a reserve account funded through a definite appropriation of up to $500 million in additional annual funding for fiscal years 2004 through 2006. The funds in the account would be available to the Forest Service and Interior for fire suppression activities only if (1) the agencies are initially appropriated funds equal to or greater than the 10-year average of wildfire suppression costs and (2) the initial appropriations are insufficient to cover actual costs. Such an alternative would add to the federal budget deficit, unless the $500 million was reduced from other Forest Service, Interior, or other governmentwide programs when the Congress initially develops the federal budget. Further, if the funds in this account were sufficient to pay for all wildfire suppression activities above the 10-year average of suppression costs, there would be no need for the Forest Service or Interior to transfer funds from other program accounts. Had there been a $500 million reserve account available for wildfire suppression over the last 5 years, transfers would still have been necessary, but to a lesser extent, because suppression costs greatly exceeded the 10-year average in the extensive fire seasons in 2002 and 2003. During our visits with agency officials, we also discussed various other ideas for acquiring additional revenues to help pay for wildfire suppression. One idea was to charge fees for visitors, and state, local, and private entities that use federal land and resources, or to people who own property adjacent to federal forest land. For example, agencies could place a surcharge on existing user fees at national forests, parks, and other federal lands and use the additional revenue to help fund wildfire suppression. Another idea was to establish a special fund, similar to the K-V Fund, whose revenues would be dedicated to wildfire suppression. Revenues accruing to such a fund could come from fees charged for state, local, or private use of federal lands and its resources. Still another option was to levy a stipend on property owners’ federal tax for living in the wildland urban interface. Some other, more unconventional methods for mitigating the federal share of wildfire suppression costs also were discussed, such as allowing private companies to “sponsor” fire suppression efforts by providing funding as a measure of corporate goodwill to the local community. The advantage of all of these options would be to reduce the federal government’s burden to pay for fire suppression. Because the Forest Service and Interior do not have the authority to increase funding for suppression over the amount provided in appropriations, any of these options would require congressional action. Further, all of these options could strain agency relations with the public and others. Wildfires burn millions of acres of federal land every year, and the Forest Service and Interior spend billions of dollars suppressing them. In doing so, the agencies must balance the goal of protecting lives, property, and resources against the goal of containing costs. Transferring funds from other agency programs has helped fund needed wildfire suppression activities but not without a cost. These transfers have had widespread negative effects on Forest Service and Interior programs, projects, relationships, and management. In addition, the subsequent repayment of transfers with supplemental appropriations has added hundreds of millions of dollars to the federal budget deficit. These effects are likely to increase should funding transfers continue to be necessary in the future. Notwithstanding the uncertainties and difficulty of accurately estimating wildfire suppression costs, there are a number of factors that exacerbate the problem of transferring funds to help suppress wildfires. First, the methodology the agencies use to estimate suppression costs and determine their budgets is flawed because it does not adequately account for recent increases in the costs to suppress wildfires. Without this information, the Congress may have insufficient information to make prudent funding decisions. Second, the estimates generated by the monthly forecasting models have been inaccurate and did not provide a sound basis for deciding if, and to what extent, funding transfers were needed. Third, the agencies have inadequate information to understand the effects that transfers are having on their programs. As such, they are not well positioned to report the impacts to the Congress or make informed decisions about future transfers. Finally, the Forest Service’s method for estimating salary costs for the remainder of the fiscal year without adequately consulting with local forest units is problematic. Consequently, Forest Service headquarters officials do not have sufficiently accurate data to make transfer decisions and preclude agency programs from going into deficit. Because of the difficulty of accurately estimating suppression costs and the budget implications of providing additional funding for suppression, it is likely that suppression funding shortfalls will continue in the future. To minimize the budgetary implications, the intended goal should be to achieve an appropriate balance between the shortfall and the impacts that transfers will have on agency programs. Despite the best efforts to achieve this balance, there will be times when the size of the shortfall will create problems and impacts to important programs. Currently, there is no budgeting or funding mechanism that can help mitigate these impacts. Consequently, the agencies are forced to make difficult decisions to fund wildfire suppression at the expense of meeting other important programmatic goals. To help minimize the impacts of wildfire funding transfers on other agency programs and to improve the agencies’ budget estimates for wildfire suppression costs, we are recommending that the Secretaries of Agriculture and the Interior direct the Forest Service and Interior agencies to work together to improve their methods for estimating annual wildfire suppression costs by more effectively accounting for annual changes in costs and the uncertainties associated with wildfires in making these estimates, so that funding needs for wildfire suppression can be predicted with greater accuracy; annually conduct a formal assessment of how the agencies’ methods for estimating annual suppression costs and their monthly forecasting models performed in estimating wildfire suppression costs relative to actual costs, to determine if additional improvements are needed; and consistently track accomplishment shortfalls caused by funding transfers across all programs and include this information in annual accomplishment reports to provide agency decision makers and the Congress with better information for making wildfire suppression transfer and funding decisions. In addition, to more accurately determine the amount of funds available to transfer for wildfire suppression, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to estimate remaining salary needs for the fiscal year by consulting with local forest officials to obtain more current, specific payroll information, so that the risk of programs going into deficit can be reduced. To reduce the potential need for the Forest Service and Interior to rely on transferring funds from other programs to pay for wildfire suppression on public lands, the Congress could consider alternative funding approaches for wildfire suppression, such as, but not limited to, establishing a governmentwide or agency-specific emergency reserve account. We provided a draft of this report to the Secretaries of Agriculture and the Interior for review and comment. In responding, the Forest Service generally concurred with our findings and recommendations, and Interior concurred with our findings, but both agencies expressed concerns about our recommendation that they pursue alternative methods for estimating suppression costs. Both the Forest Service and Interior provided written comments, which are included in appendixes IV and V, respectively. Concerning our recommendation that the agencies improve their methods for estimating annual wildfire suppression costs, Interior commented that the current method—relying on the 10-year average of suppression costs— has proved to be “a reasonable and durable basis for suppression budgeting.” In support of this point, they noted that between 1995 and 1998, their actual suppression costs were below the 10-year average in three seasons. While we do not dispute this fact, we disagree that using the 10-year average has been “a reasonable and durable basis” for budgeting for suppression costs. As noted in our report, since 1990, the agencies’ reliance on the 10-year average has frequently resulted in annual budget estimates well below actual suppression costs. For Interior, the 10-year average was below actual costs in 8 of the 14 years since 1990; for the two agencies together, the 10-year average was below actual costs in 11 of the 14 years. Further, in the years when the average has understated actual costs, the difference has frequently been significant. Over the last 5 years, the 10-year average has understated the two agencies’ actual suppression costs by a total of about $1.8 billion. The Forest Service, in commenting on the use of the 10-year average, recognized the weaknesses associated with using the average to estimate annual wildfire suppression costs and noted the agency has looked into other methods that could more accurately predict future suppression costs. Some of the methods considered included using a 5-year average and inflating the historical costs to current dollar values. The Forest Service also noted that agency officials have discussed various modeling methods with researchers who said they could design a very expensive, complex model that would be more accurate than the 10-year average. We support the Forest Service for taking this initial step and encourage the agency to continue its efforts to identify and implement a cost-effective method for improving their estimates of annual suppression costs. As noted in our report, alternative methods that more effectively account for annual changes in expenditures and that convey the uncertainties associated with making the forecasts should be considered. The Forest Service also noted that our report does not address the potential consequences associated with not making the funding transfers. These negative impacts could include (1) not having adequate personnel and equipment, (2) an increase in the number of acres burned, and (3) an increase in the loss of homes and other property. While we believe that such impacts could result if funding transfers did not occur, the objective of our report is to identify the effects on Forest Service and Interior programs from which funds were actually transferred. In addition, Interior noted that shifting funds from one program to another within the wildland fire management account does not constitute a transfer, and, as such, we were incorrect in saying that Interior transferred funds from wildland fire programs. However, as noted in footnote 2, for ease of explanation throughout the report, we use the word “transfer” to refer both to the transfer of funds from one appropriation account to another and to the reprogramming of funds between programs within a single appropriation account. In either situation, the program from which the funds were taken is affected. The agencies also provided other comments and technical clarifications on the draft that we incorporated into the report where appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the Chairman, Senate Committee on Energy and Natural Resources; the Chairman and Ranking Minority Member, House Committee on Resources; the Chairman and Ranking Minority Member, Subcommittee on Forests and Forest Health, House Committee on Resources; and other interested congressional committees. We will also send copies of this report to the Secretary of Agriculture; the Secretary of the Interior; the Chief of the Forest Service; the Directors of the Bureau of Land Management, the National Park Service, and the Fish and Wildlife Service; the Acting Director, Bureau of Indian Affairs; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report are listed in appendix VI. To determine the amount and the programs from which the U.S. Forest Service and the Department of the Interior transferred funds from 1999 through 2003, we collected data from the agencies’ headquarters on funds transferred and reimbursed by agency, program, and year. We identified the procedures the agencies follow when transferring and reimbursing funds by obtaining and reviewing agency strategy and planning documents and discussing the procedures actually used with agency officials in headquarters, regional offices, and local units. We also interviewed agency officials about the internal controls they use to carry out these procedures. In addition, we contacted budget officers at the Forest Service’s nine regional offices and obtained information on the amounts transferred and reimbursed to their units. Where appropriate, we also met with officials from the Interior agencies that are involved with wildfire suppression activities—the Bureau of Indian Affairs, Bureau of Land Management, U.S. Fish and Wildlife Service, and National Park Service. We interviewed budget officers in Forest Service and Interior headquarters about the financial systems they use to ensure the accuracy of the amount of funds transferred and reimbursed. We also interviewed Office of Management and Budget (OMB) officials to obtain their views on the reliability and completeness of the data they receive from each agency, as well as the adequacy of the agencies’ internal procedures to generate and track these data. Although we relied primarily on agency data, we compared these data with budget documents that corroborated the amounts transferred and reimbursed, where possible. We took appropriate measures to ensure that the Forest Service and Interior data on the amount of funds transferred and reimbursed and on actual suppression costs were sufficiently reliable for our purposes, and that the internal procedures at the Forest Service and Interior were sufficient to generate these data. In addition, we used the Gross Domestic Product Price Index to adjust dollars for inflation. To identify the impacts on agency programs from which funds were transferred, we interviewed Forest Service and Interior headquarters officials with responsibility for the affected programs. We also visited six Forest Service regional offices; 7 national forests, and contacted an additional 14 national forests; and visited seven Interior field offices. Although we did not visit all Forest Service regions, we chose a nonprobability sample of regions that reflected a range of funds transferred as well as the geographic diversity of program impacts (see table 3). Where appropriate, we also met with Interior field offices, grant recipients, a state forester, and representatives of nonprofit organizations who were collocated in the Forest Service regions visited. In addition, we contacted national forests officials in each region we visited and obtained detailed information regarding the specific impacts to their programs and projects. We interviewed representatives of impacted programs in both regional and national forest offices. We collected documents that listed the projects deferred or canceled due to transfers; obtained information on the cost of the impact to some affected projects; and—in some instances—conducted site visits to affected project locations. In our review of impacts, we focused on fiscal years 2002 and 2003 because in these 2 fiscal years transfers for wildfire suppression involved many more programs than they did previously. In reviewing the agencies’ methods for estimating suppression costs, we discussed the details of each method with agency officials responsible for developing the estimates. We reviewed the agencies’ current estimation methodology, compared the estimates with actual costs and discussed the reasons for differences between them with agency officials, and identified alternatives for estimating suppression costs. In reviewing alternative approaches for funding wildfire suppression, we reviewed previous GAO and Congressional Budget Office reports, as well as a Forest Service study related to budgeting for emergencies, and discussed alternative funding options with agency officials. We also obtained the views of OMB officials on other appropriation approaches for funding wildfire suppression. In addition, we analyzed Forest Service and Interior budget documents, congressional appropriations documents, and agency suppression cost forecasting models. We performed our work between July 2003 and March 2004 in accordance with generally accepted government auditing standards. These tables summarize the amount of funds transferred from and reimbursed to Forest Service and Interior programs from 1999 through 2003. Table 4 summarizes the funds transferred from major Forest Service programs and from the construction and land acquisition programs, as well as various fire programs, within Interior’s four agencies that have responsibility for wildfire suppression activities. Table 5 summarizes the amount of funds reimbursed to these programs over the 5-year period. The information presented in the tables was obtained from Forest Service and Interior budget documents. These tables include information on funds made available for transfers, by Forest Service region. Table 6 summarizes information on funds made available for transfers by region for each year from 1999 through 2003. Table 7 summarizes information on funds made available for transfers by major Forest Service program and by region, aggregated over the 5-year period. Table 8 summarizes information on funds made available for transfers as a percentage of overall budget authority for each Forest Service region and by major program for 2002. In addition to the individual named above, Nathan Anderson, Paul Bollea, Christine Bonham, Christine Colburn, John Delicath, Timothy Guinane, and Richard Johnson made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In 2003, wildfires burned roughly 4 million acres, destroyed over 5,000 structures, took the lives of 30 firefighters, and cost over $1 billion to suppress. The substantial expense of fighting wildfires has exceeded the funds appropriated for wildfire suppression nearly every year since 1990. To pay for wildfire suppression costs when the funds appropriated are insufficient, the U.S. Forest Service and the Department of the Interior have transferred funds from their other programs. GAO was asked to identify (1) the amount of funds transferred and reimbursed for wildfire suppression since 1999, and the programs from which agencies transferred funds; (2) the effects on agency programs from which funds were taken; and (3) alternative approaches that could be considered for estimating annual suppression costs and funding wildfire suppression. The Forest Service and Interior transferred over $2.7 billion from other agency programs to help fund wildfire suppression over the last 5 years. On average, the Congress reimbursed agencies about 80 percent of the amounts transferred. Interior primarily used funds from its construction and land acquisition accounts. In recent years, the Forest Service used funds from many different programs; while before 2001, it transferred funds from a single reforestation program/timber sale area restoration trust fund. Transferring funds for wildfire suppression resulted in canceled and delayed projects, strained relationships with state and local agency partners, and difficulties in managing programs. These impacts affected numerous activities, including fuels reduction and land acquisition. Although transfers were intended to aid fire suppression, some projects that could improve agency capabilities to fight fires, such as purchasing additional equipment, were canceled or delayed. Further, agencies' relationships with states, nonprofit groups, and communities were negatively impacted because agency officials could not fulfill commitments, such as awarding grants. Transfers also disrupted the agencies' ability to manage programs, including annual and long-term budgeting and planning. Although the agencies took some steps to mitigate the impacts of transfers, the effects were widespread and will likely increase if transfers continue. To better manage the wildfire suppression funding shortfall, the agencies should improve their methods for estimating suppression costs by factoring in recent changes in the costs and uncertainties of fighting wildfires. Also, the Congress could consider alternative funding approaches, such as establishing a governmentwide or agency-specific reserve account. |
The Federal Acquisition Regulation (FAR) establishes the policies and procedures governing suspension and debarment actions related to federal contracts. The Nonprocurement Common Rule (NCR) establishes the policies and procedures governing suspension and debarment for discretionary nonprocurement awards (i.e., grants, cooperative agreements, scholarships, or other assistance). The FAR and the NCR specify numerous causes for suspensions and debarments, including fraud, false statements, theft, bribery, tax evasion, and any other offense indicating a lack of business integrity. A suspension is a temporary exclusion pending the completion of an investigation or legal proceeding which generally may not last longer than 18 months, while a debarment is an exclusion for a reasonable, specified period depending on the seriousness of the cause, but generally should not exceed 3 years. A suspension or debarment under either the FAR or NCR has government-wide effect for all purposes, so that a party precluded from participating in federal contracts is also precluded from receiving grants, loans, and other assistance, and vice versa. OMB has the authority to issue guidelines for nonprocurement suspensions and debarments and the Office of Federal Procurement Policy within OMB provides overall direction for government-wide procurement policies, including those on suspensions and debarments under the FAR. ISDC, established in 1986, monitors the government- wide system of suspension and debarment. The ISDC consists of representatives from 24 federal agencies, as well as 18 independent agencies and government corporations. The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 augmented and clarified certain ISDC functions to include providing assistance to help agencies achieve operational efficiencies in their suspension and debarment programs. The ISDC was also made responsible for coordinating lead- agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. In 2011, we made recommendations to improve agency and government- wide suspension and debarment efforts. We reviewed 10 agencies and found that the four agencies with the most procurement-related suspension and debarment cases shared common characteristics: a suspension and debarment program with dedicated staff, detailed policies and procedures, and practices that encourage an active referral process. Agencies are required to establish procedures for referring appropriate matters to their suspension and debarment official for consideration. The six agencies with few or no procurement-related suspensions or debarments for the period we reviewed—Commerce, HHS, Justice, State, Treasury, and DHS’s FEMA—did not have these characteristics regardless of each agency’s volume of contracting activity. To improve their suspension and debarment programs, we recommended these agencies take action to incorporate the characteristics associated with active programs. We also reported that government-wide efforts to oversee and coordinate suspensions and debarments faced a number of challenges. For example, we reported that the ISDC relies on agencies’ participation and resources to fulfill its missions. To improve suspension and debarment programs at all agencies and enhance government-wide oversight, we recommended that OMB issue government-wide guidance that (1) describes the elements of an active suspension and debarment program, and (2) emphasizes the importance of coordinating with the ISDC. We found that the Departments of Commerce, HHS, Justice, State, the Treasury, and DHS’s FEMA all took action since we made recommendations in 2011 to incorporate characteristics associated with active suspension and debarment programs.agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating the suspension and debarment function into one office. The six agencies also have taken actions such as issuing formal policy and promulgating detailed guidance. Finally, the six agencies have engaged in practices that encourage an active referral process, including establishing positions to ensure cases are referred, developing case management tools that Since 2011, all six allow for referral tracking and case reporting, and establishing training programs. Table 1 summarizes the actions that agencies have taken since 2011. We found that all six agencies reported an increase in the number of suspension and debarment actions from fiscal year 2009 to 2013 as shown in table 2. The agencies generally experienced a notable increase starting in fiscal year 2011 when they began to take action to incorporate the characteristics associated with active suspension and debarment programs. Agency officials told us that the actions taken since 2011 to incorporate the characteristics associated with active suspension and debarments programs have resulted in an increased level of suspension and debarment activity at their respective agencies, though officials emphasized different factors. For example, officials from the Departments of Commerce, State, and the Treasury stated that improved coordination between the Office of the Inspector General and the Suspension and Debarment Official coupled with increased training and awareness resulted in more referrals and the processing of more actions. While the number of actions Treasury reported for fiscal years 2009 through 2013 has been modest, officials told us that 62 actions have been processed in the first 5 months of fiscal year 2014 and they expect continued increases in the number of referrals. Justice officials stated that one factor that may have contributed to an increased number of referrals and actions is the Attorney General’s January 2012 memorandum to all litigating authorities and the Director of the Federal Bureau of Investigation, reminding them to consider whether the facts of a case could be used as a basis for an exclusion or debarment and to coordinate with agency suspension and debarment authorities. HHS officials noted that an increased number of actions have resulted in part from the Office of Inspector General providing additional resources for training investigators and auditors on how to make suspension and debarment referrals involving procurement and nonprocurement matters. Officials from DHS attributed an increase in the number of actions at FEMA and across DHS to having a centralized suspension and debarment office, a directive establishing common standards, increased staffing, and training. The number of suspension and debarment actions government-wide has increased in recent years, more than doubling from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013, as shown in figure 1. ISDC officials do not consider the overall number of suspensions and debarments as the only measure of success, and emphasized that increased suspension and debarment activity has been coupled with agencies’ increased capability to use suspension and debarment appropriately and adhere to the principles of fairness and due process as laid out in the governing regulations. According to ISDC officials, the programmatic improvements made by many agencies are due in part to increased management attention within individual agencies, guidance from OMB, and support from the ISDC. OMB and ISDC have taken a number of actions to strengthen government-wide suspension and debarment efforts. In response to GAO’s recommendations, on November 15, 2011, OMB directed agencies to take a number of actions to address program weaknesses and reinforce best practices in their suspension and debarment programs, including the following: Appoint a senior accountable official, if one has not already been designated, to be responsible for assessing the agency’s suspension and debarment program and the adequacy of available resources, ensuring that the agency maintains effective internal controls and tracking capabilities, and ensuring that the agency participates regularly on the ISDC. Review internal policies, procedures, and guidance to ensure that suspension and debarment are being considered and used effectively. ISDC reported in September 2012 that each of the 24 agencies said it had an accountable official in place responsible for suspension and debarment activities, including assessing the adequacy of available training and resources; taken steps to address resources, policies, or both—in some cases by dedicating greater staff resources to handle referrals and manage cases and in others by entering into agreements to be mentored by the managers of successful programs; and procedures to forward possible actions to the suspending and debarring official. The ISDC also has increased its efforts to coordinate government-wide suspension and debarment efforts by promoting best practices and coordinating mentoring and training activities. For example, the ISDC maintains an online library of documents aimed at promoting standardization and has efforts to help agencies develop their suspension and debarment programs to ensure appropriate attention to administrative due process in accordance with the governing regulations. ISDC officials cite robust participation in the ISDC, including agencies with mature suspension and debarment programs, which has enabled the ISDC to assist agencies in making program improvements and, in some cases, standing up programs where none existed before. The ISDC also conducts training for member agencies, including cosponsoring with the Council of the Inspectors General on Integrity and Efficiency an annual debarment workshop. Also, ISDC members provide instructors for the debarment training courses offered by the Federal Law Enforcement Training Centers.understanding of suspension and debarment and holds monthly meetings to discuss topics, including specific suspension and debarment actions and selected agencies’ suspension and debarment procedures and tracking tools. Finally, the ISDC undertakes outreach to promote The six agencies we reviewed reported that they highly value the functions performed by the ISDC as a focal point for government-wide suspension and debarment efforts. For example, Treasury officials told us that they designed their suspension and debarment program around the best practices identified by the ISDC, taking advantage of templates, guidance, and mentoring available through the committee. Officials from several agencies noted that the ISDC is instrumental in managing an informal process to help agencies coordinate lead agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. According to officials from the agencies we reviewed, the ISDC regularly distributes information on new potential cases reported by the agencies. The agencies take into consideration factors such as financial, regulatory, and investigative interests in determining which agency should take the lead in the case. Several of the agencies we reviewed reported that this process helps identify the most appropriate lead, while also involving other agencies that may have a stake in a particular action. Officials from several agencies also reported that ISDC monthly meetings provide an important forum through which suspension and debarment officials can seek advice from agency counterparts on a range of issues. In addition to speaking with officials from the six agencies we reviewed in 2011, we also reviewed the VA’s suspension and debarment program to determine if government-wide efforts had affected the program. Based on our review, we found that the VA currently has the characteristics associated with active suspension debarment programs. For example, VA has a Debarment and Suspension Committee with a staff of about 10 positions that review all referrals for procurement-related suspension and debarment actions, conduct fact-finding, and present facts and recommendations to the Suspension and Debarring Official. Officials reported that VA has taken action to improve its suspension and debarment program in part in response to government-wide efforts. For example, VA’s Suspension and Debarment Committee is currently drafting standard operating procedures to reflect leading practices. VA officials reported that the number of procurement-related suspension and debarment actions at VA has increased from 34 in fiscal year 2011 to 73 in fiscal year 2013. We provided a draft of this report to OMB and the Departments of Commerce, Health and Human Services, Justice, Homeland Security, State, the Treasury, and Veterans Affairs for review and comment. In an email response, the Associate Administrator of the Office of Federal Procurement Policy commented that OMB is pleased with the progress agencies have been making to strengthen their capabilities to consider the use of suspension and debarment when necessary. Further, OMB credits the work of the Interagency Suspension and Debarment Committee in helping to make many of the achievements possible. None of the seven agencies we reviewed provided substantive comments, but the Departments of Commerce, Health and Human Services, and Homeland Security provided technical comments which we incorporated, as appropriate. We are sending copies of this report to interested congressional committees; the Director of the Office of Management and Budget; the Attorney General and the Secretaries of Commerce, Health and Human Services, Homeland Security, State, the Treasury, and Veterans Affairs. The report also 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) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals who made key contributions to this report were Marie Mak, Director; Tatiana Winger, Assistant Director; Kristine R. Hassinger; Angie Nichols-Friedman; and Russ Reiter. | To protect the government's interests, agencies can use suspension and debarment to exclude individuals, contractors, and grantees from receiving future contracts, grants, and other federal assistance due to various types of misconduct. In 2011, GAO reviewed ten agencies and found that agencies issuing the most procurement related suspensions and debarments shared common characteristics: dedicated staff, detailed policies and procedures, and an active referral process. GAO recommended that six agencies—the Departments of Commerce, Health and Human Services, Justice, State, the Treasury, and the Federal Emergency Management Agency—incorporate those characteristics, and that OMB issue guidance to improve oversight and government-wide suspension and debarment efforts. GAO was asked to review actions taken to implement the 2011 recommendations. This report examines (1) actions taken by the six agencies to incorporate characteristics of active suspension and debarment programs; (2) changes in the level of suspension and debarment activity; and (3) actions taken to improve oversight and government-wide efforts. To do so, GAO reviewed suspension and debarment programs, interviewed agency officials, verified the accuracy of agency data, and reviewed government-wide efforts. GAO is not making any new recommendations in this report. OMB commented that it is pleased with the progress that agencies have made and with the work of the ISDC.The other agencies did not provide substantive comments. The six agencies GAO reviewed all took action to incorporate characteristics associated with active suspension and debarment programs. Since GAO made recommendations to do so in 2011, the agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating suspension and debarment functions. The agencies also have issued formal policies and promulgated detailed guidance. Finally, the agencies have engaged in practices that encourage an active referral process, such as establishing positions to ensure cases are referred for possible action, and developing case management tools. The number of suspension and debarment actions government-wide has more than doubled from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013. The number of suspension and debarment actions for the six agencies increased from 19 in fiscal year 2009 to 271 in fiscal year 2013 (see table below). The six agencies generally experienced a notable increase starting in fiscal year 2011 when the agencies began to take action to incorporate the characteristics associated with active suspension and debarment programs. The Office of Management and Budget (OMB) and the Interagency Suspension and Debarment Committee (ISDC) have taken action to strengthen government-wide suspension and debarment efforts. In November 2011, OMB directed agencies to address weaknesses and reinforce best practices in their suspension and debarment programs. The ISDC reported to Congress in September 2012 that, per OMB direction, the 24 standing member agencies of the ISDC had an accountable official in place responsible for suspension and debarment; taken steps to address resources, policies, or both; and procedures to forward matters to the suspension and debarment official for possible action. The ISDC has promoted best practices, coordinated mentoring and training, and helped coordinate lead agency responsibility when multiple agencies have an interest in pursuing suspension and debarment of the same entity. Reported increases in the number of suspension or debarment actions suggest that its efforts have been effective. ISDC officials emphasized that increased activity has been coupled with an increased capability to use suspension and debarment appropriately while adhering to the principles of fairness and due process. |
RHCDS was established by Public Law 103-354, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994, dated October 13, 1994. Its programs include the housing programs previously administered by the Farmers Home Administration and the rural community loan programs previously administered by the Rural Development Administration. (See fig. 1.) Rural Economic and Community Development Rural Housing and Community Development Service Rural Business and Cooperative Development Service RHCDS’ housing mission is to improve the quality of life in rural America by assisting rural residents in obtaining adequate and affordable housing. “Rural areas” include open country and places with populations of 10,000 or less, but some towns with populations between 10,000 and 20,000 may qualify under certain circumstances. Major program activities, authorized by title V of the Housing Act of 1949, as amended, include single-family direct and guaranteed homeownership and repair loans, direct multifamily rental housing loans, and rental assistance payments. RHCDS’ direct single-family loans are designed to promote successful homeownership for low-income and very-low-income rural Americans who cannot otherwise obtain loans at reasonable rates. Houses must be modest in design, cost, and price. Interest rates on these loans are subsidized and, depending on the borrower’s household income, the subsidy can reduce the borrower’s effective interest rate to as low as 1 percent. RHCDS is required by law to recapture all or a portion of the subsidy it provides when the property is sold or vacated. Direct loans are meant to provide temporary credit—borrowers are required to graduate from the direct loan program to private credit when their incomes are sufficient to afford private credit. RHCDS has loaned $49 billion in making over 2 million direct loans since 1950. As of June 30, 1995, RHCDS held a portfolio of about 750,000 direct loans made to 643,000 borrowers with a total outstanding principal balance of $18.7 billion. In 1991, RHCDS initiated a new program to assist moderate-income rural borrowers through guaranteed loans for single-family housing. Guaranteed loan borrowers are not provided with interest subsidies. To qualify for the program, homes may be new or existing residences located in rural areas. In guaranteeing a single-family housing loan, RHCDS agrees, in the event that a borrower defaults, to reimburse a commercial lender for up to 90 percent of the lost principal plus accrued interest and liquidation costs. In fiscal years 1991 through 1994, RHCDS guaranteed 25,000 housing loans for about $1.5 billion. RHCDS’ multifamily housing loans are designed to help low-income rural renters obtain access to decent, safe, and affordable housing by holding down mortgage costs. RHCDS and its predecessor agencies have financed more than 18,000 projects with more than 450,000 rental units since the loan program was first authorized in 1962. The loans, which are usually for 50 years at interest rates as low as 1 percent, can be made to individuals, partnerships, public agencies, limited equity cooperatives, Indian tribes, nonprofit organizations, and for-profit corporations. Recipients of the loans also must be unable to provide moderate-cost rental units without financing by RHCDS. As of January 1994, RHCDS’ rental assistance was available to about 235,000 housing units through a direct outlay program that is administered in tandem with RHCDS’ multifamily loans. RHCDS makes payments directly to RHCDS-financed projects to reduce the rents (including utilities) paid by qualifying low-income households to no more than 30 percent of their monthly incomes, as adjusted for certain expenses. Residents in more than 90,000 other units, however, were paying a greater percentage of their income for rent. (App. I contains information on proposed loan levels and outlays for RHCDS’ major rural housing programs for fiscal year 1996.) There are opportunities to save millions of federal dollars in operating rural single-family housing programs. These opportunities include centralizing loan servicing, graduating borrowers from the direct loan program, and reforming the requirements for recapturing loan interest subsidies. Servicing RHCDS’ 724,000 direct loans using a state-of-the-art system from a central location could eliminate the need for numerous manual processes currently required in each of RHCDS’ hundreds of county offices. Thus, centralized servicing could reduce staff costs. In December 1993, the Administrator of RHCDS gave approval to begin planning for centralized servicing, and in May 1995, RHCDS awarded a contract to purchase an off-the-shelf servicing system. In September 1995, RHCDS began to study whether it would change the size of and functions to be performed by its field structure, given the new capacity for automation. In our September 1993 report and subsequent testimonies, we endorsed the concept of centralized servicing of RHCDS’ single-family housing loans as an example of the type of private-sector management concept needed to “reengineer” the Department of Agriculture. We reported that allowing the public and private sectors to compete for centralized servicing of the direct loan portfolio that was being serviced by local RHCDS field offices would fundamentally change the way RHCDS does business and could increase efficiencies, innovations, and customer satisfaction. The private sector has shown that centralized servicing—using highly specialized personnel at one location to perform all loan-servicing actions after a home loan is closed—results in far greater staff productivity and efficiency. The benefits of centralized servicing typically include lower delinquency rates as a result of more efficient servicing and reduced staff levels as a result of staff specialization. Also, escrow capability helps borrowers budget their payments and protects the government’s security interest by ensuring that taxes and insurance are paid. In September 1993, we reported that RHCDS had developed three plans of action since 1988 for developing centralized servicing and escrow capability but that no final decision had been made to begin implementation. In December 1993, RHCDS developed a new plan that was approved by the Administrator. In December 1994, USDA officials gave the final go-ahead to request proposals from companies interested in selling RHCDS an off-the-shelf commercial loan origination and servicing system that would be modified to enable RHCDS to handle its particular loan-servicing requirements. RHCDS awarded a $7.3 million contract to Data-Link System, a subsidiary of FIserv, Inc., in May 1995. RHCDS projects total budget costs of $39 million for the system, expects to begin phasing in the system by October 1996, and plans to have placed in escrow by September 1998 the tax and insurance payments for all but existing borrowers who are current on their payments. Centralized servicing should reduce the need for such labor-intensive tasks as researching county tax records and calling in tax-delinquent borrowers to work out repayment terms each year. RHCDS believes the system will substantially lower servicing costs, saving over $100 million per year by fiscal 2000 and each year thereafter. A 1991 RHCDS study concluded that centralized servicing could yield a net savings of 2,200 staff positions and the consolidation or closing of 742 county offices. On the basis of this study, the Congressional Budget Office estimated about $171 million in budget outlay savings from the associated reductions in full-time employees in fiscal years 1999 and 2000. However, these cost savings will not be fully achieved if RHCDS adds a new centralized staff and keeps most of its present field structure. RHCDS plans to phase in a new staff of about 700 employees in its St. Louis Finance Center to service its housing portfolio using a centralized servicing system. The Secretary of Agriculture announced his Department-wide reorganization in December 1994, including the planned closing of about 1,200 field offices. The reorganization plan projects reducing RHCDS’ field staff during fiscal years 1995 through 1999. However, centralized servicing technology was not specified in the criteria for identifying which offices to close. In September 1995, the Under Secretary for Rural Economic and Community Development established a task force to recommend the size of and appropriate functions to be performed by a rural housing and community development field structure within a centralized servicing environment. In addition to studying the impact of centralized servicing on field offices, the task force expects to study whether some of the resources freed up as a result of centralized servicing should be used to meet other unmet rural development priorities. Included in the task force’s preliminary description of critical unmet needs are job tasks such as providing technical assistance to rural communities, promoting the community facilities loan guarantee program, and providing outreach for the multifamily housing program. The task force is also expected to consider the second phase of the National Performance Review, which in August 1995 recommended a centralized servicing system for RHCDS’ rural housing portfolio. The National Performance Review states that $250 million in savings over 5 years would accrue from closing additional county offices and reducing staff by up to 1,200 full-time equivalents. The task force is expected to report back to the Under Secretary in November 1995. In addition, the potential exists to reduce servicing costs to the levels obtained by private-sector companies by adopting private-sector processes and practices. However, private-sector efficiencies will not be achieved unless RHCDS focuses on changing the underlying work processes in keeping with the new technology. A 1992 study contracted by RHCDS concluded that with the proper procedures and communication methods in a centralized environment, the “need for face to face communications with the borrowers and visits to the properties can be reduced to a minimum.” In our December 1994 report, we identified over $2.2 billion in direct nonsubsidized loans, constituting 12 percent of the outstanding direct loan portfolio, whose borrowers could benefit by receiving a lower interest rate if they were allowed to graduate by refinancing through the guaranteed program. Such an approach would have the advantages of (1) assisting borrowers in obtaining private credit when their financial conditions have improved but are still not sufficient to qualify for nonguaranteed private credit and (2) reducing servicing costs that account for about 35 percent of the county offices’ workloads. In addition, allowing borrowers to refinance through guaranteed loans would be consistent with farm credit programs that allow farmers to refinance their direct loans through the guaranteed farm loan program. RHCDS has the legal authority to require borrowers to graduate to private credit if it appears that credit can be obtained from another source at reasonable rates and terms. However, RHCDS is statutorily prohibited from refinancing direct housing loans using its guaranteed program. We recommended that the Congress consider amending the Housing Act of 1949 to allow RHCDS’ direct loan borrowers to refinance their mortgage loans using the guaranteed program. The administration has endorsed our recommendation and believes its implementation would increase the marketability of these loans to secondary market purchasers, such as the Federal National Mortgage Association. As of July 31, 1995, legislation had not been introduced in the Congress to implement this recommendation. Other opportunities may exist to increase graduations involving loans with balances under $5,000 and subsidized loans. RHCDS’ policy does not allow loans with balances under $5,000 to be considered for graduation. Over 80,000 loans, or almost 12 percent of the outstanding portfolio, are over 10 years old and have outstanding balances under $5,000. RHCDS pays more to service some of these loans than it receives in interest each year. For example, in 1994 RHCDS received $152.70 in interest on a 26-year-old loan in Illinois. Yet RHCDS estimated servicing costs of about $240 per loan for that year. RHCDS officials believe that eliminating this policy or offering incentives to borrowers with low loan balances could increase graduations. Similarly, RHCDS’ policy does not permit considering borrowers with interest subsidies for graduation because of the general view that no banks would accept such borrowers. However, in our December 1994 report we pointed out that about 7,200 subsidized loans had effective interest rates which at that time exceeded the RHCDS-guaranteed loan rate. RHCDS officials agree that changing the law to allow direct loan borrowers to refinance their direct loans using RHCDS guaranteed loans, providing incentives, and eliminating policies that prohibit considering loans with balances of less than $5,000 and small subsidy payments for graduation should incrementally improve graduation rates. But more fundamental changes in the program’s design are needed if temporary credit and the acceleration of graduation rates are to become more prevalent. An RHCDS staff member suggested basing mortgage payments for nonsubsidized borrowers on income rather than having mortgage payments remain fixed. Such a policy could have a significant impact on graduation rates because it would help overcome the major disincentive for borrowers to graduate—holding a lower fixed-interest rate than the prevailing private-market mortgage interest rate. When borrowers first enter the direct loan program, they typically receive interest subsidies when 20 percent of their adjusted annual incomes are insufficient to cover their payments for principal, interest, taxes, and insurance at the prevailing mortgage interest rate. Under the current program, borrowers make mortgage payments of 20 percent of their adjusted annual incomes and stop receiving subsidies when their incomes increase to the point where they can afford the full mortgage payments. However, as a borrower’s income continues to increase, the percentage of income going toward the mortgage payment drops. If the mortgage interest rate is below the prevailing rates offered in private markets, the borrower has little incentive to refinance. RHCDS and its predecessor agencies have historically not vigorously enforced the graduation requirement because the only option available was foreclosure and because the agencies believed that U.S. attorneys would not accept such cases. However, if the program is changed to require borrowers to pay 20 percent of their incomes as mortgage payments, the effective interest rates paid by higher-income borrowers will begin to exceed those required by established mortgage interest rates. When a borrower’s effective interest rate exceeds those available on the private market, a strong incentive for graduation will exist. Payments made in excess of the amount required by the mortgage interest rate could be credited to the borrower and used to retire the borrower’s deferred obligation to pay back a portion of the interest subsidies provided over the life of the loan, which is discussed in the next section of this report. Because RHCDS stops collecting income information once borrowers stop receiving interest subsidies, we cannot estimate the impact of such a program change. However, in examining individual loan files of borrowers who have graduated, we have seen consistent growth in incomes from the time borrowers stopped receiving interest subsidies to the time when they refinanced to private credit. Of course, such a change would increase graduation rates only if the household incomes of the borrowers who no longer qualify for interest subsidies continue to grow. The Housing Act of 1949, as amended, requires RHCDS to recapture a portion of the subsidy provided over the life of the direct loan when the borrower sells or vacates a property. The idea is that because taxpayers paid a portion of the mortgage, they are entitled to a portion of the property’s appreciation. Unlike a shared appreciation mortgage, in which the investor’s return is fixed when the loan is originated, the amount recaptured by RHCDS is based on a complex formula that primarily factors in the subsidy provided, the reduction in principal attributable to the subsidy, and the property’s appreciation. The total amount recaptured can equal the total of the subsidy provided and the reduction in principal attributable to the subsidy, but it can be no more than 78 percent of the property’s appreciation. The recapture process is administratively burdensome and fraught with reliability problems. RHCDS estimates that each year, 10 staff years are spent by its St. Louis Finance Office monitoring the recapture of interest subsidies. Field office staff perform the calculation each time a borrower expresses interest in refinancing to private credit. According to USDA’s Inspector General (IG), the manual accounting system used to figure the recapture amounts and poor internal controls frequently result in incorrect or inconsistent recapture computations. RHCDS believes that the planned in-house centralized servicing system will overcome the problems cited by the IG. As shown in figure 2, as of September 30, 1994, RHCDS had recaptured $562 million, or less than 10 percent of the $5.8 billion in subsidies provided on loans that have left the portfolio. About $7.1 billion in subsidy payments was outstanding on active loans. Whether the government should (1) attempt to increase revenues by recapturing a greater share of the subsidy in the future or (2) abandon the recapture program because of the high administrative costs and low expected appreciation rates are two extreme positions taken on the issue. Additional study is needed before any definitive conclusions can be reached. Subsidy Recaptured ($562 Million) Subsidy on Outstanding Loans ($7.1 Billion) In addition, because recapture is not mandated when homes are refinanced, RHCDS’ policy allows borrowers who pay off direct RHCDS loans but continue to occupy the properties to defer the payments for recapturing the subsidies. As of June 30, 1995, RHCDS’ records show that about $119 million is owned by borrowers who have refinanced their mortgages but continue to occupy the properties. RHCDS does not charge interest on the amounts owed by these borrowers. RHCDS officials pointed out that a legislative change to require recapture when properties are refinanced, in addition to when they are sold or vacated, would save the administrative costs of calculating and setting up the borrowers’ deferred obligations and increase federal revenues. As an alternative, legislative changes could be made to allow RHCDS to charge market rate interest on recapture amounts owed by borrowers to help recoup the government’s administrative and borrowing costs. However, these changes would also likely reduce the number of borrowers of direct RHCDS loans who graduate to private credit. RHCDS and others have proposed program changes aimed at reducing the cost of the multifamily program. Some changes would shorten benefit periods or serve higher-income populations. We and others have also found that the process for funding individual projects for multifamily rental housing does not ensure that the neediest areas receive assistance from the program. While the multifamily housing loan program has a long history of serious problems, a number of managerial improvements have been undertaken by RHCDS during the past several years. (A discussion of instances of multifamily program fraud, waste, and abuse found by the IG, along with RHCDS’ plans for addressing such problems, can be found in app. II.) The basic goal of RHCDS’ two principal multifamily housing programs is to make rental housing affordable to lower-income people in rural America. The two programs make rents more affordable by holding down project developers’ mortgage costs and, to the extent possible, subsidizing tenants who cannot afford to pay the full amount of the projects’ rents. To hold down mortgage costs, RHCDS typically provides 50-year loans at an interest rate of 1 percent. Annual authorized loan levels for this program were about $500 million to $575 million in fiscal years 1987 through 1994. However, because of a number of concerns about the program, the Congress reduced loan levels to $220 million in fiscal year 1995. This change has sparked interest in making more efficient and effective use of the available funds. The following are some of the ideas being considered by RHCDS officials: Shorten the term of the loan. This action would reduce the cost of the interest subsidy for each loan, but it would also reduce the time that the housing was restricted to lower-income tenants. Net savings could be achieved by shortening the term of the loan from 50 to 40 years. Another option would be to shorten the term even more (say, to 25 years) but continue to amortize the loan as if it were for a 50-year term. This action would keep monthly payments low but would leave a large unpaid loan balance at the end of the term that would either have to be paid off in a lump sum or refinanced. Neither of these options would likely require a change to RHCDS’ current legislative authority, according to RHCDS officials. However, RHCDS believes shortening the loan term could increase a project’s monthly loan payments, which could lead to higher rents and the need for increased federal rental assistance or a greater rent burden on the tenants. Eliminate certain equity loans. These loans were authorized by the Congress to discourage the owners of qualifying older projects from prepaying their loans and replacing lower-income tenants with those able to pay higher rents. In general, a project funded before December 21, 1979, is eligible for an additional loan in an amount up to 90 percent of the owner’s equity if the owner demonstrates to RHCDS the intent and financial ability to prepay. Approved applications are placed on a waiting list, and the loans are made as funds become available. Each year, RHCDS allocates a portion of its loan program appropriation to fund some of these equity loans. As a result, equity loans compete for available appropriations with loans for constructing new projects and with loans for rehabilitating older projects that are in poor condition. To date, RHCDS has made about 300 equity loans totaling over $109 million; 74 more, totaling about $26 million, are awaiting funding. These loans typically have been for the maximum allowable amount, which is 90 percent of the owner’s equity in the project. RHCDS officials told us they believe that relatively few property owners would prepay their loans and leave the program even without the equity loans. They noted that in a few local markets, projects might be more valuable to owners as commercial-rate rental property but that this situation is generally not the case. Eliminating the loans would require a change to the legislation that authorizes the multifamily loan program (the Housing Act of 1949, as amended). Increase the amount of equity that owners contribute to projects. The authorizing legislation also limits the amount of equity that RHCDS can require borrowers to contribute on original loans. The required equity contribution is limited to 5 percent of a project’s cost for projects that receive federal low-income-housing tax credits and to 3 percent for other projects. Raising this limit could reduce the size of individual loans and thus the government’s cost of subsidizing the interest rates. We were told by RHCDS multifamily program officials that the agency is drafting a legislative proposal that would allow it to vary borrowers’ required equity contributions on the basis of local community resources and housing needs. USDA’s IG subsequently recommended in August 1995 that RHCDS immediately seek a change to the authorizing legislation to eliminate the restriction on equity contributions that can be required of developers if tax credits are received. The IG also recommended that as soon as this limitation is removed, RHCDS implement procedures that consider tax credits as government assistance when defining the necessary level of individual loans. In most cases, this change would result in lower loan amounts and larger equity contributions by borrowers than RHCDS’ past procedures. Reducing the costs of RHCDS’ rent subsidy program without also increasing the tenants’ rent burden is more difficult. RHCDS has considered the idea of setting aside 40 percent of the loan program’s annual funding for projects that do not require rental assistance. In most cases, these would be projects with a mix of moderate- and lower-income households, in which residents could afford to pay the necessary rents. While existing projects predominately serve households in the very-low-income category, those in the low- and moderate-income categories are also eligible tenants. While implementing this idea would mean that the program would be serving a somewhat higher-income population than at present, the program would still be serving households that are eligible to receive assistance under the authorizing legislation. The funding of projects under RHCDS’ multifamily rental housing loan program is now based on priorities set forth in the authorizing legislation. The legislation requires priority for projects that will serve those in the most rural areas who have the greatest housing needs because of their low incomes and inadequate housing. RHCDS allocates funds to each state and selects projects within each state using criteria designed to reflect these priorities. (See fig. 3.) However, this process does not ensure that the neediest areas receive assistance from the program. Our June 1994 report and reports by USDA’s IG, the National Council of State Housing Agencies, and the Surveys and Investigations Staff of the House Committee on Appropriations have each identified problems in this area, including that (1) housing needs estimated by RHCDS may differ from actual needs; (2) developers determine the locations for proposed projects; (3) the projects selected for funding may be inconsistent with the priorities established by state and local governments; and (4) the project selection procedures give too much weight to proposals for projects located specified distances from urban areas. (See app. III for additional information on problems reported by us and others on the selection process for multifamily projects.) RHCDS recognizes the limitations of the current funding process and is taking steps to better target RHCDS’ projects to rural areas with the greatest need. Specifically, RHCDS officials said they would not object to statutory authority to discontinue the current project selection system and limit the selection of new projects to rural areas that, on the basis of objective criteria, have the greatest need. RHCDS envisions a system similar to that proposed last year in an amendment offered during deliberations on the housing reauthorization bill (H.R. 3838). The reauthorization bill was not passed, but that amendment would have allowed RHCDS to identify counties and communities with the greatest need for rural rental housing funds and select projects only in those locations. The sources of information used by RHCDS to determine need would have included the U.S. Census and State Comprehensive Housing Affordability Strategy plans. RHCDS officials believe that a system of this nature, if enacted, would allow project selection to be more consistent with local priorities. Pending enactment of a legislative change, RHCDS is proceeding with changes to the current project selection system to better direct funding to rural areas with the greatest need for affordable housing, while still meeting the current statutory priorities. Agency officials expect proposed regulations reflecting these changes to be published for public comment in the near future. The changes include reducing the weight given to projects at least 20 miles from urban areas; increasing the use of county data, rather than state data, in estimating needs under the project selection process; and giving additional weight to proposed projects that also use funding from other sources, projects in underserved areas, and projects in areas with the highest shares of households paying over 30 percent of their incomes for rent. While these measures would not address all of the concerns raised about the funding process, if effectively implemented, they could better direct rural rental housing assistance to the neediest areas. We provided a draft of this report to RHCDS for its review and comment. We met with RHCDS officials, including the Acting Administrator and the Assistant Administrator for Housing, to obtain their comments. RHCDS officials generally agreed with the factual material presented in the report. The Acting Administrator pointed out that while she agrees that new centralized servicing technology was not specified in the criteria considered by the Secretary’s reorganization task force, she believes the office-closing plans were, to a degree, driven by the planned technology. She also pointed out that the Under Secretary of Agriculture for Small Community and Rural Development has recently formed a task force with a 60-day mandate to decide on the appropriate field structure that will be needed to operate in a centralized servicing environment. The report was changed to reflect this view and new development. RHCDS officials also provided other clarifying information, which we incorporated where appropriate. To identify opportunities for cost savings and management improvements in RHCDS’ rural single-family and multifamily housing programs, we interviewed personnel from RHCDS’ Washington, D.C., office; Finance Office in St. Louis, Missouri; and field offices in Maryland, Illinois, and Missouri. We also obtained program regulations, guidance, and progress reports from RHCDS showing corrective actions based on GAO’s and the USDA IG’s previous recommendations and analyzed files and records as of March 31, 1995. We also met with IG officials and individuals representing banking, building, and rural housing groups to obtain their views on cost savings and other program reform opportunities. We conducted our work between January and October 1995 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and Members of Congress; the Secretary of Agriculture; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me on (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix IV. As shown in figure I.1, proposed new single-family guaranteed loans totaling $1.3 billion, new direct loans totaling $1.2 billion, and multifamily rental housing loans totaling $220 million constitute the vast majority of the proposed $2.85 billion program loan level for fiscal year l996. 8% Sec. 515—Rental Housing ($220 Million) 4% Other ($127 Million) Sec. 502—Single Family Guaranteed ($1.3 Billion) Sec. 502 —Single-Family Direct ($1.2 Billion) Figure I.2 shows proposed outlays of $1.32 billion for rural housing in fiscal 1996. Sec. 521—Rural Rental Assistance ($489 Million) Administrative Expenses ($395 Million) Sec. 502—Single-Family ($249 Million) Sec. 515—Rental Housing ($149 Million) Outlays for the housing loan programs are lower than the loan amounts because they are based on subsidy costs and projected losses that are less than loan levels. For example, while proposed single-family guaranteed loans were the single largest portion of proposed loan levels in figure I.1 ($1.3 billion), the proposed outlays associated with this loan level were $6 million (these outlays are included in the “Other” category in figure I.2). This occurs because the guaranteed program’s borrowers do not receive interest subsidies and because expected default rates are lower than for the direct program. The rural rental assistance program is the costliest program because it is a direct outlay program. The Rural Housing and Community Development Service (RHCDS) estimates that it will need more than $2.4 billion just to renew existing rental assistance contracts that will be expiring over the next 5 years (fiscal years 1996-2000). This amount assumes renewals of expiring contracts over a 5-year period. Given that the trend in tenants’ average household incomes appears to be heading down, the cost may go even higher, according to RHCDS officials. The U.S. Department of Agriculture’s (USDA) Inspector General (IG) has found instances of fraud, waste, and abuse by a number of participants in the Rural Housing and Community Development Service’s multifamily housing loan program. Some of the more serious and persistent findings have been (1) inflated, improper, and undocumented charges for project construction costs; (2) unauthorized use of project operating funds and reserve accounts; (3) failure to perform essential maintenance; and (4) inadequate verification of tenants’ incomes. The instances of abuse often have involved ownership or management ties between project developers’ construction contractors, material suppliers, and property management firms. The IG’s recently issued report on the multifamily housing loan program addresses another potential area of abuse on which we testified in 1992—that of developers realizing excessive profits on projects through the combined benefits derived from RHCDS’ programs and federal low-income-housing tax credits. RHCDS has taken a number of specific actions designed to address the problems identified by the IG’s work, and more are under way. These actions relate to health and safety violations at RHCDS’ projects, RHCDS’ enforcement tools, and the agency’s efforts to improve verification of tenants’ incomes. Because of confirmed reports of serious uncorrected health and safety problems at selected projects, RHCDS during 1994 conducted a nationwide review and inspection of all RHCDS-financed rural rental housing projects that were over 5 years old. About 7 percent of the 14,142 projects reviewed were found to have health and safety violations. According to RHCDS officials, these violations encompass a wide range of severity—from inoperable smoke alarms to severe structural deficiencies. About 9 percent of the projects had seriously deferred maintenance that did not pose an immediate health and safety danger. RHCDS officials concluded that conditions in the states of Texas, Oklahoma, Mississippi, Louisiana, and Illinois were serious enough to warrant special reviews of RHCDS’ oversight efforts. Reports on these reviews should be completed soon. In response to the waste, fraud, and abuse problems, RHCDS has bolstered its enforcement system to more effectively identify and deal with program abusers. In March 1994, it issued instructions establishing a system of civil penalties (fines) for noncriminal violations of program rules. RHCDS officials also told us that they have improved their system for notifying field offices of individuals who have been barred or suspended from participating in RHCDS’ programs because of misconduct and that they will soon have on-line a new automated system for tracking the performance of and identifying problem borrowers. RHCDS officials are examining ways to address another problem area—verifying the incomes of tenants receiving rental assistance to ensure that they are eligible. Property managers are responsible for at least annually verifying tenants’ incomes and reporting accurate income data to RHCDS. These data are used, among other things, to determine how much rent the tenant pays and how much, if any, rental assistance subsidy RHCDS pays. However, income verification tends to be an unpopular task with property managers, and understatement of tenants’ incomes has been a recurring problem. RHCDS now checks the reliability of reported income data primarily by matching it to wage data that employers report to state labor agencies. According to RHCDS officials, this process can be cumbersome, especially in states that do not have computerized records, and the process cannot be used universally. Some states have laws that prohibit the practice, and other states just are not interested in helping out for one reason or another. We understand from RHCDS officials, however, that the Department of Housing and Urban Development is pilot-testing a new system that would allow automated, centralized verification of earned income with data reported by employers to the Social Security Administration and verification of investment income with data reported by financial institutions to the Internal Revenue Service via Form 1099. RHCDS hopes to also use this system, if it proves successful, as well as strengthen its current wage-matching system with the states. Our 1994 report identified three reasons why rural rental housing needs estimated under the Rural Housing and Community Development Service’s funding process may differ from actual needs: First, the process estimates needs at one point in time and therefore may not reflect current needs. The data used to estimate needs generally come from the U.S. Census and are not updated between Census years. As a result, the needs estimates do not capture fluctuations in state and local economic and demographic conditions during the 10 years between Censuses. Second, in selecting projects for funding, RHCDS has generally used data aggregated at the state and county levels to estimate needs. RHCDS has recognized, however, that even when county data are used, there may be more localized pockets of need that go unfunded in counties that have a relatively low estimated need overall. Accordingly, in fiscal 1994 RHCDS began to allow its state directors to use local data for specific communities if reliable data are available and vary from county data by a threshold amount. Third, the funding process may not account for all of the factors that can contribute to an area’s need for rental housing funds. For example, project development costs, which can vary among states, are not considered in the allocation process. A state with relatively high costs may be able to fund fewer housing units with a given amount of money than other states with lower costs. Our 1994 report also pointed out that project developers, rather than RHCDS, determine where proposed projects will be located. If developers consider that developing a project in a particular area is infeasible or unattractive, they will not propose projects for that location, even if projects are greatly needed. Under a targeting program established by legislation in 1990, RHCDS does set aside a portion of all rural housing program funds specifically for loans in counties that have very high levels of poverty and substandard housing and have been underserved by RHCDS’ rural housing programs. However, providing program assistance to these targeted areas still depends on developers’ willingness to propose projects in them. A 1994 report by a task force of the National Council of State Housing Agencies identified other problems with the current project selection process. Among other things, the task force found that there was little or no coordination on project selection between RHCDS’ field offices and the state agencies that allocate federal low-income-housing tax credits to certain projects. Many of the projects applying to RHCDS for loans are eligible for, and receive, these tax credits. By law, the state agencies must develop project selection criteria that are consistent with the needs and priorities set forth in the state’s Comprehensive Housing Affordability Strategy, a planning document required by the Department of Housing and Urban Development as a prerequisite for the state’s receipt of federal housing assistance. Although legislation in 1992 directed RHCDS to require its state offices to establish a process for coordinating project selection with the housing needs and priorities established in the states’ plans, the task force found that little coordination occurred. As a result, the projects selected under RHCDS’ funding process may not be located in the areas identified by the states’ plans as the neediest. Before the task force’s report, RHCDS issued regulations in March 1994 instructing its state directors to cooperate with the state agencies in the development of the states’ housing affordability plans to ensure that, to the extent possible, RHCDS’ resources are coordinated with the states’ priorities. Under the regulations, such cooperation may include, but is not limited to, sharing data on RHCDS’ estimates of need for areas within the state. However, the task force found that RHCDS had not provided its state directors with further guidance on how to coordinate their project selection with the states’ plans. RHCDS officials point out, however, that they are bound by their own legislatively directed criteria, which are not necessarily consistent with the state agencies’ criteria. As a result, RHCDS officials believe they can do little more to ensure consistency without a change in the legislation. Finally, a 1994 report by the Surveys and Investigations Staff of the House Committee on Appropriations raised concerns about the weight that RHCDS’ selection process gives to projects located away from urban areas.According to the report, the preference given to proposed projects in rural communities located at least 20 miles from an urban area has resulted in some projects being built in small rural communities that have only a limited need for rental housing, while exempting projects in other communities that have a greater need but are too close to a defined urban area. Christie M. Arends Arthur W. Brouk The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Rural Housing and Community Development Service's (RHCDS) housing loan programs, focusing on opportunities for cost savings and management improvements in the loan programs. GAO found that: (1) RHCDS is improving its loan programs' operations, but improving program delivery could save the federal government money and benefit borrowers and tenants in the programs; (2) centralized servicing of RHCDS loans could save over $100 million per year through staff reductions and greater staff productivity; (3) the number of direct loan program borrowers graduating to private credit could be increased by allowing borrowers to refinance their loans with commercial lenders and considering all loans for graduation, but RHCDS has few mechanisms in place to force loan graduation; (4) RHCDS could reduce multifamily housing program costs by shortening the terms of loans, eliminating certain equity loans made to owners, and funding more projects not requiring rental assistance; and (5) the process used to fund individual projects does not ensure that the neediest areas receive program assistance. |
The department’s vision of “One VA” was articulated to assist it in carrying out its mission of providing benefits and other services to veterans and dependents. It stems from the recognition that veterans think of VA as a single entity, but often encounter a confusing, bureaucratic maze of uncoordinated programs—such as those handling benefits, health care, and burials—that puts them through repetitive and frustrating administrative procedures and delays. According to the department, the “One VA” vision describes how it will use IT in versatile new ways to improve services and enable VA employees to help customers more quickly and effectively—in short, to really become “One VA.” To help carry out its activities, VA plans to spend about $1.4 billion of its total fiscal year 2001 budget of about $48 billion on various IT initiatives. Of this $1.4 billion, about $763 million, $80 million, and $400,000, respectively, are intended for VHA, VBA, and the National Cemetery Administration (NCA). The remaining $589 million is for VA-wide IT initiatives in the financial management, human resources, infrastructure, security, architecture, and planning areas. The Clinger-Cohen Act and other related legislative reforms provide guidance on how agencies should plan, manage, and acquire IT as part of their overall information resources management responsibilities. These reforms require agencies to (1) appoint CIOs responsible for providing leadership in acquiring and managing IT resources, (2) perform business process reengineering prior to acquiring new IT, and (3) complete an integrated architecture to guide and constrain future investments. The Clinger-Cohen Act requires agency heads to implement an approach for maximizing the value and assessing and managing the risks of IT investments. It stipulates that this approach should be integrated with the agency’s budget, financial, and program management processes. As detailed in our investment guide,an IT investment process is an integrated approach that provides for disciplined, data-driven identification, selection, control, life-cycle management, and evaluation of IT investments. In May 2000, we testified before this Subcommittee that VA had improved its processes for selecting, monitoring, and managing Capital Investment Board-level projects.In addition, VA had improved its in-process and post implementation reviews. However, as we testified, the in-process reviews may still not have been timely and lessons learned from post implementation reviews were provided only to the sponsoring VA organizations, and not to decisionmakers, such as the investment panel members, who could also benefit from them. Finally, the capital investment process used for projects below the Capital Investment Board- level was not as structured, and guidance for managing those projects was not complete. To address these issues, we testified that VA needed to (1) establish and monitor deadlines for completing in-process reviews, (2) provide decisionmakers with information on lessons learned from post implementation reviews, and (3) develop and implement guidance to better manage IT projects below the Capital Investment Board threshold. Last month we recommended that the Acting Secretary of Veterans Affairs implement these actions to improve VA’s IT investment decision-making process.VA concurred with these recommendations, and stated that the in-process review plans will include completion dates, post implementation review findings, such as lessons learned, will be provided to investment panel members, and the VAInformationTechnologyCapitalInvestmentGuide,which was printed and distributed to VA’s agencies earlier this month, provides guidance on processes for selecting, controlling, and evaluating IT investments and procurements below the Capital Investment Board threshold. The Clinger-Cohen Act directs the heads of major federal agencies to appoint CIOs to promote improvements in work processes used by the agencies to carry out their programs; implement integrated agencywide information technology architectures; and help establish sound investment review processes to select, control, and evaluate IT spending. To help ensure that these responsibilities are effectively executed, the act requires that the CIO’s primary responsibility be related to information management. In July 1998, we reported that the responsibilities of VA’s CIO were not limited to information management.Specifically, the CIO served the department in a variety of top management positions, including assistant secretary for management, chief financial officer, and deputy assistant secretary for budget. We noted that in an agency as decentralized as VA, the CIO was faced with many significant information management responsibilitiesthat constituted a full-time job for any CIO. Accordingly, we recommended that the Secretary of Veterans Affairs appoint a CIO with full-time responsibility for information resources management. VA concurred with this recommendation. It decided to separate the CIO function from the chief financial officer and established the position of assistant secretary for information and technology to serve as VA’s CIO. This executive branch position—assistant secretary for information and technology—has remained unfilled, however, since its creation in 1998. Instead, the principal deputy assistant secretary for information and technology served as VA’s acting CIO from July 1998 until he retired on June 1, 2000. The Secretary subsequently designated an acting principal deputy assistant secretary to serve as VA’s acting CIO. VA still intends to have a departmentwide CIO. The White House just announced last week that it intends to submit a nominee to the Senate for confirmation as assistant secretary for information and technology and department CIO. The Clinger-Cohen Act requires agency heads to analyze the missions of their agencies and, on the basis of the results, revise and improve the agency’s mission-related administrative processes before making significant investments in supporting IT. According to our business process reengineering guide,an agency should have an overall business process improvement strategy that provides a means to coordinate and integrate the various reengineering and improvement projects, set priorities, and make appropriate budgetary choices. We reported in 1998that VA had not analyzed its business processes in terms of implementing its “One VA” vision. We also pointed out that VA did not have a departmentwide business process improvement strategy specifying what reengineering and improvement projects were needed, how they were related, and how they were ranked. At that time, VA concurred with our recommendation to develop such a strategy. This past May,we testified before this Subcommittee that VA no longer planned to develop such a strategy. According to VA’s assistant secretary for policy and planning, the department will, instead, rely on each of its administrations—VBA, VHA, and NCA—to reengineer its own business process. We subsequently recommended to the Acting Secretary of Veterans Affairs that VA reassess its decision to delegate business process reengineering to the individual administrations. VA did not concur with this recommendation. Specifically, the department stated that the administrations best understand the desired outcomes of their missions and the means to achieve them. It further stated that business process reengineering is a constantly evolving function that is not conducted in a vacuum. We agree that the individual administrations best understand their own operations and that business process reengineering is an evolving function that does not take place in a vacuum. However, by delegating primary responsibility for reengineering to the individual administrations, each administration is able to pursue its own reengineering initiatives separate and apart from each other, rather than focusing on achieving the “One VA” vision. Accordingly, VA is less likely to achieve this vision until it develops a departmentwide business process reengineering strategy. The Clinger-Cohen Act and Office of Management and Budget guidelines direct agency CIOs to implement an architecture to provide a framework for evolving or maintaining existing IT and for acquiring new IT to achieve the agency’s strategic and IT goals. Leading organizations both in the private sector and in government use systems architectures to guide mission-critical systems development and to ensure the appropriate integration of information systems through common standards. In 1997, VA adopted the National Institute of Standards and Technology (NIST) five-layer modelfor its departmentwide IT architecture. However, as discussed in our 1998 report,VA and its components had yet to define a departmentwide, integrated IT architecture. Accordingly, we recommended that VA develop a detailed implementation plan with milestones for completing such an architecture. VA concurred with this recommendation. In May 1999, VA published a departmentwide technical architecture,which included a technical reference model and standards profile. This document described one layer—the technology layer—of the NIST model. VA had not documented the remaining four layers—the logical architecture—showing the business processes, information flows and relationships, applications processing, and data descriptions for the department. Mr. Chairman, during the Subcommittee’s May 11, 2000, hearing, you requested that VA provide the Subcommittee with a plan and milestones for completing the logical portion of its departmentwide IT architecture within 60 days of the hearing. The resulting two-page plan, submitted to the Subcommittee on August 25, provides a high-level discussion of VA’s approach for developing a target departmentwide logical architecture and time estimates for various deliverables. According to this plan, the VA administrations are expected to develop logical architectures for their administrations. To avoid duplicating the efforts of the administrations, VA expects the departmentwide logical architecture to focus on crosscutting issues and interdependencies. VA is obtaining contractor support to develop a detailed plan with milestones and to assist in developing this departmentwide logical architecture. VA expects this architecture to be completed within 6 months of the contract award date. In commenting on a draft of this testimony, VA stated that it expects to have the contract awarded by mid-October. VA’s strategy for developing its logical architecture will not likely result in an integrated departmentwide architecture. In fact, VA acknowledges in its plan that the architectures developed by the administrations will not provide a unified picture of the department’s architecture. By allowing each administration to develop its own logical architecture, at least three separate architectures could result. To avoid this, VA needs to reassess its current strategy and work together with VBA and VHA to develop an integrated, departmentwide logical architecture, consistent with the Clinger-Cohen Act. This will help foster achievement of the “One-VA” vision. According to VADirective6000,VA officials are required to maintain complete and accurate data on all personnel and non-personnel costs associated with IT activities. Further, the VACapitalInvestment MethodologyGuiderequires that project managers track expenditures against budget authorizations for IT projects. In addition, according to our IT investment management guide,an important step in the IT investment control process is a disciplined process for regularly tracking each project’s expenditures over time. Further, according to our IT investment guide,organizations should have a uniform mechanism such as a management information system for collecting, automating, and processing data on expected versus actual outcomes, including expenditures. Although required to maintain complete and accurate IT cost data, VA does not consistently track IT expenditures across the department. Instead, the department has delegated the responsibility for tracking expenditures for IT projects to project managers within VA’s administrations and offices, leading to different tracking approaches and difficulties in readily identifying the extent of IT costs. At the administration level, the extent of expenditure tracking varies. For example, VBA tracks IT expenditures centrally for procurements, such as hardware, software, and contract services. However, VBA does not track all regional office personnel costs associated with a project. In contrast to VBA, VHA has a decentralized process for tracking IT expenditures. Specifically, it has given responsibility for tracking more than 80 percentof its IT expenditures to its 22 VISNs. However, VHA does not have a uniform mechanism for tracking IT expenditures across the administration. VHA’s new CIO acknowledged the need for a system to track all expenditures associated with IT projects. Until VA develops a uniform mechanism for tracking IT expenditures, the department will be less likely to make informed decisions on whether to modify, cancel, accelerate, or continue projects. At the same time, VA and its administrations may be unable to provide timely cost and budget IT information to the Congress. To improve tracking of IT project costs, VA recently initiated several actions. First, it is developing a uniform numbering system for its capital investment projects. This system is expected to generate reports from VA’s financial management system showing actual expenditures associated with those projects. However, the department has yet to establish a date for when this system will be implemented. Second, VA has recently issued draft guidancedirecting the administrations to track actual IT expenditures. The department has not yet established a deadline for finalizing the guidance. Accordingly, the department needs to (1) establish timeframes for finalizing this draft guidance and then monitor its implementation to ensure compliance and (2) establish timeframes for implementing a uniform numbering system for its capital investment projects. I would now like to discuss the status of VA’s efforts to develop and implement VHA’s Decision Support System and VBA’s compensation and pension replacement project. Each is at a different stage of development and implementation, and each continues to pose challenges to VA. VHA’s Decision Support System is an executive information system designed to provide VHA managers and clinicians with data on patterns of patient care and patient health outcomes, as well as the capability to analyze resource utilization and the cost of providing health care services. VHA expects to use DSS to (1) prepare budgets for its medical centers, (2) allocate resources based on performance and workload, (3) generate productivity analyses and patient-specific costs, (4) support continual quality improvement initiatives, (5) measure outcomes-based performance and effectiveness of health care delivery processes, and (6) improve efficiency of care processes through the use of clinical practice guidelines. By the end of October 1998, DSS had been implemented at all VA medical centers. The total VA estimated cost from fiscal year 1994 through fiscal year 1999 to develop and operate DSS was approximately $213 million. As of June 30, 2000, VA calculated that it had spent another $36 million on DSS this fiscal year. As we testified this past May, DSS was not being fully utilized.Although cost reductions and improved clinical processes had been experienced by some VISNs and medical centers using DSS, none of the ones we contacted used DSS for all of the purposes VHA intended. The reasons given by VISNs and medical centers for not making greater use of DSS included (1) concerns about the accuracy and completeness of DSS data, (2) the need for 2 years of DSS data for budget formulation and resource allocation purposes, and (3) DSS staffing issues, including insufficient staff, staff with inadequate skills, and staff turnover. The May 2000 responses to two questions asked by VHA’s chief network officer also indicate that DSS is not being fully utilized. Specifically, in a March 15, 2000, memorandum sent by VHA’s chief network officer to all VISN and medical center directors, he asked for specific examples describing how the use of DSS had benefited veterans at the VISN and medical centers, and explanations for why DSS was not being used, including identification of barriers to its use. Regarding the first question on DSS usage, 4 of 22 VISNs—VISN 6 (Durham, North Carolina), VISN 8 (Bay Pines, Florida), VISN 20 (Portland, Oregon), and VISN 21 (San Francisco)—did not provide examples of DSS use. Further, VISN 6 and VISN 21 explicitly stated that they do not use DSS at the VISN level because they did not have reliable DSS data at the time from their medical centers. As illustrated in figure 1, the remaining 18 VISNs provided examples of using special studies/reports and cost studies/reports to make decisions with regard to resource utilization and quality improvement. Of the 18 VISNs, two—VISN 13 (Minneapolis) and VISN 10 (Cincinnati)—cited seven or more categories of DSS use; three VISNs—VISN 14 (Omaha), VISN 18 (Phoenix), and VISN 22 (Long Beach) cited only two categories of use. Data qualitym prove m ent Regarding medical centers, 59 of 140 did not provide specific examples of DSS use.Three of the 59 medical centers—Beckley (West Virginia), Anchorage Health Care System, and Boise (Idaho)—explicitly stated that they did not use DSS. Both Anchorage and Boise medical centers cited staffing problems as a reason for not using DSS; Beckley indicated problems with DSS data integrity. Figure 2 provides a snapshot of the 81 medical centers providing specific examples of DSS use. The Long Beach and Portland (Oregon) medical centers used DSS for the most categories—that is, eight or more. At the same time, three medical centers—Tomah (Wisconsin), St. Louis, and Wichita (Kansas)—cited only one category of use. Moving to the second question, on barriers, slightly over half of the VISNs—13—identified barriers to using DSS. As illustrated in figure 3, the barrier most often cited was the fiscal year conversion process,followed by data integrity concerns, software/connectivity issues,and staffing issues. Of the 24 medical centers identifying barriers, the fiscal year conversion process was also cited most frequently. For a snapshot of their responses, see figure 4. Lack om anage m enundersandng To address barriers with the fiscal year conversion process, the 2001 fiscal year clinical and financial conversion guidelines were issued on July 27, 2000, and the goal is to begin fiscal year 2001 processing by December 18, 2000. To encourage greater use of DSS, VHA has initiatives underway. For example, in December 1999, the undersecretary for health mandated the use of DSS data rather than data in cost distribution reports for the fiscal year 2002 budget resource allocations. DSS data will also be used as a performance measure in 2001 to determine whether VHA providers are following clinical guidelines for diabetes, according to VHA’s Chief Quality and Performance Officer. Finally, the VISN and medical center managers’ use of DSS data is expected to be monitored in 2001. Even with these initiatives, VHA officials within the Office of the Associate CIO for Implementation and Training and the VISNs and medical centers have told us that they are concerned that the recent decision to move the DSS program office from the Office of the CIO to the Office of the Chief Financial Officer may diminish DSS use for clinical purposes.These officials are concerned that this move may shift top management support and commitment more to the financial rather than clinical benefits of using DSS. According to VHA officials, using DSS for clinical purposes is very important and allows VA to improve health care delivery to veterans. For example, as we testified in May,the clinical practice of routinely ordering two units of pre-surgery autologousblood for total knee replacement was changed, based on DSS data, at the Portland (Oregon) VA medical center, resulting in estimated savings of $600+ per case. The transition plan for moving the DSS program office is currently being drafted and will address the oversight roles and responsibilities for DSS. The plan is expected to be completed by the end of this month. The second of the two projects you asked us to review is VBA’s compensation and pension replacement project, one of the major initiatives under the agency’s Veterans Service Network (VETSNET) strategy. This project was intended to replace VBA’s existing compensation and pension payment systems with one new, state-of-the-art system. The project, which began in April 1996, had an estimated cost of $8 million and was originally scheduled for completion in May 1998. Over the years, we and others have reported on the problems VBA has encountered in completing this project.We stated that one key reason for the project’s delays was the lack of an integrated architecture defining the business processes, information flows and relationships, business requirements, and data descriptions. For example, the project was begun before VBA had fully developed its business requirements. Project delays subsequently resulted due to confusion over the specific requirements to be addressed. Another reason for the project’s problems was VBA’s immature software development capability. In 1996 we reported that VBA’s software development capability was ad hoc and chaotic—the lowest level of software development capability.At this level, VBA could not reliably develop and maintain high-quality software on any major project within cost and schedule constraints. Reviews by VA and by us illustrated that this project had difficulties meeting deadlines and that not all critical systems development areas were addressed. To date, VBA has yet to reach the next, repeatable, level of software development. The compensation and pension replacement project has missed several key milestones. For example, the project missed its original May 1998 completion date and a revised completion date of December 1998. In 1999, VBA changed its strategy for the compensation and pension replacement project to incorporate several software products previously developed and used at selected VBA regional offices. At that time, VBA did not have a completion date for this project. Since then, VBA has developed short-term milestones for this project. Specifically, the first product scheduled for implementation under VBA’s revised strategy is expected to be rating board automation 2000. This product is expected to be implemented this November and is to assist veterans service representatives in rating benefit claims. Other products under development as part of the compensation and pension replacement project include: Modern award processing-development (MAP-D)—which is expected to manage claims development processes, including the collection of data to support the claim, requests for exams to determine degree of injury or disability, and tracking of the claim. MAP-D is also expected to provide direct access to three other software products that address claims development processes. Search/participant profile—which is expected to establish the veteran record and collect basic information on the veteran and family. Award processing—which is expected to compute the award or payment amount based on the results of the rating process. Finance and accounting system—which is expected to develop the actual payment record and handle all accounting functions. The project manager said that current plans are to complete development and testing of these five products by December 2000. A pilot test of all of the above products except MAP-D is expected to begin in January 2001. In the pilot, 10 new claims are to be processed and payments generated using the new products. However, before the compensation and pension replacement pilot can be fully implemented, top management in VBA must address several important issues. First, large, complex projects, such as the compensation and pension replacement project should have an approved project management plan and schedule to determine what needs to be done and when, and to use as a means of measuring progress. VBA has yet to develop such a project plan and schedule for developing and implementing this system. Instead, detailed plans and schedules exist only for the next few months. Similarly, VBA has yet to address fully other critical systems development areas. The first of these is data conversion. Specifically, data in the existing VBA system will need to be converted to the new system. According to VBA officials, this is the most difficult remaining part of the compensation and pension replacement project. They told us that a data conversion strategy has been drafted and is under review. In addition, VBA must develop data exchanges to allow the compensation and pension replacement system to share data with other systems. For example, it is critical that changes to veteran information, such as name and address, captured in the compensation and pension replacement system be changed in other VBA systems. Lastly, VBA is vulnerable to disruptions due to contractor volatility and staffing uncertainties. For example, of the 25 contractors currently involved in the compensation and pension replacement project, over half (13) have been added to the project within the last year. According to VBA officials, they may also experience problems with obtaining in-house staff from its data centers to help develop the compensation and pension replacement system and other VBA projects, such as an effort to consolidate VBA’s data center operations from Hines (Illinois) and Philadelphia to Austin, because they compete for some of the same people over the next 2 years. These concerns increase the likelihood that schedule delays and cost overruns may occur. VBA officials acknowledge the above issues and have informed us that efforts are underway to address them. However, until VBA develops a fully integrated project plan and schedule that incorporates all critical system development areas, challenges and vulnerabilities will remain. The last area you asked us to discuss is computer security—critical to any organization’s ability to safeguard its assets, maintain the confidentiality of sensitive information, and ensure the reliability of its financial data. If effective computer security practices are not in place, financial and sensitive information contained in VA’s systems is at risk of inadvertent or deliberate misuse, fraud, improper disclosure, or destruction—possibly occurring without detection. Over the past several years we have reported on VA’s computer security weaknesses. In September 1998 we reported that computer security weaknesses placed critical VA operations such as financial management, health care delivery, and benefits payments at risk of misuse and disruption.We reported in October 1999 that VA’s success in improving computer security largely depended on strong commitment and adequate resources being dedicated to the information security program plan.In May 2000 we testifiedthat VA had still not adequately limited the access granted to authorized users, appropriately segregated incompatible duties among computer personnel, adequately managed user identification and passwords, or routinely monitored access activity. Earlier this month, we reported that serious computer security problems persisted throughout the department and VHA because VA had not yet fully implemented an integrated security management program and VHA had not effectively managed computer security at its medical facilities.Consequently, financial transaction data and personal information on veterans’ medical records continued to face increased risk of inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. Specifically, as we reported, VA’s New Mexico, North Texas, and Maryland health care systems had not adequately controlled access granted to authorized users, prevented employees from performing incompatible duties, secured access to networks, restricted physical access to computer resources, or ensured the continuation of computer processing operations in case of unexpected interruption. To facilitate VA actions to develop and implement a comprehensive, coordinated security management program that would encompass VHA and other VA organizations, we reiterated our October 1999 recommendation that VA develop computer security guidance and oversight processes and recommended that VA monitor and resolve coordination issues that could affect the success of the departmentwide computer security program. VA concurred with these recommendations and stated that it intends to develop an accelerated plan to improve information security at its facilities. Specifically, VA stated that it would track the resolution of the recommendations we made to correct specific information security weaknesses at the health care systems we visited. In addition, VA provided examples of security management activities performed by the VHA central security group to implement and oversee computer security throughout the administration. VA also stated that it would use its Information Security Working Group, which includes representatives of all administration and staff office security groups, to develop departmentwide policy, guidance, and processes. In summary, the department still faces important challenges in several IT areas. While it has improved its IT investment decision-making process and plans to fill its department CIO position, VA may encounter problems achieving its “One VA” vision until it develops an overall business process reengineering strategy and a departmentwide, integrated IT architecture. Full implementation of our prior recommendations in these areas is essential to VA’s achieving its “One VA” vision. In addition, VA’s lack of departmentwide tracking of IT expenditures makes it difficult for the department to manage the risks of its IT investments. Further, top management support and commitment are essential to addressing the challenges VA faces in making greater use of DSS and in addressing issues involved in developing the compensation and pension replacement project. Improving VA’s computer security will also take sustained leadership and commitment to developing and implementing a comprehensive security management program. We performed this assignment in accordance with generally accepted government auditing standards, from June through September 2000. In carrying out this assignment, we assessed the actions taken to address our recommendations on improving VA’s IT investment decision-making process. We reviewed documentation on VA’s efforts to fill the CIO position and reviewed and analyzed VA, VBA, and VHA IT architecture documents, comparing these with NIST’s five-layer standard, the guidance used by VA. To determine how IT expenditures are tracked, we reviewed and analyzed VA’s policies and procedures and compared them with applicable guidance in this area. We discussed cost tracking procedures with officials at VA, VBA, VHA, and five VISNs, and reviewed relevant documentation. For the DSS project, we reviewed VISN and medical center examples for DSS use and barriers, and visited four VISNs—VISN 5 (Baltimore), VISN 8 (Bay Pines, Florida), VISN 18 (Phoenix), and VISN 21 (San Francisco)—to discuss their examples of DSS use and barriers to such use. Specifically, we analyzed the examples provided by the VISNs and medical centers and summarized them into nine categories of DSS use and 13 categories of barriers to such use. We also reviewed performance documentation and met with VHA officials to discuss actions planned for DSS use. For the compensation and pension replacement project, we reviewed plans and schedules for the project and visited the development site at Bay Pines. We also discussed issues with VBA managers in Washington, D.C. In the area of computer security, we evaluated security controls at three VHA medical facilities—VA Maryland Health Care System, VA New Mexico Health Care System, and the VA North Texas Health Care System—and reviewed our recent reports and VA updates on actions taken to address our recommendations. We provided a draft of this testimony to VA for comments and incorporated changes where appropriate. Mr. Chairman, this concludes my statement. I would be pleased 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 me at (202) 512-6253 or by e-mail at [email protected] making key contributions to this testimony included Nabajyoti Barkakati, Michael P. Fruitman, Amanda Gill, Tonia L. Johnson, Helen Lew, Barbara S. Oliver, J. Michael Resser, and Kevin Secrest. (511856) | Pursuant to a congressional request, GAO discussed the Department of Veterans Affairs' (VA) information technology (IT) program, focusing on VA's efforts to: (1) improve its process for selecting, controlling, and evaluating IT investments; (2) fill the chief information officer (CIO) position; (3) develop an overall strategy for reengineering its business processes; (4) complete a departmentwide integrated systems architecture; (5) track its IT expenditures; (6) implement the Veterans Health Administration's (VHA) Decision Support System and the Veterans Benefits Administration's (VBA) compensation and pension replacement project; and (7) improve the department's computer security. GAO noted that: (1) overall, VA's IT investment decision-making process has improved, and it has started to implement recommendations GAO enumerated in May and August of this year; (2) further, VA is obtaining a full-time CIO now that the Administration has identified a candidate for the position; (3) however, the department no longer plans to develop an overall strategy for reengineering its business process to effectively function as "One VA," nor has it defined the integrated IT architecture needed to efficiently acquire and utilize information systems across VA; (4) in addition, VA lacks a uniform mechanism that readily tracks IT expenditures; (5) instead, VA's different offices use various mechanisms for tracking IT expenditures; (6) VHA's Decision Support System (DSS) and VBA's compensation and pension replacement project continue to face challenges; (7) as demonstrated in a survey to all Veterans Integrated Service Networks and medical centers directors, DSS is not being fully utilized; (8) in addition, while VBA plans to pilot test portions of its compensation and pension replacement system in January 2001, other key issues need to be addressed before the system can be fully implemented; (9) for example, VBA does not have a plan or schedule for converting data from the old system to the new system and exchanging data between the new system and other systems; (10) regarding computer security, VA has begun to address weaknesses identified by GAO and its Office of Inspector General; and (11) until it develops and implements a comprehensive, coordinated security management program, VA will have limited assurance that financial information and sensitive medical records are adequately protected from misuse, unauthorized disclosure, and destruction. |
A supercomputing revolution is under way in the United States as dramatic advances in supercomputers continue—doubling in power approximately every 18 months. Supercomputers are defined as the largest and fastest computers currently being built. Today’s supercomputers are capable of processing speeds of up to 1,000 times greater than they were capable of 5 years ago. Federal agencies, including the Department of Energy (DOE), have been at the forefront of this revolution. A DOE-funded supercomputer at the Sandia National Laboratory that is capable of about 1.8 trillion operations per second holds the world record for processing power. DOE, working with industry, has plans to build even faster computers, with a goal of 3 trillion operations per second by mid-1998, and 100 trillion by 2004. Currently, seven DOE national laboratories and two DOE atomic power laboratories have supercomputers. DOE’s program offices fund supercomputer purchases (or leases), and the laboratories’ management and operating contractors acquire and operate the systems. According to DOE, new supercomputer acquisitions are relatively frequent because of rapidly changing technology. Since 1993, when statistics were first systematically collected, DOE has consistently had several supercomputers that have ranked among the world’s most powerful as measured by a list of the top 500 supercomputers in the world. As of November 1997, for example, DOE had the first and fifth most powerful computers in the world and 10 of the top 100 supercomputers. Overall, DOE’s laboratory supercomputers accounted for about 17 percent of the total supercomputer capacity in the world. DOE’s supercomputing capability has grown over 10-fold from fiscal year 1994 through fiscal year 1997, from a total for DOE laboratories of about 360 billion operations per second to about 3.8 trillion operations per second. Under DOE’s plans, this total capability will increase another 280 percent by fiscal year 2000, as shown in figure 1.1. Supercomputers enable DOE to do leading-edge scientific research. Advances in computing power have been made possible by a new supercomputer configuration (or “architecture”) called massively parallel processing. Past supercomputers (with “sequential” or “vector” architectures) executed operations more or less sequentially, using at most a few processors working concurrently. The latest supercomputers, however, execute many operations in parallel, simultaneously using hundreds, and even thousands, of processors. Such systems are referred to as scalable, massively parallel systems. In experimenting with such systems, researchers have linked more and more processors together to achieve ever greater processing speeds. To accommodate these newer, larger systems, concurrent research in software programs, interconnections, and graphics capabilities have been necessary. As the year 2000 approaches and computing operations on the scale of a trillion operations per second become more routine, DOE is funding a variety of research initiatives to take advantage of the new simulation and computational capabilities of supercomputers. These initiatives include increasingly complex computations and the simulation of nuclear weapons, the global climate, the environment, pollution, and human gene structure. DOE uses supercomputers to support two major research missions: (1) ensuring the safety and reliability of nuclear weapons, under its Office of Defense Programs’ nuclear stockpile stewardship program and (2) attempting to solve nondefense science and engineering problems, called “Grand Challenges,” under its Office of Energy Research. The Office of Defense Programs funds nuclear stockpile computing efforts to simulate the behavior of nuclear weapons. The Accelerated Strategic Computing Initiative (ASCI) was created by DOE in response to a presidential decision in 1995 to sign the Comprehensive Test Ban Treaty. ASCI is designed to provide the unprecedented simulation capabilities needed to help verify the safety and reliability of U.S. nuclear weapons without nuclear testing. ASCI has the ambitious goal of achieving increasing computer speeds at a rate of development exceeding the current and projected state of the art in coming years. Speeds of 3, 10, 30, and ultimately 100 trillion operations per second by 2004 are envisioned. ASCI funding for fiscal year 1998 was $223.5 million. ASCI-related funds are also contained in DOE’s stockpile computing budget. On the other hand, the Office of Energy Research funds nondefense computational research projects, including specific grand challenges that require large-scale supercomputing capability. Grand challenge research is coordinated on an interagency basis through the High Performance Computing and Communications (HPCC) program, a $1-billion-a-year supercomputing initiative stemming from the High Performance Computing Act of 1991. This act was intended to accelerate the development of advanced technologies for the information age. DOE’s fiscal year 1997 budget request for the HPCC program was $124.6 million, and its request for grand challenges research funding was about $10 million. According to DOE, about 80 percent of the $1.4 billion it spends each year for information management is spent by the management and operating contractors that run its major facilities, including the national laboratories. Figures 1.2 through 1.4 show the types of supercomputers in DOE’s national laboratories. The Congress has shown an ongoing interest in supercomputers and information technology, both from the perspective of helping to ensure U.S. leadership in the field—as with the High Performance Computing and Communications Act of 1991—by promoting the efficient acquisition and management of computers. Under the Brooks Act of 1965, the Congress gave the General Services Administration the central authority within the federal government for acquiring information technology. In 1996, the Congress passed the Clinger-Cohen Act, which repealed the Brooks Act and gave the heads of agencies the authority to procure information technology directly. The act requires agencies to adopt a comprehensive approach to acquiring and managing information technology (including supercomputers) and charges the Office of Management and Budget with oversight responsibility. As requested by the Chairman, House Committee on the Budget, we (1) identified the number and cost of the supercomputers DOE acquired in fiscal years 1994 through 1997 and the number and proposed funding for planned major supercomputer acquisitions in fiscal years 1998 through 2000; (2) determined the stated need for DOE’s supercomputers, the utilization rates for them, and the potential for facilities to share these resources; and (3) identified and described the process DOE and its contractors employ to validate the need for additional supercomputers and compared that process with the technology investment process set forth in the Clinger-Cohen Act. The scope of this review was departmentwide, including all facilities having supercomputers, although our principal focus was on DOE’s multiprogram national laboratories. We also gathered information on the number and cost of supercomputers at two single-program laboratories—the Bettis and Knolls Atomic Power Laboratories. However, we did not perform detailed work at these two laboratories because of time constraints, the narrow focus and unique mission of their research programs, and their distinctive program management under the Office of Naval Reactors within DOE. To identify the number and cost of DOE’s existing supercomputers, we requested that DOE’s Offices of Defense Programs and Energy Research provide us, for each supercomputer that they had funded, the year of purchase or lease and the cost (including the costs of any major upgrades after the initial purchase of the computer). The Office of Energy Research provided information on supercomputers at the Argonne, Lawrence Berkeley, Los Alamos, Oak Ridge, and Pacific Northwest National Laboratories. The Office of Defense Programs provided information on supercomputers at the Lawrence Livermore, Los Alamos, and Sandia National Laboratories. The Office of Naval Reactors provided information on supercomputers at the Bettis and Knolls Atomic Power Laboratories. We visited the seven national laboratories listed above and verified the data provided, although we did not independently verify the costs reported. In most cases, we relied on the cost data provided by the program offices, while in several other cases, we obtained clarifying cost information during our laboratory visits. To identify major planned supercomputer acquisitions, we relied primarily on information provided by the Offices of Energy Research and Defense Programs. Where possible, we sought to verify this information either during visits to the relevant laboratories or through documents used in formulating the agency’s budget requests. Recognizing that the initial purchase or lease cost of a supercomputer may represent only a portion of the cost of operating a supercomputer, we also developed information on the total costs of operating supercomputer centers at the seven national laboratories. To do this, we requested that the laboratories provide cost data for all of the cost accounts that constitute the supercomputing effort at the laboratory. We asked that these costs be divided into direct labor and “other” operating costs, and that they include any relevant program and laboratory overhead expenses. We requested this information for fiscal years 1994 through 1997 and asked that the laboratories project these costs for fiscal years 1998 and 1999. Where a cost center included activities unrelated to supercomputing, we asked the laboratory staff to estimate the proportion of costs attributable to the supercomputing effort. Finally, we asked that the laboratories reconcile the cost information provided with the information they supplied to DOE’s budget and reporting system. We then provided draft summaries of this information to each of the laboratories and DOE’s Office of the Chief Financial Officer for their review and comment or concurrence. To determine the utilization rates for DOE’s supercomputers, we held discussions with knowledgeable staff at Argonne and Sandia National Laboratories to learn how they collected and analyzed utilization data. We then developed a standardized data request for each supercomputer to determine its utilization rate on the basis of the number of processor hours available for running computer applications. In addition to the processor hours available, we asked for the number of processor hours actually used for applications and the number of processor hours the computer was down for maintenance or repairs. We subtracted the number of hours that machines were down for maintenance or other reasons from the total number of hours available, to arrive at the number of hours the machines were actually available to users. We also wanted to determine the types of tasks the computers were used for because the largest, fastest, and most expensive supercomputers are being justified on the need for the capability to run the largest, most complex applications in a reasonable amount of time. Such jobs would be expected to use all or a large portion of the supercomputer’s processors. Thus, for the newer supercomputers—those with over 128 processors—we asked the laboratories to provide information on the number of jobs using various ranges of available processors, that is 0 to 25 percent, 26 to 50 percent, 51 to 75 percent, and over 75 percent. We then analyzed the responses to determine whether the bigger supercomputers were being used to run the big computing jobs for which they were purchased (i.e., the percent of computing jobs that used over one-half of the available processors). We took several steps to ensure that the data provided to us on the utilization of supercomputers by the laboratories were reliable. First, we visited the Lawrence Livermore, Los Alamos, and Sandia laboratories, which, taken together, have at least one supercomputer from all of the major manufacturers. We noted that collecting standard utilization data for each manufacturer and computer was possible because the utilization data are produced within the computers’ operating systems using the same algorithms. During visits to these laboratories, we discussed controls over the systems, including physical access controls, which we found to be stringent because of the nature of the work performed by the laboratories. Each laboratory reviewed the data for reasonableness either periodically and/or before it sent us the data (e.g., checking to ensure that the utilization reported did not exceed total time available). We also sent a brief questionnaire to four other laboratories that provided utilization data and found similar processes and controls. On the basis of this review of the process, controls, and data reviews related to the creation of the utilization data provided us, we concluded that the utilization data are sufficiently reliable for use in this report. To examine DOE’s needs determination process for supercomputers, we interviewed responsible officials and obtained pertinent documentation at DOE’s headquarters offices—Defense Programs, Energy Research, and the Office of the Chief Information Officer—as well as at selected DOE operations offices and at the various national laboratories where supercomputers are in use. From these sources, we obtained an overview of existing and past DOE procedures for justifying the acquisition of supercomputers, as well as a newly approved justification process intended to implement the Clinger-Cohen Act. Furthermore, we examined the details of DOE’s informal and formal program and project planning and budgeting processes. DOE uses these processes to validate the need for projects that may also include supercomputers. We compared the information obtained to the requirements of the Clinger-Cohen Act. We also analyzed whether DOE’s most expensive supercomputers, such as its ASCI computers, should be managed by the Department as strategic systems under its life-cycle asset management process. We conducted our review from September 1997 through June 1998 in accordance with generally accepted government auditing standards. DOE has experienced rapid growth in the number, capability, and cost of its supercomputers since fiscal year 1994. As of December 31, 1997, DOE’s laboratories had 42 supercomputers, several of which ranked among the most powerful in the world. From fiscal year 1994 through fiscal year 1997, DOE’s supercomputer capability grew by more than 10-fold. Thirty-five of DOE’s supercomputers were purchased in these years at a cost of about $300 million (in current year dollars). These supercomputers were funded either by the Office of Energy Research or the Office of Defense Programs. Supercomputers are also expensive to maintain and operate. The overall cost of supercomputing, in addition to the costs of the supercomputers, for the seven DOE laboratories we examined was about $526 million for fiscal years 1994 through 1997. DOE currently plans to spend an additional $257 million on major supercomputer acquisitions during fiscal year 1998 through fiscal year 2000. The newest, fastest supercomputers commercially available can cost $20 million or more to buy or lease. Some very large developmental models can cost more than $100 million. These acquisitions will increase DOE’s supercomputing capability by almost 300 percent. DOE’s seven national laboratories have significant supercomputer capacity, including several machines that are among the most powerful in the world. The laboratories had 42 supercomputers at the end of fiscal year 1997, up from 25 supercomputers at the start of fiscal year 1994. DOE’s stated need for acquiring supercomputers is to perform increasingly complex computations and modeling to support two main program missions—(1) maintaining the safety and reliability of U.S. nuclear weapons under the Department’s stockpile stewardship program, administered by the Office of Defense Programs, and (2) conducting civilian research into complex scientific problems, such as global climate change, human gene structure, and environmental contamination, in projects administered by the Office of Energy Research. These acquisitions have significantly enhanced the capacity and capability of DOE’s supercomputers. For example, at the start of fiscal year 1998, DOE’s supercomputers had the capacity to run about 3.8 trillion operations per second—more than 10 times the total capacity it had at the start of fiscal year 1994. In addition, individual machines, which can now have several dozen to several thousand processors linked together, are much more powerful. The newer supercomputers are capable of running software programs on several hundred to several thousand processors simultaneously to solve complex computer models. A DOE-funded supercomputer at Sandia which is capable of 1.8 trillion operations per second, is currently ranked as the fastest in the world. DOE purchased 35 of the supercomputers in fiscal years 1994 through 1997 at a cost of about $300 million (in current year dollars). These supercomputers were funded by either the Office of Energy Research or the Office of Defense Programs. Table 2.1 shows the location and cost of the 35 supercomputers. In addition to increasing in power, DOE’s newest supercomputers are increasingly costly. While the average cost of a supercomputer acquired by DOE since fiscal year 1994 is about $8.5 million, the cost of the newer, more powerful supercomputers can be significantly more. For example, the commercially available Cray T3E-900 at Lawrence Berkeley, which was the fifth most powerful computer in the world in November 1997, cost over $25 million. In comparison, the largest machines being developed by DOE, in conjunction with industry, can cost several times that amount. The ASCI Red supercomputer cost about $55 million in fiscal year 1997. The ASCI Blue Pacific supercomputer at Lawrence Livermore (3 trillion operations per second) will cost about $95 million, including development and some support costs. Los Alamos is acquiring a similarly sized machine, known as the ASCI Blue Mountain, at a cost of about $135 million. DOE’s Office of Energy Research is funding a smaller version (1 trillion operations per second) of the ASCI Blue Mountain machine, also at Los Alamos, at a cost of about $40 million. In February 1998, the Office of Defense Programs funded another ASCI effort at Lawrence Livermore. This $85 million contract funds the next planned increment of the ASCI program for a computer capable of 10 trillion operations per second. The costs of operating supercomputers are also substantial. These costs at the seven laboratories totaled about $526 million in fiscal years 1994 through 1997, excluding the costs of acquiring the supercomputers. These costs varied depending on the size of the facility and the programs involved. At one of the larger facilities, Los Alamos, for example, the annual costs of supercomputing were over $56 million in fiscal year 1997. Supercomputers consume large amounts of electrical power and often require special, or additional, air conditioning equipment. For example, electricity costs for the computing center at Livermore are almost $1 million per year. In addition, software for supercomputers, especially those with massively parallel architectures, is generally not available commercially. As a result, additional resources must be available to help users develop, convert, or optimize their applications to run on these machines. The ASCI program has contributed to significant increases in supercomputing costs at the three weapons laboratories since it started in fiscal year 1996. At Livermore, for example, the overall costs of supercomputing increased by about 30 percent from fiscal year 1995 to about $35.2 million in fiscal year 1997. Sandia is constructing a new building largely to support ASCI supercomputing, with a budgeted total cost of about $29 million between fiscal years 1999 and 2001. Similarly, Livermore is nearing completion of a $12 million renovation of an existing building to support its next generation of ASCI supercomputers. Most of the Livermore cost results from bringing in the electrical power to run and cool the supercomputers. DOE expects that its planned major supercomputer acquisitions for fiscal years 1998 through 2000 will cost about $257 million. These acquisitions represent the minimum that DOE plans to spend for supercomputers during those years because smaller acquisitions and upgrades are not included.For several of these machines, including the ASCI-funded machines at Los Alamos and Lawrence Livermore and the Energy Research-funded machine at Los Alamos, the $257 million represents only the future funding increments for those machines that are being acquired and installed over more than one fiscal year. Table 2.2 shows DOE’s planned major acquisitions for fiscal year 1998 through fiscal year 2000. These planned acquisitions will increase DOE’s total supercomputing capability by another 280 percent by fiscal year 2000. Lawrence Livermore and Los Alamos are acquiring and installing supercomputers even larger than the ASCI Red machine—each capable of over 3 trillion operations per second. The “Option White” supercomputer at Livermore will be more than 3 times as large as either of those machines. These three machines are funded by the Office of Defense Programs as part of the ASCI program. The ultimate goal of this program is to build a computer capable of 100 trillion operations per second that will be used to model and simulate nuclear weapons as part of DOE’s Stockpile Stewardship Management Program. Such a machine, planned for completion by fiscal year 2004, would equate to over 25 times the total capability of all of DOE’s current supercomputers combined. The “Option White” machine planned at Livermore is expected to cost about $85 million to complete. The cost of acquiring other ASCI program supercomputers and eventually the machine capable of 100 trillion operations per second is unknown at this time. The cost of operating supercomputers is also expected to increase. Livermore officials told us that the ASCI Option White machine will consume over 6 megawatts of electric power when complete. Six megawatts is enough electric power to supply about 5,000 homes for one year. Consequently, Livermore projects that by fiscal year 1999, its supercomputing costs will increase to about $46.5 million, up from about $35.2 million in fiscal year 1997. DOE is underutilizing its supercomputing resources and is missing opportunities to share them. Consequently, laboratory contractors may be acquiring additional costly supercomputers while DOE still has capacity available that could meet their needs. With respect to utilization, we found that DOE’s laboratories are utilizing, on average, only about 59 percent of their available supercomputer capability. The rates of utilization we observed ranged from 31 percent to 75 percent. DOE is missing opportunities to use its available capacity in part because it no longer emphasizes that opportunities for sharing should be considered. The only exception to this situation occurs at the National Energy Research Supercomputing Center at Lawrence Berkeley, which is set up to be a user facility. At this site, sharing with off-site users funded by DOE is substantial. However, there is little sharing overall. With about 41 percent of its existing capacity—almost 1.7 trillion operations per second—unused, DOE is missing opportunities to better share supercomputers among sites as an alternative to buying or leasing new machines. DOE is underutilizing its existing supercomputers. According to utilization data we obtained from DOE’s laboratories, the average utilization rate is about 59 percent overall, which is low in comparison with the higher rates (70 to 75 percent) reported at Lawrence Berkeley and other laboratories. With substantial additional capacity being added in fiscal years 1998 through 2000, overall utilization rates may decline even further. Although DOE expects usage to increase dramatically when the ASCI program is further developed, the extremely large size of the ASCI computers means that if even a small percentage of the capacity of those machines is available for sharing, they could potentially meet all of DOE’s other supercomputing needs. However, DOE cannot say whether or how much unused capacity it has because it no longer monitors supercomputer workloads and utilization, even when a laboratory is seeking funding for a new machine. Thus, the Department lacks basic information on how effectively the machines are being used. The utilization rates for supercomputers varied widely at the laboratories we visited, from about 31 percent to about 75 percent (see table 3.1). Because DOE does not maintain this information, we asked DOE laboratories to generate utilization data for each of their supercomputers from available site records. Data were available for 35 machines at seven laboratories. While table 3.1 displays utilization for fiscal year 1997, data we obtained for fiscal years 1994 through 1997 showed similar results. Utilization rates for individual machines varied because of a number of factors, including whether the machine is new or old, or an experimental or a more stable production model. Laboratories’ supercomputer officials told us that in some instances, researchers prefer some supercomputers more than others because the preferred machines are more reliable or run the researchers’ computer programs more efficiently. On the other hand, some machines at sites with particularly low utilization rates are old machines that are being phased out—such as the Pacific Northwest supercomputer listed in table 3.1—or new machines that are still being phased in. The highest overall utilization rate was at Lawrence Berkeley, which is a designated user facility available to any researcher in the United States funded by DOE’s Office of Energy Research. This factor probably contributes to the relatively high utilization of the supercomputers at this facility and demonstrates the benefits of sharing supercomputing resources. While recognizing that various factors can affect utilization rates, we nevertheless believe that utilization rates of 59 percent or lower show that these computers are being underutilized. Arguably, the threshold for underutilization could be set even higher, at 70 percent or more, since at least one site exceeds 75-percent utilization and several individual machines’ rates exceeded 90 percent. An alternative way of looking at utilization is to consider how many of the available processors are used to run very large jobs. The largest machines—more than 128 processors for this review—are also the most expensive supercomputers acquired by DOE. The acquisition of these machines is typically justified by the need for very large machines to run very large programs simultaneously across many processors in order to complete the work in a reasonable period of time. Ideally, most of these machines should be running very large programs most of the time or at least a significant percentage of the time available. If a facility does not have a significant number of large jobs to run, it may be more cost-effective to buy one or more smaller supercomputers to run the smaller programs and to look for the opportunity to share a large machine with another facility. In fact, the laboratories’ data showed that the largest machines are severely underutilized. During 1997, less than 5 percent of the jobs run on the largest supercomputers at DOE laboratories used more than one-half of the available processors. In other words, these supercomputers are severely underutilized for the types of programs that were used to justify their acquisition. In many cases, these larger machines are being used to run a large number of smaller programs that would have fit on smaller, less expensive supercomputers. In some cases, such as the ASCI computers at Livermore, Los Alamos, and Sandia, the computer programs needed to fully use the capability provided by these machines are still being developed. For example, through the end of November 1997, less than 1 percent of the programs run on Sandia’s ASCI Red supercomputer, which can process 1.8 trillion operations per second, used more that one-half of the available processors. Other laboratories may have more very large machines available than very large programs to fill them up. For example, Lawrence Berkeley has a large 512-processor supercomputer that is utilized 75 percent of the time it is available. However, less than one-half of 1 percent of the jobs run on that machine require more than one-half of its processors. Beginning in fiscal year 1999, Lawrence Berkeley plans to replace this 512-processor supercomputer, ranked as the fifth most powerful supercomputer in the world when acquired in fiscal year 1997 for $26 million, with a newer model estimated to cost $27 million and capable of up to 1 trillion operations per second. As previously discussed, the Lawrence Berkeley Laboratory is a designated user facility for all Office of Energy researchers and thus has a fairly high utilization rate. However, locating another large-scale supercomputer at Berkeley may call for careful evaluation, given that two other DOE facilities funded by the Office of Energy Research are already in the process of acquiring, or planning to acquire, new large-scale supercomputers in about the same time frame. As discussed earlier, Los Alamos is now acquiring and installing a $40 million machine with several thousand processors capable of 1 trillion operations per second. The same careful evaluation is called for in the case of the Pacific Northwest Laboratory, which plans to replace its new machine (a 512-processor machine accepted in 1998) with a larger machine in about the same timeframe. Given the large amount of unused capacity at DOE facilities, the new capacity being acquired, and the limited number of large-scale programs that require these very large machines, acquiring a new large machine for Lawrence Berkeley, Pacific Northwest, or any other laboratory may not be justified. Furthermore, as discussed earlier, if even a small percent of the capability of the very large-scale ASCI machines is available for sharing, this availability could meet all of DOE’s other supercomputing needs. In the past, under a DOE order on computer management and acquisition (Order 1360.1b), cancelled in September 1995, DOE’s operations offices and headquarters information technology managers were responsible for collecting and analyzing workload and other performance data. They used these data to help ensure that the Department’s information technology resources—including supercomputers—were being used to their maximum effectiveness. The order specified that, commensurate with program requirements, computer managers analyze performance data to define workload trends and identify problems. These analyses were to help them to adjust workloads, maximize return on investments, and assist in projecting future workloads, among other things. Under the old order, DOE’s operations offices were routinely involved in overseeing laboratories’ management of computers, including supercomputers. However, as further discussed in chapter 4, DOE canceled the order on computer management and acquisition, replacing it with a more general order on information technology management (O 200.1, September 30, 1996), which considerably reduced DOE’s oversight over laboratories’ information technology acquisitions. Under the new order, operations offices are no longer responsible for overseeing laboratories’ computers (including research computers/supercomputers) and no longer collect workload and performance data on them. As a result, DOE cannot systematically monitor existing utilization rates before investing in additional supercomputers. When a laboratory is seeking funding for a new supercomputer, existing workload and utilization rates are not routinely calculated or factored into the decision-making. Given the amount of existing unused capacity and planned growth in capacity, DOE is missing sharing opportunities because it does not emphasize to its program offices and laboratories that they should be looking for them. Only a limited amount of supercomputer sharing occurs at DOE’s laboratories. Most sharing occurs at the Lawrence Berkeley’s National Energy Research Supercomputing Center, which was specifically created as a user facility and is shared among DOE-funded users from across the country. The facility, funded by DOE’s Office of Energy Research, has six supercomputers, associated data storage devices, and other related hardware. According to officials, the facility serves about 2,000 users at the Berkeley Laboratory, other national laboratories, universities, and industry across the country. Some sharing also takes place at other DOE laboratories. Lawrence Livermore reported that over 30 users from Los Alamos and Sandia currently use its ASCI Blue supercomputer, and a variety of users from Livermore and Los Alamos use the ASCI Red supercomputer at Sandia. However, the Los Alamos and Livermore laboratories are in the process of installing their own ASCI-funded supercomputers, which will each be capable of over 3 trillion operations per second; in contrast, Sandia’s ASCI Red machine is capable of 1.8 trillion operations per second. In all likelihood, this huge increase in capacity at Los Alamos and Livermore will decrease the use of the Sandia machine. The amount of existing unused supercomputer capacity in DOE’s laboratories indicates that opportunities for sharing are being missed. For example, in a May 1995 report, DOE’s inspector general criticized the Department for failing to consider alternatives to buying a $13 million machine at Pacific Northwest’s Environmental Molecular Sciences Laboratory. The report stated that three other sites “already had the computer systems that could fulfill the needs of the new Research Laboratory.” This is the same supercomputer system that Pacific Northwest had already started planning to replace, even before it had completed its final acceptance testing of the machine and placed it in service. In addition, planned new capacity to be added in the next year may compound the problem. As shown in table 3.2, over 40 percent of DOE’s total existing supercomputing capacity of over 4 trillion operations per second is not being utilized, and additional capacity of 1 trillion operations per second is planned for delivery within the next year. The lack of emphasis on sharing may be especially true at DOE’s weapons laboratories, where ASCI machines with huge capacities are being built. According to officials of the weapons laboratories and of DOE’s defense programs, they look for opportunities to share supercomputers within the ASCI program, but they believe that sharing among DOE’s programs and laboratories is limited by various technical factors, including the state of communications links between them and problems with alternating between classified and unclassified computer operations. While these may be legitimate concerns at the level of 100 trillion operations per second, which is envisioned for the future and discussed later in this chapter, in our view they are not legitimate concerns at the current level of operations, as demonstrated by the experience at Lawrence Berkeley. Currently, four supercomputers at Sandia Laboratory have been using less than 40 percent of their available capacity. In addition, Los Alamos is building two supercomputers in the same room, which when complete will both likely rank among the top 5 to 10 supercomputers in the world and cost a total of about $174 million. One system, the ASCI Blue Mountain machine, is designed to achieve a speed of 3.1 trillion operations per second at a planned cost of $134.4 million. The other system, the Energy Research program’s Nirvana Blue machine, is designed to achieve a speed of 1 trillion operations per second at a planned cost of about $40 million. While this effort at Los Alamos might appear to be an example of supercomputer sharing across programs, in fact the two DOE program offices involved have no formal agreement to collaborate in building or using the two machines. However, they initially told us that the goal in building the two machines at the same laboratory was to achieve synergy in the development of numerical algorithms, hardware, and software. DOE officials initially spoke of connecting the two machines to achieve a peak performance of up to 4 trillion operations per second. However, a recent statement by the head of the ASCI program raises questions about this collaboration. He told us that he would like to see the Office of Energy Research remove the “Blue” designation from its machine to make it clear that this machine is not associated with the ASCI program. DOE also is adding outside ASCI capacity while unused capacity exists at the weapons laboratories. Total existing unused capacity and planned added new capacity within the three ASCI program laboratories (Livermore, Los Alamos, and Sandia) is substantial. Despite this, in February 1998, DOE, through its Lawrence Livermore National Laboratory, leased additional computer capacity of about 200 billion operations per second from the Pittsburgh Supercomputer Center (formerly funded by the National Science Foundation) for 1 year at a cost of $4.5 million, in order to support the ASCI Strategic Alliances Program. DOE’s existing unutilized supercomputer capacity at the time of the new lease was more than 8 times the added capacity the Pittsburgh facility would supply. In addition, the planned new DOE capacity scheduled to come on line in fiscal year 1998 alone is 5 times greater than the amount of added capacity leased from the Pittsburgh facility. While, this decision may have been made in part because the program has not resolved how it is going to provide access to foreign nationals working at its university partners, there appears to be sufficient other capacity available in DOE to have met some or all of this need. According to DOE officials, they performed an informal analysis of the available supercomputing capacity within the laboratories, for which there is no documentation, before Livermore entered into this $4.5 million contract. The lack of documentation is not surprising because, as noted earlier, DOE does not require its laboratories to keep utilization data and the program offices that make most funding decisions do not routinely consider such information or the option of sharing existing resources. According to DOE, if used to their full potential, the supercomputers of the future will process and generate more data than can be effectively handled by DOE’s existing communications infrastructure and thus could hinder the ability to share supercomputers among sites. As discussed in chapter 2, the ASCI program’s ultimate goal is to build a supercomputer capable of 100 trillion operations per second, or over 25 times the capability of all existing DOE supercomputers. Machines of this scale will generate enormous amounts of data and could potentially overwhelm DOE’s communications infrastructure if not adequately planned for. For example, ASCI officials at Livermore estimate that the classified wide area network that handles their transmissions is currently 100 to 300 times too small to support their highest computing needs in the future. Research is under way as part of the ASCI program to address this issue. DOE-funded supercomputers are underutilized in terms of both the percentage of time they are being used and the size of the programs being run on them. We believe that two factors contribute to the underutilization of DOE-funded supercomputers. First, DOE does not monitor its laboratories’ supercomputer workloads and utilization and does not require that such information be considered when deciding to acquire new supercomputers. Second, DOE no longer requires the contractors and universities that operate its national laboratories, nor its program offices that provide the funding, to address opportunities for sharing supercomputers when justifying the need for new supercomputers. At a minimum, we would expect to find documentation of (1) workloads and utilization rates and (2) sharing opportunities within DOE’s existing supercomputer portfolio when the acquisition of a new supercomputer is being contemplated. Without considering such information, decisions to acquire new supercomputers are, in essence, being made in a vacuum. We believe that there are opportunities for DOE to rectify the low utilization rates for DOE-funded supercomputers by increasing the general sharing of supercomputers among sites and by concentrating the very large programs at one or more of the existing supercomputers, which also are underutilized in terms of running very large programs. Such action could lead to a rise in the overall utilization rate for supercomputers and could result in the more effective use of the largest machines to run the programs that were the basis for their acquisition in the first place. Taking advantage of these opportunities could obviate the need to acquire as many supercomputers or supercomputers of the size currently planned. We make recommendations in chapter 4 that will address this issue. In its comments, DOE stated that processor utilization is only one dimension of massively parallel computing systems and does not account for the other factors, such as memory size, memory bandwidth, and input/output bandwidth, that could render a supercomputer “fully saturated” at well under a 70-percent utilization rate. While, we agree that these and other factors would prevent DOE from achieving 100-percent utilization, we did not state that DOE should or even could achieve 100-percent utilization. Rather, we concluded that DOE was missing opportunities to improve its low overall utilization rate because it does not monitor utilization or require that opportunities to share supercomputers be considered before making decisions to buy supercomputers. We continue to believe that DOE can improve its utilization of supercomputer resources and achieve an overall utilization rate greater than its current 59 percent rate. DOE’s National Energy Research Scientific Computing facility located at Lawrence Berkeley routinely achieves rates of over 70 percent on its massively parallel supercomputer. DOE argues that such machines are not similar to its ASCI supercomputers because they are stable “production” machines. However, DOE is using commercially available technology to build the large-scale ASCI supercomputers, which are in many ways similar to other supercomputers using the same technology. If DOE could improve its utilization rate by 10 to 15 percent overall, it could save tens of millions of dollars in acquisition costs for new supercomputers. DOE also stated that the 5 percent of the jobs using over one-half of the processors on the ASCI Red supercomputer at Sandia account for 80 percent of the utilization of this machine. DOE also stated that our conclusion that 41 percent of its overall supercomputer capacity is available for sharing was erroneous because of the 80-percent utilization rate cited for the ASCI Red supercomputer. DOE therefore concluded that its supercomputers (1) do not have available capacity to share, (2) are being used for large-scale applications, and (3) have unused capacity that is actually close to zero. DOE also stated that the sharing of the ASCI program machines is very difficult because of national security concerns. We disagree. The ASCI Red supercomputer is used only 43 percent of the total available time, including its use for all large-scale applications. The 80-percent utilization rate cited by DOE represents the portion of the 43 percent total use devoted to large-scale programs—in other words about 34 percent. Thus, a large proportion of this machine, up to 57 percent of total available time, is still available for use by others. With regard to the sharing of the ASCI machines, they were originally planned and are being installed to allow just this type of sharing. The three ASCI supercomputers are designed to have both classified and unclassified modules that can also, after following proper procedures, be linked together to run the largest programs. In fact, one of the requirements of the ASCI Red supercomputer was that it could be switched between classified and unclassified uses in less than 30 minutes. In addition, ASCI program documents state that 10 percent of the capacity of these machines will be available to users from outside DOE’s laboratories, such as the universities participating in the ASCI program’s research. DOE has not effectively overseen the acquisition and use of supercomputers, and its proposed implementation of the Clinger-Cohen Act will not improve its oversight. The Department does not have a process in place to ensure that supercomputer acquisitions are fully justified and represent the best use of funds among competing priorities. Instead, its existing program planning, project management, and budget formulation processes focus more on overall research projects than on the acquisition of supercomputers that support those projects. As a result, new systems are planned and acquired without DOE oversight, while substantial unused and underutilized capacity already exists within DOE. In April 1998, DOE outlined plans for a new process to comply with the Clinger-Cohen Act, which requires that federal agencies implement a comprehensive, efficient approach to acquiring and managing information technology. DOE’s new process separately manages administrative and scientific computers, leaving the responsibility for scientific computers—including supercomputers—to individual program offices. As envisioned, this approach may allow DOE’s program offices to continue acquiring supercomputers outside the Department’s normal process for implementing the Clinger-Cohen Act. This approach, contrary to what is envisioned in the Clinger-Cohen Act, effectively places the vast majority of DOE’s information technology resources outside the purview of the Department’s chief information officer. DOE has established criteria for designating projects as “strategic systems” if they cost over $400 million, are an urgent national priority, are high risk, have international implications, or are vital to national security. The purpose of designating strategic systems is to ensure informed, objective, and well-documented decisions for key events, such as changes to baseline costs and schedules. The ASCI program will cost about $4 billion from fiscal years 1996 through 2010, is an urgent national priority because of national security concerns, and has international implications because it is a major factor in United States’ support of the Comprehensive Test Ban Treaty. In addition, the program is high risk because it seeks to advance the state of the art in supercomputing and simulation well beyond current capabilities, has already experienced delays, has had its projected costs increased, and depends on as yet unknown technologies for success. However, the program has not been designated as a strategic system. Neither DOE’s existing processes for research planning nor for overseeing information technology focus on the acquisition and use of supercomputers in an independent, comprehensive manner. Consequently, as discussed in earlier chapters, no one person or office within DOE knows how many supercomputers are at the national laboratories, what they cost, or how they are being used. As a result, new systems are planned and acquired without departmental oversight, while substantial unused and underutilized capacity already exists. DOE’s program offices, including its Office of Defense Programs and Office of Energy Research (the program offices that acquire most of DOE’s supercomputers), conduct their own, largely independent, research planning efforts in keeping with their separate program missions. These offices have research planning activities that generally include the following similar steps: continuously redefining programmatic and mission needs, developing and submitting written research proposals (which may include a proposed supercomputer acquisition), and reviewing and selecting proposals for inclusion in DOE’s program planning and budget formulation processes. As these steps indicate, these processes focus more on overall research initiatives than on the specific supercomputer acquisitions that may be included in the initiatives. Furthermore, these activities are not standardized or systematically documented in either of the two program offices or in DOE as a whole. In practice, in the Offices of Defense Programs and Energy Research, research ideas develop in a variety of ways from different sources. Neither office has standardized procedures for reviewing and selecting proposals. Consequently, the Department does not have a systematic framework for weighing competing supercomputing proposals when they are included in research programs. The results of the program offices’ planning activities are to be integrated into the annual budget cycle. In this process, proposed research projects are included in “field work proposal packages” from each national laboratory and subjected to reviews by the operations, program, and budget offices; the chief financial officer, and the Office of the Secretary. Approved projects are incorporated into DOE’s proposed budget, which is subject to review and approval by the Office of Management and Budget (OMB) and the Congress. In DOE’s process, proposed supercomputer acquisitions may not show up in budget documentation and thus are not systematically weighed against one another. For example, the acquisition of the $40 million Nirvana Blue supercomputer at Los Alamos has been included in two larger initiatives, the ASCI program and the Interagency Nondefense High Performance Computing and Communications Program. While those programs have been highlighted in the budget, specific funding and justification for the Nirvana Blue supercomputer has not been highlighted. In other cases, funding and justification may be only partially visible in budget documentation. This is true of the ASCI Blue Mountain supercomputer at Los Alamos. According to DOE and laboratory records, total funding for this machine for fiscal year 1999 is $38 million, but only $2.8 million is visible in budget documentation. Program officials said that the remaining $35.2 million for this machine came from elsewhere in the ASCI budget. Under DOE’s current order on information technology management, “Information Management Program” (Order O 200.1, Sept. 30, 1996), the Executive Committee on Information Management consists of senior program and staff officers and the chief information officer, who has a nonvoting role. The executive committe and chief information officer oversee major information technology investments, and the chief information officer has the specific responsibility of overseeing the Department’s information technology process. Under the order, the executive committee and the chief information officer exercise no controls over supercomputer acquisitions, which are essentially managed and overseen by the program offices and the laboratory management and operating contractors. Thus, over 80 percent of the information management assets funded by DOE are outside of the Department’s information management structure, including most systems (including supercomputers) at the national laboratories. This situation contrasts with past departmental practices. Under a former order, which was canceled in September 1995 (“Acquisition and Management of Computing Resources,” Order 1360.1b) the following requirements were in place: Laboratories planning to acquire supercomputers were required to submit detailed implementation plans justifying the acquisitions to DOE’s headquarters program offices and the office of information resource management for review and approval; Laboratories annually submitted long-range site plans for information resources management to the program offices and the office of information resource management; and DOE’s operations offices were required to determine whether laboratories, before acquiring additional supercomputers or other computers, were maximizing investments, taking into account use data on existing machines, and considering sharing computer assets. According to DOE officials, the order was canceled as part of a departmental effort to streamline the management of the national laboratories and to eliminate unnecessary paperwork requirements. This lack of DOE oversight and controls over supercomputers means that even the most expensive systems are not necessarily visible to the Department’s information technology managers. For example, DOE has not exercised systematic departmentwide oversight over five major planned or ongoing supercomputer acquisitions for Lawrence Berkeley, Livermore, and Los Alamos. These computers, funded by Defense Programs and Energy Research, have a projected total cost of well over $250 million for fiscal years 1998 through 2000. Similarly, we found that a planned $7 million upgrade of Pacific Northwest’s supercomputer—proposed for fiscal year 1999 by the manager of Pacific Northwest’s computing facility and included in a list of ongoing/planned acquisitions supplied to us by Energy Research—was otherwise undocumented within DOE’s and the laboratory’s ad hoc and formal planning processes. The Clinger-Cohen Act requires that DOE and other federal agencies implement an effective process for investing in information technology. DOE recognizes that its existing procedures for acquiring information technology do not follow Clinger-Cohen criteria and decided in April 1998 to implement a new process for planning and overseeing investments in information technology. This new “dual track” process includes investments in both administrative and scientific information technology but subjects them to separate management. In so doing, the process recognizes that DOE’s program offices have viewed supercomputers as research “tools,” not as information technology. The new process is a compromise. It attempts to implement the Clinger-Cohen Act but may allow program officials to keep their existing research planning processes and to continue to acquire supercomputers without subjecting them to any sort of overall investment strategy. The Clinger-Cohen Act of 1996 provides criteria for federal agencies to follow when acquiring information technology, including supercomputers. Among other things, the act requires agencies to implement a process for selecting, controlling, and evaluating information technology investments—a process that assesses and manages the risks of information technology investments on an ongoing basis. As part of the process, agencies are to develop and employ quantitative and qualitative criteria for comparing and setting priorities among alternative information technology investments. OMB guidance, known as the “Raines rules,” lays out the investment criteria to be met. The Clinger-Cohen Act also envisions a key role for the chief information officer, who under the act is responsible for, among other things, promoting the effective, efficient design and operation of all major information resources management processes for the agency; monitoring and evaluating the performance of the agency’s information technology programs; and advising the head of the agency on whether to continue, modify, or terminate a program or project. In April 1998, the Department decided to implement an investment planning and oversight process for major administrative and scientific information technologies. DOE’s new process separates computers into two categories—administrative and scientific, which includes supercomputers—and establishes separate review and oversight processes for each category. Under DOE’s approach, proposals to acquire either administrative or scientific information technologies (above a threshold of $2 million per machine) will undergo an annual review and selection process that DOE calls “dual track.” As envisioned, projects will be screened by a steering committee (co-chaired by the chief financial officer and chief information officer, with program offices’ resource managers as members), which would decide, in step with the budget cycle, which projects are to be reviewed on the administrative track, and which on the scientific (sometimes referred to as programmatic) track. Thereafter, the dual tracks are to be independent in the following way: For investments in administrative information technology, a project team develops a rigorous business case for the acquisition, obtains all stakeholders’ input on requirements, and performs a cost-benefit analysis. Projects are then scored and ranked for technological risk, business benefits, and return on investment. Using this analysis, the Executive Committee on Information Management, acting as the corporate investment board, evaluates projects against broader executive priorities and makes selections for funding. During implementation, selected projects are to be monitored against performance measures established by the project team. In selected cases, post-implementation evaluations will also be conducted. For investments in scientific (programmatic) information technology, the process is less defined. According to the decision document for the process, these investments will not be evaluated using OMB’s “Raines rules,” but instead “program offices will plan and review these systems using appropriate criteria for research conducted by contractors.” In addition, “the Secretary and OMB review systems as part of the budget process.” Also, under a new reporting requirement, scientific information technology is to be included along with administrative information technology in an annual report to OMB. DOE’s proposed process allows the program offices to retain their present processes for acquiring supercomputers and appears to categorically exempt supercomputers from DOE’s normal process to meet the requirements of the Clinger-Cohen Act. According to a staff member in the office of the chief information officer, the precise details of the process for scientific information technology remain to be worked out among the program offices and the chief information officer. However, a Defense Programs official said that from that office’s point of view, the agreed approach does not treat scientific computers as information technology nor subject them to any sort of oversight by the chief information officer. It remains to be seen how DOE will implement in detail the Clinger-Cohen Act for supercomputers. On the one hand, the Department recognizes that its existing processes for scientific information technology may not follow the Clinger-Cohen Act’s criteria. On the other hand, DOE’s program offices view the act’s oversight requirements as a potential impediment to their research efforts. According to program officials, supercomputers are basically research tools, not information technology investments. In addition, the program offices do not want the Department’s chief information officer to play a greater oversight role over the supercomputer acquisition process, as envisioned in the Clinger-Cohen Act. They view the chief information officer as lacking in knowledge of their research missions. The newly approved departmental “dual track” process is a compromise by DOE to implement the act and yet keep scientific information technology (and supercomputers) in a special management category, not under the oversight of the chief information officer or the Executive Committee on Information Management. In this regard, the new process may allow the program offices to continue with their “old” supercomputer acquisition processes, which do not follow the act’s requirements. Another issue to consider in DOE’s implementation of the Clinger-Cohen Act is that most (over 80 percent) of the Department’s information technology funding is spent by its management and operating contractors that run most of DOE’ major facilities, including the seven national laboratories. In this regard, the act defines information technology to include information technology equipment used directly by the agency and equipment used by a contractor under the following circumstances: The contract (1) requires the use of such technology or (2) requires the use, to a significant extent, of such equipment in the performance of a service or the furnishing of a product. However, the act also provides that the term information technology does not include any equipment acquired by a federal contractor that is incidental to a federal contract. To date, DOE has not taken a position on whether it will argue that the Clinger-Cohen Act is or is not applicable to the Department’s scientific information technology that is acquired and used by its management and operating contractors. However, according to DOE, the Department does not normally require its management and operating contractors to use a particular information technology in performing their contracts but leaves such matters to the contractors’ discretion. Thus, according to DOE, scientific information technology, such as the supercomputers acquired and used by its management and operating contractors, arguably do not fall within the act’s definition of information technology and are not covered by the act. DOE acknowledges that a narrow interpretation of the act’s definition of information technology, even where technically and legally supportable, might not be well received by OMB and the Congress. DOE also recognizes that the argument that the technology is incidental is difficult to make when the contractors’ expenditures related to information technology are high—as is the case at the national laboratories where DOE’s supercomputers are located. Furthermore, in most cases, while DOE does not require the use of a particular system, it is clear from the nature of the work it is funding at the laboratories that they need supercomputers to complete the research. Thus, in our view, it would be inconsistent for the Department—given the size, cost, and importance to DOE’s mission of the supercomputers, as well the laboratory contractors’ expressed need for them to carry out their work—to argue that the supercomputers acquired by its contractors are not required to perform the contract or are incidental to the contract, and are therefore outside the scope of the act. DOE may not be managing its largest supercomputer acquisitions appropriately. DOE does not manage even the most expensive supercomputer acquisitions—such as the ASCI system—as strategic system acquisitions requiring the attention of departmental management at the highest levels. DOE has established criteria for designating projects as strategic systems if they cost over $400 million, are an urgent national priority, are high risk, have international implications, or are vital to national security. The purpose of designating strategic systems is to ensure informed, objective, and well-documented decisions for key events, such as changes to baseline costs or schedules. In prior years, the Department has not effectively managed such systems, which have often been late and over budget. DOE currently manages 11 projects as strategic systems, including two systems related to stockpile stewardship—the National Ignition Facility under construction at Lawrence Livermore (estimated to cost $1.1 billion), and the Tritium Supply Facility (total cost to be determined). No supercomputer acquisitions, including those for the ASCI program, are or have been designated as strategic systems. Nevertheless, the ASCI effort to acquire a supercomputer capable of performing 100 trillion operations per second—to simulate the effects of aging and ensure the reliability of nuclear weapons—meets the criteria for being treated as a strategic system. The ASCI program is a separate line item in DOE’s budget, will likely cost about $4 billion from fiscal years 1996 through 2010, is a key part of the stockpile stewardship program, is an urgent national priority on national security grounds, and has international implications because it is a major factor in U.S. support of the Comprehensive Test Ban Treaty. Finally, the ASCI program is high risk because it seeks to advance the state of the art in supercomputing and simulation well beyond current capabilities, has already experienced delays, has had its projected cost increase, and depends on as yet unknown technologies for success. Although these characteristics would appear to make the ASCI program a clear candidate for being designated as a strategic system, Defense Programs officials said they have not managed ASCI as a strategic system because it is a program, not a system, and does not meet OMB criteria for being treated as a capital investment in the budget. However, this position is not consistent with DOE’s November 1995 “Joint Program Office Policy on Project Management,” which noted that some strategic systems are actually programs that include projects. The ASCI program, which has at its heart an ambitious effort to acquire supercomputer systems, would qualify. The ASCI program has to date already spent, or committed to spend, $370 million on four supercomputers and will build two or more significantly larger ASCI supercomputers in the next few years. In terms of total program cost, systems acquisition cost, and other factors, the ASCI program appears to be a prime candidate for designation as a strategic system. DOE has not exercised effective oversight of its supercomputers, and its proposed implementation of the Clinger-Cohen Act will not improve its oversight. Currently, no person or office within DOE knows at a given time how many supercomputers the national laboratories have, what they cost, or how they are being utilized. As a result, new systems are planned and acquired without departmental oversight, while substantial unused and underutilized capacity exists. This gap between capability and utilization may grow even wider as DOE acquires still more powerful and expensive systems. Consequently, DOE lacks assurance that its existing supercomputers are being efficiently and effectively used. The Department also lacks assurance that additions to this inventory represent a well-justified allocation of resources among the its competing priorities. Furthermore, DOE’s proposed “dual track” process appears to categorically exempt supercomputer acquisitions from the Department’s normal process for complying with the Clinger-Cohen Act. In addition, we believe it would be inconsistent for the Department—given the size, cost, and importance to DOE’s mission, as well the laboratory contractors’ expressed need for them to carry out their work—to argue that supercomputers are not required to perform a contract or are incidental to a contract and therefore are outside the scope of the act. Finally, the Department should keep in mind that its most important, valuable supercomputer systems need the oversight of top level management, whether as information technology investments, strategic systems, or both—simply as a good management practice. Given the number and cost of DOE’s existing supercomputers, the unused capacity that exists, and future planned acquisitions, it is increasingly important that DOE better manage the acquisition and use of these systems. Therefore, we recommend that the Secretary of Energy adopt an approach to information technology investment and oversight that meets the criteria set out in the Clinger-Cohen Act. Specifically, under such an approach, DOE should adopt a process for acquiring scientific information technology that (1) pertains to all Department-funded supercomputers; (2) ensures, prior to providing funds for the acquisition of any new supercomputers, that a written justification clearly demonstrates the need, addresses the benefits of acquiring the subject supercomputer, and allows for meaningful comparison with alternative investments; and (3) includes a laboratory-specific analysis of the utilization of existing supercomputers and an analysis of the potential to share supercomputers with other sites and/or programs. We further recommend that the Secretary designate the Department’s most ambitious acquisitions of supercomputer systems—such as those in the ASCI program—as strategic systems warranting oversight at the highest departmental level. DOE disagreed with our recommendations. The Department believes that it has implemented an appropriate process for acquiring information technology—including supercomputers—that meets the intent of the Clinger-Cohen Act. The Department also believes it is unnecessary for ASCI to be designated a strategic system because effective program oversight is in place. In its comments, DOE stated that it has taken steps to implement the Clinger-Cohen Act and has in place a comprehensive managerial review process for supercomputers. According to the Department, its implementation of the Clinger-Cohen Act recognizes that administrative and scientific information technology systems have different purposes and uses and therefore should be managed differently. Accordingly, under the dual-track approach, scientific systems such as supercomputers are to be reviewed by the program offices using appropriate criteria for research. DOE also stated that appropriate rationales and justifications for supercomputer acquisitions are developed during the annual departmental review of program budget proposals. As part of its Clinger-Cohen implementation, the Department will report “aggregate information” on major scientific systems through the chief information officer to OMB. GAO agrees that administrative and scientific computers are used for different purposes. However, we do not agree that an appropriate Clinger-Cohen process for supercomputer acquisitions is yet in place or that supercomputer acquisitions by DOE’s program offices should be exempt from departmentwide oversight. DOE’s acquisition of supercomputers are not always visible in program planning or budget documentation, which tend to focus on the overall research process, not the acquisition of supercomputers, even if they cost tens of millions of dollars. In addition, DOE’s efforts to implement the Clinger-Cohen Act through (1) its new dual-track approach for acquiring administrative and scientific information technology and (2) its plan to collect and report to OMB “aggregate information” on scientific information technology systems do not go far enough toward greater departmentwide oversight. In fact, the dual track approach supports the status quo by specifically excluding scientific information technology from oversight by the chief information officer and the Executive Committee on Information Management. This leaves supercomputer management to the separate program offices responsible for purchasing and using the supercomputers, which are not in a position to oversee and evaluate these systems as part of any sort of overall departmental investment strategy for information technology. Accordingly, we stand behind our recommendation that DOE should adopt a departmentwide process that meets the Clinger-Cohen Act criteria and includes supercomputers and other scientific computing resources. In its comments, DOE also stated that our recommendation to designate the ASCI program as a strategic system was unnecessary, in part because the Department has a Clinger-Cohen type process in place. We disagree that an appropriate Clinger-Cohen process is in place, as discussed above. The process DOE is implementing in response to the act would allow the same program office that has a vested interest in acquiring a supercomputer to be the Department’s oversight body for the acquisition of that supercomputer. In our view, this approach neither follows the act nor achieves the degree of high-level oversight that designation as a strategic system would provide. In this regard, considering that the ASCI program is critical to efforts to ensure the safety and reliability of the nation’s stockpile of nuclear weapons, and meets all other criteria for designation as a strategic system, we continue to believe that greater oversight of the ASCI supercomputers is essential, whether in the form of (1) a comprehensive justification and acquisition process for ASCI and other supercomputers, (2) designation of the ASCI program as a strategic system, or (3) both. The following are GAO’s comments on the Department of Energy’s letter dated June 29, 1998. 1. The letter included a colored attachment, which we did not include in this report. 2. In regard to DOE’s comments on utilization, we agree that various factors would prevent the Department from achieving 100-percent utilization. However, we continue to believe that DOE can improve its utilization of supercomputer resources. DOE’s National Energy Research Scientific Computing facility at Lawrence Berkeley routinely achieves rates of over 70 percent on its massively parallel supercomputer. DOE argues that these computers are not similar to its ASCI supercomputers because they are stable “production” computers. However, DOE is using commercially available technology to build the large-scale ASCI supercomputers, which are in many ways similar to other supercomputers that use the same technology. If DOE could improve its utilization rate by 10 to 15 percent overall, it could save tens of millions of dollars in new acquisition costs for supercomputers. DOE also asserts that it has utilization data for the past 30 years when, in fact, it stopped requiring the laboratories to keep such data in 1996, and no laboratory or DOE official made such an assertion or provided any such data during the course of our review. 2. While DOE points out that the 5 percent of the jobs using over one-half of the processors on its ASCI Red supercomputer at Sandia account for 80 percent of the utilization of this supercomputer, we note that the utilization rate for this supercomputer is only 43 percent. Stated another way, DOE is saying that 34 percent of the available time on its ASCI Red supercomputer is taken up by jobs using over one-half of the available processors. This still leaves significant unused capacity available to run other applications, including additional large programs. We therefore disagree with DOE’s assertion that DOE’s figures equate to “utilization rates that are within expectations for leading-edge supercomputing machines” and that the “true percentage of DOE’s unused supercomputer capacity is close to zero.” 3. We disagree with DOE’s position on the percent of overall capacity available for sharing, and with the Department’s view that sharing of ASCI supercomputers is difficult. In fact, as we point out above, the total use on the ASCI Red supercomputer, including the very large programs, is only 43 percent, and up to 57 percent is still available for other use. With regard to the sharing of the ASCI supercomputers, they were originally planned and are being installed to allow just this type of sharing. To date, the three ASCI supercomputers are set up to have both classified and unclassified modules that can also, after following proper procedures, be linked together to run the largest programs. In fact, one of the requirements of the Sandia ASCI Red supercomputer was that it could be switched between classified and unclassified uses in less than 30 minutes. In addition, ASCI program documents state that 10 percent of the capacity of these supercomputers will be available to users from outside DOE’s laboratories, such as the universities participating in the ASCI program’s research. 4. In regard to DOE’s comment on the implementation of the Clinger-Cohen Act, GAO agrees that administrative and scientific computers are used for different purposes. However, we do not agree that an appropriate Clinger-Cohen process for supercomputer acquisitions is yet in place or that supercomputer acquisitions by DOE’s program offices should be exempt from departmentwide oversight. DOE’s acquisition of supercomputers are not always visible in program planning or budget documentation which tend to focus on the overall research process rather than the acquisition of supercomputers, even those costing tens of millions of dollars. In addition, DOE’s efforts to implement the Clinger-Cohen Act through (1) its new dual-track approach for acquiring administrative and scientific information technology and (2) its plan to collect and report to the Office of Management and Budget “aggregate information” on scientific information technology systems do not go far enough toward greater departmentwide oversight. In fact, the dual-track approach supports the status quo by specifically excluding scientific information technology from oversight by the chief information officer and the Executive Committee on Information Management. This leaves supercomputer management to the separate program offices responsible for purchasing and using the supercomputers, which are not in a position to oversee and evaluate these systems as part of any sort of overall departmental strategy for investing in information technology. Accordingly, we stand behind our recommendation that DOE should adopt a department-wide process that meets the Clinger-Cohen Act criteria and includes supercomputers and other scientific computing resources. 5. In its comments, DOE also stated that our recommendation to designate the ASCI program as a strategic system was unnecessary, in part because the Department has a Clinger-Cohen process in place. We disagree that an appropriate Clinger-Cohen process is in place, as discussed above. The process DOE is implementing in response to the act would allow the same program office that has a vested interest in acquiring the supercomputer to be the Department’s oversight body for the acquisition of that supercomputer. In our view, this approach neither follows the act nor achieves the degree of high-level oversight that designation as a strategic system would provide. In this regard, considering that the ASCI program is critical to the efforts to ensure the safety and reliability of the nation’s stockpile of nuclear weapons and meets all other criteria for designation as a strategic system, we continue to believe that greater oversight of the ASCI program is essential, whether in the form of (1) a comprehensive justification and acquisition process for ASCI and other supercomputers, or (2) designation of the ASCI program as a strategic system, or (3) both. Ed Zadjura, Assistant Director Dave Brack Pat Dunphy Dan Feehan Jonathan N. Kusmik Anne McCaffrey 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. 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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 Energy's (DOE) acquisition and use of supercomputers, focusing on the: (1) number and cost of the supercomputers DOE acquired in fiscal years (FY) 1994 through 1997 and the number and proposed funding for planned major supercomputer acquisitions in FY 1998 through FY 2000; (2) stated need for DOE's supercomputers, the utilization rates for them, and the potential for facilities to share these resources; and (3) process DOE and its contractors employ to validate the need for additional supercomputers and how that process contrasts with the technology investment process set forth in the Clinger-Cohen Act. GAO noted that: (1) DOE has about 17 percent of the world's supercomputing capacity and is planning to almost triple its capacity over the next 3 years; (2) during FY 1998 through FY 2000, the Department plans to acquire five major supercomputers at an estimated cost of $257 million; (3) overall, DOE's national laboratories used only about 59 percent of their available supercomputing capacity in 1997 and are missing opportunities to share these resources; (4) the sharing of supercomputers among DOE's laboratories and with DOE-funded off-site users is not generally considered as a way to better use existing resources and to forgo the need to acquire more supercomputers; (5) DOE has not effectively overseen the acquisition and use of supercomputers; (6) the Department lacks an investment strategy and a defined process to ensure that supercomputer acquisitions are fully justified and represent the best use of funds among competing priorities; (7) instead, the Department's existing management processes separate supercomputer acquisitions from the projects they support, and the Department's chief information officer does not oversee the acquisition or use of supercomputers; (8) as a result, new supercomputers are planned and acquired with little departmental oversight, while underutilized capacity already exists within the Department; (9) DOE's proposed implementation of the Clinger-Cohen Act will not improve departmental oversight; (10) in April 1998, the Department outlined its plan to implement a new investment planning and oversight process for information technology in response to the Clinger-Cohen Act; (11) this proposed approach reflects the view of the Department's program offices that supercomputers are research tools rather than information technology investments; (12) this approach may also allow DOE's program offices to continue acquiring supercomputers outside the Department's normal process for complying with the Clinger-Cohen Act; (13) contrary to what is envisioned in the Clinger-Cohen Act, this approach effectively places the vast majority of DOE's information technology resources outside the purview of the Department's chief information officer; (14) in addition, the cost and significance of the supercomputers being developed under the Department's Accelerated Strategic Computing Initiative (ASCI) warrants that program's being designated as a strategic system subject to the highest level of departmental oversight; and (15) the ASCI program is estimated to cost about $4 billion from FY 1996 through FY 2010. |
VA’s national health care system is one of the largest in the United States and provides enrolled veterans—including women veterans—with a full range of services including primary care, mental health care, inpatient care, and residential treatment. VA’s national health care system is organized into regionally organized VISNs containing individual VAMCs and health care systems made up of multiple VAMCs. In addition, VAMCs operate VA community-based outpatient clinics that provide basic primary care services on site. VHA is responsible for oversight of the provision of health care at all VA medical facilities. Through its medical facilities, VA provides a wide range of sex-specific health care services to women veterans. Basic women’s primary care services are typically provided by women’s health primary care providers who are trained in providing sex-specific primary care to women veterans. Women’s health primary care providers must maintain clinical competency through ongoing education and training and by having a certain percentage of women veterans on their patient panel. Sex- specific primary care for women veterans includes breast examinations, cervical cancer screenings, management of contraceptive medications, and menopause management. More specialized sex-specific care for women is typically provided by a gynecologist. Services provided by a VHA gynecologist include treatment of menstrual disorders, fertility assessments, treatment of gynecological malignancies, and performance of gynecological procedures such as colposcopy. VHA requires all facilities to follow certain standards related to the environment of care in accordance with agency policy and Joint Commission standards. VHA policies specify privacy, dignity, sense of security, and safety considerations that all clinical spaces in VA medical facilities must meet. To ensure compliance with environment of care standards, VHA directs VAMCs to conduct weekly inspections of the facility (known as environment of care rounds), and all patient care areas must be inspected twice every fiscal year. An environment of care rounds team made up of representatives from various facility departments—such as nursing, police service, and environmental management—is responsible for identifying any instances of noncompliance. The women veterans program manager—a staff person at each VAMC or health care system who is responsible for helping to coordinate services for women veterans—is a member of the environment of care rounds team and is responsible for ensuring compliance with requirements related to women veterans. The environment of care rounds coordinator is responsible for examining rounds data and closing the inspection on an online tool, which then automatically sends a notification to the appropriate medical facility departments to address instances of noncompliance; this data then also becomes available to officials at VHA Central Office. According to VHA policy, noncompliance must be addressed within 14 days, including developing an action plan, if necessary. VHA Central Office maintains a database that contains all noncompliance reports and periodically follows up with facilities to check on the status of open reports. If veterans cannot receive timely care within VA or need care that a VA medical facility cannot provide, VHA is authorized to purchase care for veterans from non-VA providers, known as VA care in the community. Non-VA care is frequently used for women veterans because some VA medical facilities do not offer certain types of sex-specific health care, such as mammography or maternity care. According to VHA, based on fiscal year 2014 data—the latest available data at the time of our review— women utilize more non-VA outpatient care than men. Veterans may be referred to a care in the community program by a VHA clinician, but VA medical facility staff must determine the veteran’s eligibility before authorization for care is granted. Current VA care in the community options include: Veterans Choice Program. Choice was established in November 2014 under the Veterans Access, Choice, and Accountability Act of 2014. According to VHA policy, it typically must be the first option considered for providing care in the community to veterans. According to VHA data from March 2016, the majority of care in the community authorizations are for Choice. After a veteran is authorized for Choice, the TPA that administers the relevant Choice network is responsible for (1) contacting the veteran to determine whether she would like to receive Choice care, (2) identifying community providers in the TPA’s network who can meet the veteran’s needs and asking the veteran if she wants to see a specific provider, (3) scheduling an appointment, and (4) ensuring that the veteran’s appointment is within specified time frames. Specifically, after the TPAs have confirmed veterans would like to receive Choice care, the TPAs are contractually required to, among other things: schedule appointments within 5 business days (for routine care) from the time the veteran agrees to participate in Choice or within 2 business days (for urgent care) of accepting the authorization from the referring VA medical facility; ensure that veterans receive care within 30 days of scheduling an appointment for routine care or within 2 business days (for urgent care) of accepting the authorization from the referring VA medical facility; return authorizations to the referring VA medical facility when appointments cannot be scheduled within required time frames; and track the number of authorizations for which they did not schedule appointments for veterans and the reasons why. Patient-Centered Community Care (PC3). In September 2013, VHA awarded contracts to two TPAs to develop regional networks of community providers of specialty care, mental health care, limited emergency care, and maternity and limited newborn care when such care is not feasibly available from a VA medical facility. VHA and the TPAs began implementing the PC3 program in October 2013, and it was fully implemented nationwide as of April 2014. In August 2014, VHA expanded the PC3 program to allow community providers of primary care to join the networks. PC3 is a program VHA created under existing statutory authorities, not a program specifically enacted by law, like Choice. Currently, the two TPAs that administer PC3 also administer Choice. The regional networks built for PC3 provided a basis upon which the Choice networks were established. Individually authorized care. VA medical facilities may approve individual authorizations for care in the community from providers who agree to see VA patients. Historically, individually authorized care was the primary means by which VHA provided care in the community to veterans. Choice is scheduled to expire in August 2017, or when appropriations for the program are expended, whichever occurs first. The upcoming expiration of Choice does not extend to VHA’s other care in the community programs, which VHA has proposed to consolidate into a single program. VHA Central Office lacks complete and accurate data on the extent to which VAMCs are in compliance with environment of care requirements. VHA relies on VAMC staff to self-report their facilities’ level of compliance with environment of care requirements; however, almost all of the noncompliance that we identified at the six VAMCs we visited was not reported to VHA Central Office. In addition, during site visits, we found that levels of compliance with VHA’s environment of care requirements for women veterans varied. VHA Central Office does not have complete and accurate information on VAMCs’ compliance with the environment of care requirements for women veterans and, as discussed later, does not verify the data it receives from facilities. Based on our inspections, we observed 155 instances of noncompliance at six VAMCs we visited, and almost all (152) of these instances had not been reported to VHA Central Office and entered into its database, according to our analysis of VHA data. For four of the VAMCs we visited, none of the instances of noncompliance we observed had been reported to VHA Central Office. Because VHA Central Office uses this database to track facility compliance, the accuracy of the data is vital for the agency to perform its oversight duties effectively. Among the six VAMCs we visited, based on our inspections, we observed varying levels of compliance with selected VHA requirements related to the environment of care for women veterans, ranging from 65 percent to 81 percent. Across all six VAMCs, outpatient clinics had lower rates of compliance than inpatient units and residential treatment programs. Specifically, outpatient clinics complied with 74 percent of selected VHA requirements related to the environment of care for women veterans; in comparison, inpatient units and residential programs across the six VAMCs each complied with 96 percent of selected VHA requirements. (See table 1.) The number of instances where requirements were applicable varies by facility, due to facility size and types of services available. In addition, at the time of our inspections, circumstances may have precluded us from observing each requirement in every instance; for example, some exam rooms may have been occupied or some clinics were not open. VHA requires VAMCs to comply with its environment of care requirements in all instances where they are applicable. (See appendix III for VAMC compliance rates by each individual requirement we inspected.) Outpatient setting. Across the six selected VAMCs, rates of compliance with the selected outpatient environment of care requirements varied. Figure 1 shows how frequently each of the VAMCs was in compliance with the applicable environment of care requirements in the outpatient areas we reviewed. Some common areas of noncompliance that we observed in outpatient clinics included the following: Lack of auditory privacy at check-in clerk station. VHA policy requires that check-in clerk stations must be positioned in a way that protects the privacy of patients who are checking in. However, over one-third (14 out of 40) of all check-in stations we observed across the selected VAMCs were located in such close proximity to the waiting room area that conversations between the patient and the check-in clerk could be heard by other patients. Only one of the six VAMCs we visited ensured adequate auditory privacy at the check-in clerk station in all outpatient clinical settings. Lack of auditory privacy in procedure and testing areas. VHA policy requires that patients be assured auditory privacy while they are in procedure and testing areas to help protect the confidentiality of their health conditions and treatments. However, in over one-third (11 out of 32) of all outpatient clinics in the selected VAMCs, we observed at least one examination room from which conversations between a patient and provider could be heard from the hallway despite a closed door. Only one of the six VAMCs that we visited was fully compliant with VA’s requirement of auditory privacy in all procedure and testing areas. Privacy curtains not present in all examination rooms. VHA policy requires that all examination rooms be equipped with a privacy curtain. However, in over one-quarter (8 out of 28) of all outpatient clinics that we observed where this requirement was applicable, at least one examination room where women veterans could be asked to disrobe was missing a privacy curtain. Additionally, in many exam rooms where privacy curtains were present, the curtains were positioned in a way that did not adequately shield adjustable exam tables. Figure 2 (right) shows an example of an examination room we inspected that was missing a privacy curtain. In addition, the examination room featured an adjustable exam table placed with the foot facing the door. Both of these are inconsistent with VHA policy. Sanitary products not available in all women’s restrooms. According to VHA policy, sanitary napkins and tampons must be made available in all women’s restrooms. However, in over half (40 out of 69) of all women’s restrooms that we inspected across the six selected VAMCs, there were no sanitary napkins or tampons provided. One facility official stated that she places sanitary products only in the restrooms that are most frequently used by women, but this is inconsistent with VHA policy. Unrestricted access to examination and procedure areas. According to VHA policy, access to clinic examination and procedure areas must be limited only to authorized clinic staff and patients with appointments. However, 38 percent (15 out of 39) of the examination and procedure areas that we observed across the selected VAMCs either had unlocked doors that allowed for unrestricted access or were adjacent to other unrestricted clinic hallways, potentially allowing non-clinic staff or individuals that are not patients into the exam area. Inpatient setting. The only instances of noncompliance that we observed in inpatient units were the following: Two out of the 12 units we visited did not have privacy curtains available in every examination room. While visiting one unit, we observed a staff member entering a patient room without knocking. Residential treatment programs. The only instances of noncompliance that we observed in residential treatment programs were the following: One out of the seven programs we visited did not have appropriate private space for women veterans to visit with children. While visiting one program, we observed a staff member entering a patient room without knocking. We found weaknesses in VHA’s oversight processes of the environment of care rounds and related policies. Specifically, we identified the following weaknesses: Environment of care rounds not always conducted in a thorough manner. VHA requires all patient care areas in a medical facility to be inspected twice per fiscal year. According to an official at one facility, when environment of care rounds are conducted at a time of day when care is being provided, the rounds team will not inspect examination rooms and other areas that are being used. As a result, the environment of care rounds team may not inspect every room in a facility twice per fiscal year, as required. Additionally, we found that the checklist—which was developed by an environment of care field advisory committee and is used across VAMCs to conduct the environment of care rounds—lists only 22 requirements for the environment of care, while VHA’s women’s health handbook contains 46 requirements. For example, the checklist does not require inspection teams to examine whether clinical procedure and testing areas have auditory privacy. In our review of the six selected VAMCs, we found that all six exhibited noncompliance with women’s health handbook requirements that are not included on the environment of care rounds checklist. Responsibility for addressing noncompliance not always clear. At three of the selected VAMCs we visited, facility staff were unable to identify the medical center department, such as engineering or building maintenance, responsible for correcting identified instances of noncompliance with certain environment of care policies. Without clearly delineated roles and responsibilities, instances of noncompliance are not addressed in a timely manner. For example, at one selected VAMC, we observed a privacy curtain missing from a primary care exam room. The provider who uses this room explained that she reported this noncompliance to the facility’s maintenance department but was told that the replacement of the curtain was not the responsibility of the maintenance department. When we spoke with the provider, it had been 6 months since she had reported the noncompliance, and the issue had still not been addressed. Furthermore, this instance of noncompliance was also among those that the VAMC had not reported to VHA Central Office. No systematic process to verify that medical facilities conduct thorough reviews and fully report noncompliance issues. VHA Central Office does not have a systematic process to independently verify the compliance information it receives from VAMCs. According to an agency official, VHA is largely dependent on the environment of care rounds coordinator at each facility to report information on instances of noncompliance to VHA by entering this information into VHA’s data system. However, VHA does not verify the accuracy and completeness of this information. VHA Central Office officials told us that they do conduct periodic site visits to VAMCs to review the work done by facilities’ maintenance departments, and that one component of these reviews is examining the VAMCs’ compliance with environment of care standards. According to VHA officials, only 4 of these visits were conducted in fiscal year 2015, and 9 of the 12 visits scheduled for fiscal year 2016 were conducted by June 2016. In addition, the sites to be reviewed are not selected randomly but instead are selected based on a request from VAMC or VISN leadership. In our 2010 report, we found similar problems with data accuracy and a lack of clarity in delegated responsibilities. Specifically, none of the medical facilities we visited had fully reported their noncompliance, and we recommended that the agency establish a process to independently validate facilities’ self-reported compliance with environment of care requirements for women veterans. At the time, VA agreed with our recommendation, and agency officials told us that VHA Central Office directed VAMCs to report, on a quarterly basis, information on their noncompliance with the environment of care standards. Agency officials also told us that VHA Central Office directed VISNs to verify this information by conducting separate environment of care rounds as part of the VISNs’ oversight of VAMCs. However, our current findings suggest that there are weaknesses in the operational effectiveness of these actions. Additionally, according to VHA Central Office officials, as of July 2016, VISNs are not conducting these rounds and verifying the extent of compliance among VAMCs. We have previously expressed significant concerns about inadequate oversight and accountability within VA, including that VHA’s oversight efforts have been impeded by the agency’s reliance on facilities’ self-reported data, which lack independent validation and are often inaccurate or incomplete. This failure to verify reported information is inconsistent with federal internal control standards for monitoring, which call for management to establish activities to monitor the quality of performance over time and promptly resolve the findings of audits and other reviews. Additionally, the lack of thorough inspections and of clearly delegated responsibilities is also inconsistent with federal internal control standards for control environment, which require management to establish an organizational structure, assign responsibility, and delegate authority to achieve agency objectives and to evaluate performance and hold individuals accountable for their internal control responsibilities. By not acting in accordance with federal internal control standards, VHA does not have reasonable assurance that its facilities are meeting the agency’s standards when delivering care to women veterans. Our analysis of VHA data shows that the number of VHA gynecologists increased about 3 percent nationally from fiscal year 2014 to fiscal year 2015. Specifically, in fiscal year 2014, there was the equivalent of about 75 full-time gynecologists, and in fiscal year 2015, the number increased to the equivalent of about 77 full-time gynecologists. While the increase in gynecologists exceeded the rate at which women veterans enrolled in VA’s national health care system for the same time period, it remains unclear whether the number of current VHA gynecologists is sufficient to meet demand and whether the distribution of these gynecologists across VA medical facilities is optimal. Thirty-nine of 145 VAMCs or VA health care systems in fiscal year 2015 (about 27 percent) did not have an onsite gynecologist. VHA Central Office officials said that, based on workload, not all VA medical facilities need an onsite gynecologist, and women veterans may receive necessary gynecological services through a care in the community program. At facilities where onsite gynecology was available, the number of VHA gynecologists available to treat women veterans varied. In fiscal year 2015, the number of full-time equivalent gynecologists (for VAMCs or VA health care systems that had them) ranged from 3.18 (Gainesville, Florida) to 0.02 (Dayton, Ohio), which corresponds to less than 1 hour per week. VA data also show that the number of completed gynecology appointments increased across VA, from about 81,000 in fiscal year 2014 to about 85,000 in fiscal year 2015—an increase of about 5 percent. The increase in completed gynecology appointments suggests a greater overall utilization of gynecology services in VA medical facilities. (See appendix IV for more information on the number of full-time equivalent gynecologists by VISN and the number of completed gynecology appointments by VISN.) Our analysis of VHA data indicates that the number of women’s health primary care providers increased by almost 15 percent from fiscal year 2014 through fiscal year 2015. Specifically, in fiscal year 2014, there were 2,130 providers, and in fiscal year 2015, there were 2,439 providers. The increase in providers significantly outpaced the increase in women veteran enrollment (1 percent) during the same time period. In addition, VHA data show that the number of completed women’s health appointments increased across VHA, from about 304,000 in fiscal year 2014 to about 331,000 in fiscal year 2015—an increase of about 9 percent. VHA data show that a women’s health primary care provider was available to see veterans about 31 clinical hours per week, on average, at the end of fiscal year 2015. However, that availability included any clinical time women’s health primary care providers spent seeing male veterans. Because women’s health primary care providers see both men and women, according to VHA, it is highly likely that a typical women’s health primary care provider was available for less than 31 hours per week to see women veterans. When VHA adjusted clinical availability data by the proportion of women veterans seen for primary care at each VA medical facility, the data show that a women’s health primary care provider’s availability was estimated at about 6 hours per week, on average, at the end of fiscal year 2015. Fiscal year 2015 was the first year for which VHA collected and validated data on the clinical availability of women’s health primary care providers, and according to VHA officials, the data are considered preliminary and not yet robust enough to compare with the demand for services. Despite the increase in providers nationally, VHA data show that 17 percent of VA community-based outpatient clinics that provide primary care and 3 percent of VAMCs or VA health care systems lacked a women’s health primary care provider at the end of fiscal year 2015. Specifically, 151 out of 881 outpatient clinics that provide primary care and 4 out of 155 VAMCs lacked a women’s health primary care provider at the end of fiscal year 2015. (See appendix V for more information on the number of outpatient clinics that provide primary care lacking a women’s health primary care provider.) At least 1 of the 4 VAMCs lacking a women’s health primary care provider also lacked an onsite gynecologist based on VHA fiscal year 2015 data. The fact that nearly 18 percent of VAMCs and outpatient clinics providing primary care lacked a women’s health primary care provider in fiscal year 2015 suggests that VHA may face challenges ensuring that all women veterans have timely access to these providers, as required under VHA policy. Specifically, each VA medical facility must ensure that eligible women veterans have access to comprehensive medical care that is comparable to care provided to male veterans, and veterans should not wait more than 30 days from either the date an appointment is deemed clinically appropriate by a VA provider or, if no such clinical determination has been made, the date a veteran prefers to be seen for care. A VHA official told us that if a women’s health primary care provider is not available at a veteran’s local facility, women veterans can seek sex- specific care at other VA medical facilities, though in these cases women veterans may face longer wait times and potentially longer driving distances. Eligible women veterans may also receive care through Choice or another care in the community program. In our interviews with VHA officials, they acknowledged a shortage of women’s health primary care providers at VA medical facilities. A VHA official told us that facilities have difficulty recruiting and retaining primary care providers who are interested and proficient in caring for women veterans, particularly in rural areas. According to an agency memo, VHA needs at least 675 additional women’s health primary care providers, under a guiding principle that each VA medical facility—VAMCs and community-based outpatient clinics—should have, at a minimum, two women’s health primary care providers. In addition, according to the agency memo, VA medical facilities with 2,000 or more women veteran enrollees should have the equivalent of an additional one full-time women’s health primary care provider for every 1,000 women veteran enrollees or fraction thereof. According to the memo, these providers do not all have to be new hires, but could be drawn from VHA’s existing pool of primary care providers and trained to provide sex-specific care. According to VHA, existing providers may participate in a VHA-sponsored women’s health training to become women’s health primary care providers, unless providers already possess the necessary training and experience. While VHA has taken steps to hire and train additional women’s health primary care providers, these efforts have not yet yielded a sufficient number of such providers. According to VHA, as of August 2016, using funding from the Veterans Access, Choice, and Accountability Act of 2014, VHA had hired 45 women’s health-specific providers, including 11 gynecologists, since September 30, 2015. However, due to subsequent turnover in staff as well as growth in the demand for services, VHA reported that the number of women’s health primary care providers needed to meet VHA’s criteria of a minimum of two per VA medical facility has remained approximately the same. A VHA official told us that the agency has a plan to train existing VHA providers so that there will be at least 500 additional women’s health primary care providers in fiscal year 2016. According to VHA documents, 305 providers attended the agency’s national training program in the spring and summer of 2016, and a VHA official said an additional 230 providers will be trained by the end of fiscal year 2016 at nine different VA locations across the country. Our analysis of VHA data show that the number of obstetricians and gynecologists participating in Choice networks nationally increased significantly from about 6,200 in May 2015 to 10,100 in May 2016, an increase of about 64 percent. While the number of obstetricians and gynecologists increased, some geographic areas lacked these types of providers, which provided access challenges for women veterans seeking care. For example, our analysis of VHA data for VISN 19 indicated that as of May 2016, there were almost 33 percent more community obstetricians and gynecologists participating in Choice (615) compared to the number of these providers (464) who delivered care to women veterans through individually authorized care prior to the implementation of Choice in fiscal year 2014. However, according to a VHA analysis of VISN 19 based on May 2016 data, certain areas within VISN 19 lacked these providers. (See fig. 3). Specifically, VHA’s analysis found that two VA medical facilities in Montana offered gynecology services, and there were no VHA or Choice obstetricians and gynecologists located north and east of Billings, Montana. Parts of central Utah also lacked VHA or Choice obstetricians and gynecologists. The Salt Lake City/Provo/Ogden area was the only area in Utah that offered VHA gynecology services, and Choice providers were also concentrated in this area. According to the analysis, the areas lacking Choice obstetricians and gynecologists generally had fewer veterans (male and female) relative to other areas of these states. Our analysis of VA data for VISN 10 showed that there were 4 percent fewer non-VA community obstetricians and gynecologists participating in Choice as of May 2016 (431) than there were providers who delivered care to women veterans through individually-authorized care prior to the implementation of Choice (451). According to a VHA analysis of VISN 10 based on May 2016 data, 15 percent of Choice obstetricians and gynecologists in VISN 10 are located outside of VHA’s gynecology service areas—the roughly 40 miles surrounding a VA medical facility—suggesting that most Choice obstetricians and gynecologists in VISN 10 are not extending significant access to veterans living outside of VHA’s gynecology service areas. VHA lacks performance measures for the availability under Choice of sex- specific care, such as mammograms, maternity care, or gynecology. In contrast, for another VA care in the community program, PC3—a program that the Choice TPAs also administer—VHA has performance measures to evaluate women veterans’ access to mammography and maternity care, sex-specific services that are not routinely provided at most VA medical facilities. Specifically, as part of PC3, VHA monitors women veterans’ driving distances to obtain mammograms and maternity care services as a measure of network adequacy. One VHA official responsible for monitoring the TPAs’ performance on Choice contract requirements told us that the PC3 performance measures specific to sex- specific care were simply overlooked in the haste to implement Choice. VHA could monitor driving distances for women veterans to receive mammograms and maternity care services delivered through Choice, as the TPAs currently collect these data as part of PC3, according to VHA officials. While VHA doesn’t have performance standards for sex-specific care under Choice, it does have performance standards for all care delivered through Choice. For example, VHA’s contracts with the two TPAs require the timely scheduling and completion of appointments, and VHA also monitors the rates at which the TPAs return Choice authorizations to VHA medical facilities without appointments. However, VHA data show that the TPAs did not meet VHA’s performance standards for providing timely access for veterans, including women veterans. See table 2 for TPA average monthly performance under Choice for certain access-related performance measures. If VHA monitored access to sex-specific Choice care for women veterans, it is possible that delays in care would be identified and actions could be taken to minimize future occurrence. For example, if VHA were monitoring sex-specific Choice care, it might have identified the three cases of delayed maternity care through Choice we found as part of an ongoing review of 196 Choice authorizations for care (of both men and women) from early calendar year 2016. In one case, almost a month and a half elapsed from the time of the veteran’s initial pregnancy confirmation appointment at VA (when she was 6 weeks pregnant) to when the Choice authorization was sent by the VA facility to the TPA for scheduling. It then took two additional weeks for the TPA to attempt to schedule a prenatal appointment; by that point, she was almost 15 weeks pregnant. At 18 weeks pregnant, she finally scheduled her initial prenatal appointment herself, almost 3 months after her pregnancy was confirmed at VHA. In another case, about a week and a half elapsed from the time the veteran’s Choice authorization was created (when she was 6 to 7 weeks pregnant) to when the VA facility sent it to the TPA for scheduling. It then took the TPA nearly a month to reach the veteran and determine if she wanted to participate in Choice. After the veteran agreed to participate in Choice, it took more than 2 weeks for the TPA to schedule an appointment. The veteran was about 14 weeks pregnant by the time her first appointment was scheduled. Federal standards of internal control for monitoring call for management to establish activities to monitor the quality of performance over time and promptly resolve the findings of audits and other reviews. VHA does not currently have performance measures for sex-specific care under Choice. While VA does monitor access to Choice care for all veterans, the past performance of TPAs on access-related measures highly suggests that veterans have problems obtaining timely access to these services as required under Choice. Since women are more likely to use non-VA care than male veterans, according to VHA, the lack of timely access to Choice care may affect women veterans more so than male veterans. In addition, we found instances where women veterans’ care under Choice was significantly delayed and we found a lack of participating obstetricians and gynecologists in some areas, both of which further underscore the importance of VHA’s ability to monitor access to sex- specific care for women veterans. Without performance measures, VHA does not have reasonable assurance that women veterans can obtain timely access to sex-specific care. Our review shows that, despite some progress since 2010, VHA still has a significant problem ensuring that its medical facilities are complying with VHA’s environment of care requirements, which are intended to protect the privacy, safety, and dignity of women veterans when they receive care. This lack of oversight reflects long-standing weaknesses in the policies and guidance for the environment of care rounds inspections process, including how data is collected by facility staff and what information is reported to VHA Central Office. For example, facility staff do not inspect all applicable areas within the facility and the list of requirements they inspect does not include all requirements in the VHA women’s health handbook. In addition, responsibilities for addressing noncompliance are not clearly delegated, and VHA does not verify the noncompliance information it receives from its facilities. These weaknesses are similar to those we identified in our 2010 report, and the problems have persisted even though VHA agreed with our previous recommendations to strengthen oversight of its environment of care standards. These findings further underscore the agency’s continued lack of adequate oversight and accountability, which resulted in our adding VA health care to our High Risk List in 2015. If VHA does not strengthen its environment of care inspections policies, it will remain unable to provide reasonable assurance that it is protecting the privacy, safety, and dignity of women veterans who receive care at VA medical facilities. Our review also suggests that VHA faces challenges ensuring that women veterans have access to sex-specific care at its own medical facilities and through community providers participating in Choice. VHA has acknowledged that there are an insufficient number of women’s health primary care providers across the national health system, and some services, such as mammography, maternity care, and gynecology, are not offered at many VA medical facilities. To the extent that VA medical facilities cannot deliver sex-specific services, women veterans will need to receive these services through Choice or other care in the community programs. However, VHA does not monitor access for women to sex-specific care through Choice. Unless VHA establishes performance measures that monitor access to sex-specific services, VHA will not have reasonable assurance that women veterans have adequate access to these services. To improve care for women veterans, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following two actions: Strengthen the environment of care inspections process and VHA’s oversight of this process by expanding the list of requirements that facility staff inspect for compliance to align with VHA’s women’s health handbook, ensuring that all patient care areas of the medical facility are inspected as required, clarifying the roles and responsibilities of VA medical facility staff responsible for identifying and addressing compliance, and establishing a process to verify that noncompliance information reported by facilities to VHA Central Office is accurate and complete. Monitor women veterans’ access to key sex-specific care services— mammography, maternity care, and gynecology—under current and future community care contracts. For those key services, monitoring should include an examination of appointment scheduling and completion times, driving times to appointments, and reasons appointments could not be scheduled with community providers. We provided a draft of this report to VA for review and comment. While VA was reviewing a draft of this report, the agency requested further clarification on the scope of our second recommendation; as a result, we revised the recommendation to be more clear and specific. In its written comments, which are reproduced in appendix I, VA concurred with our recommendations. VA stated it will charter a workgroup to examine issues related to VA facility compliance with environment of care requirements for women veterans. VA also said it is focused on providing community care to all eligible veterans and will ensure that future community care contracts incorporate areas for improvement based on lessons learned. VA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, the Under Secretary for Health, 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) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. Appendix II: Veterans Health Administration (VHA) Environment of Care Requirements Inspected by GAO Inpatient Units Is patient-identifiable information not visible in hallways? Residential Programs Are client records not left unattended? Are patient names not posted in public areas? Are patient records not left unattended? Are female bathrooms either private or lockable if accessible from unit hallways or other public spaces? Are patient names not called out loudly? When doors are closed, do staff knock and wait until they are invited to enter? Are female bedrooms located in a separate and secured area of the unit or located near main staff offices or nursing stations? Are sanitary napkin and tampon dispensers available in the women’s public restrooms nearest to this clinic or unit? Are privacy curtains present in all rooms (mental health units are exempt)? Is there appropriate private space available for female veterans to visit with children? Are disposal bins available in the women’s public restrooms nearest to this clinic or unit? Are rooms assigned either to only one client or to same-sex clients (except in facilities where spouses share rooms)? When doors are closed, do staff knock and wait until they are invited to enter? Are baby changing tables available in women’s public restrooms nearest to this clinic or unit? Do women patients have access to women- only toilet and shower facilities in close proximity to the patients’ rooms? Are rooms assigned either to only one client or to same-sex clients (except in facilities where spouses share rooms)? Does the interview/intake area have auditory privacy? Do women have door locks, access bar codes, or controlled access ID card scanners? Is the access to hallways restricted for patients/staff not using or working in that clinic area? Is patient-identifiable information not visible in hallways? When doors are closed, do staff knock and wait until they are invited to enter? Do restrooms not open into a public waiting room or high traffic corridor? Are privacy curtains present in all examination rooms? Are examination tables placed with the foot facing away from the door? Do procedure and testing areas have auditory privacy? Is a women’s restroom available within or in close proximity to this clinic? Are sanitary napkin and tampon dispensers available in the women’s restroom nearest to this clinic? Are disposal bins available in the women’s restroom nearest to this clinic? Outpatient Clinics Is special consideration given to privacy and dignity in gynecology? Is special consideration given to privacy and dignity in radiology dressing areas (e.g., mammography)? Is special consideration given to privacy and dignity in ultrasound, transvaginal ultrasound testing, etc.? Number (percentage) of clinics without a women’s health primary care provider 7 (16) 6 (18) 4 (14) 10 (20) 4 (24) 2 (7) 9 (20) 10 (18) 15 (28) 3 (9) 2 (6) 0 (0) 12 (20) 5 (8) 5 (14) 8 (18) 5 (12) 13 (30) 11 (26) 4 (13) 16 (26) 151 (17) In addition to the contact named above, Marcia A. Mann (Assistant Director), Stella Chiang (Analyst-in-Charge), Carolyn Fitzgerald, Arushi Kumar, and Alexis MacDonald made key contributions to this report. Also contributing were Krister Friday, Jacquelyn Hamilton, Emily Wilson, and Vikki Porter. | In 2010, GAO found a number of weaknesses related to care for women veterans at VA medical facilities. GAO was asked to update that study. This report examines (1) the extent that VA medical centers complied with requirements related to the environment of care for women veterans and VHA's oversight of that compliance; (2) what is known about the availability of VHA medical providers who can provide sex-specific care for women veterans at VA facilities; and (3) VHA's efforts to provide and monitor access to sex-specific care for women veterans through Choice. To do this work, GAO reviewed VHA data on environment of care deficiencies; the number, location, and availability of VHA and Choice medical providers; women veteran enrollment; and Choice access-related performance measures. In addition, GAO inspected the environment of care for compliance with VHA policy at a nongeneralizable sample of six VA medical centers, which were selected to achieve variation in different care models, the size of the women veterans' population, and geographical locations. GAO also interviewed VHA Central Office and VA medical center officials. The Department of Veterans Affairs' (VA) Veterans Health Administration (VHA) does not have accurate and complete data on the extent to which its medical centers comply with environment of care standards for women veterans. VHA policy requires its medical facilities, including VA medical centers, to meet environment of care standards related to the privacy, safety, and dignity of women veterans. VHA Central Office relies on medical centers to conduct regular inspections and to report instances of noncompliance, which are compiled in a VHA database. However, almost all the noncompliance GAO identified through inspections at six VA medical centers it visited had not been reported or recorded in the VHA database, and compliance rates ranged from 65 percent to 81 percent. For example, GAO found a lack of auditory privacy at check-in clerk stations and a lack of privacy curtains in examination rooms, as required by VHA policy. GAO also found weaknesses in VHA's oversight of the environment of care for women, including a lack of thorough inspections and limited verification of facility-reported data which results in inaccurate and incomplete data. As a result, the privacy, safety, and dignity of women veterans may not be guaranteed when they receive care at VA facilities. Federal internal control standards for monitoring call for management to establish activities to monitor the quality of performance over time and promptly resolve any identified issues. GAO's analysis of VHA data shows that nationally the number of VHA full-time-employee equivalent gynecologists and the number of women's health primary care providers—VHA primary care providers specially trained in women's health care services, such as breast exams—increased by 3 percent and 15 percent respectively, from fiscal year 2014 through fiscal year 2015, and those percentages exceeded the 1 percent growth in women veteran enrollment during the same period. However, about 27 percent of VA medical centers and health care systems lacked an onsite gynecologist and about 18 percent of VA facilities providing primary care lacked a women's health primary care provider, according to VHA data. VHA officials said not all facilities require onsite gynecologists and facilities may authorize gynecological services from non-VA providers. They acknowledged a shortage of at least 675 women's health primary care providers and have a plan to train at least 535 providers by the end of fiscal year 2016. The Veterans Choice Program (Choice) is a primary option for veterans to receive care from non-VA providers in the community if care cannot be provided at VA facilities. While the number of obstetricians and gynecologists under Choice has increased, some areas lack these providers, according to a VHA analysis. While VHA monitors access-related Choice performance measures (such as timely appointment scheduling) for all veterans, it does not have such measures for women veterans' sex-specific care, such as mammography, maternity care, or gynecology. VHA's data show poor performance on access-related performance measures for all veterans, and GAO found cases where women veterans' maternity care was significantly delayed, suggesting that veterans, including women, face challenges receiving timely access to care. Federal internal control standards for monitoring call for management to establish activities to monitor the quality of performance over time and promptly resolve any identified issues. GAO recommends that VA (1) strengthen the policies and guidance for its environment of care inspection process and (2) monitor women veterans' access to sex-specific care under current and future community care contracts. VA concurred with GAO's recommendations. |
At any given time, participants in the cheese industry may have an interest in buying or selling cheese for immediate delivery. Historically, they could do so by identifying a buyer or seller through their contacts and relationships in the industry or by participating in various centralized markets throughout the United States where industry participants gathered to buy and sell cheese. From 1974 to 1997, NCE was the central market of, and functioned as a surplus market for, cheese. It also served as the primary price discovery mechanism for cheese produced in the United States. In general, before 1987 cheese prices on NCE experienced little volatility, because USDA purchased cheese to ensure that cheese prices did not fall below a certain level. After mid-1988, the volatility of cheese prices increased sharply because of lower price supports for milk, and NCE’s role in price discovery took on additional importance until it closed in 1997. While price volatility does not indicate that manipulation is occurring, the increased volatility in cheese prices, the corresponding effect on milk prices, and a perceived lack of oversight of NCE raised concerns about potential price manipulation. Following a series of investigations and congressional hearings involving NCE, a joint committee composed of a dairy industry trade group and NCE solicited proposals for a new site for the spot cheese market. CME was selected and the spot cheese market began operating there in May 1997. CME, the largest futures exchange in the United States, is a publicly traded corporation that offers a marketplace where various commodities such as dairy products are traded through futures contracts or spot markets. Various financial instruments are also traded on CME. Like NCE, the CME spot cheese market functions as a surplus market for cheddar cheese. Industry participants consider the CME spot cheese market a public price discovery mechanism, and prices are published daily. Contracts for the sale of all varieties of cheese in the United States are generally set using the prices of cheddar cheese established at CME as the reference price. For example, a contract may specify that cheese will be sold based on the previous week’s average price of cheddar cheese set at the CME. The contracts often include a premium or a discount on the current price of cheddar cheese on CME based on factors such as the quality and type of cheese and other costs such as transportation. One of the federal programs designed to assist dairy farmers is the federal milk marketing order (FMMO) program, which is designed in part to improve the income of dairy farmers by stabilizing market conditions and establishing minimum milk prices. Under this program, USDA uses national dairy market price information—including cheese prices—to set the minimum prices that processors must pay for unprocessed milk in specified marketing areas or orders. FMMOs established a four-tier classified pricing system for setting minimum milk prices on a monthly basis, based upon the intended use of the milk. In general, FMMO class prices are determined by formulas that use wholesale dairy product prices. For example, the Class III milk formula uses monthly averages of weekly average butter, cheese, and dry whey prices to set the minimum price of milk that is used in the production of cheeses. According to one industry participant, pricing a commodity based on the prices of products that the commodity is used to produce is unusual. Prior to using the NASS survey as a component to calculate minimum milk prices, USDA used cheese prices from NCE directly as an input in its milk pricing formula. As concerns were raised from industry sources and others about manipulation of cheese prices at NCE, USDA developed the NASS survey of cheese prices as an alternative to using NCE prices. In 1997, USDA stopped using NCE prices in its minimum milk pricing formulas and began using data provided by the NASS survey of cheese prices. USDA has continued to use the NASS survey of cheese prices in certain milk pricing formulas as trading in the spot cheese market occurred at the CME. The CME spot cheese market shares a number of operational and structural similarities with NCE and has certain characteristics that could make the CME spot cheese market susceptible to price manipulation. Like NCE, CME is primarily a surplus market where small amounts of blocks and barrels of cheddar cheese meeting certain technical specifications are traded. Many market participants that traded at NCE also trade at the CME spot cheese market. Moreover, certain market conditions at the CME spot cheese market, including a small number of trades and a small number of traders who make a majority of trades, continue to make this market particularly susceptible to manipulation. NCE and CME share many similarities, including certain trading rules, products traded, the volume of cheese traded, and market participants, but there are differences. According to CME officials, technical rules specific to the CME spot cheese market were developed from the rules used to operate NCE and rules already established by CME for an existing spot butter market. For example, CME trades the same cheese products that were traded on NCE—carloads of 40-pound blocks and 500-pound barrels of cheddar cheese. The CME spot cheese market continues to be a surplus market for cheese on which relatively small amounts of cheese are traded relative to the overall size of the U.S. cheese market. Unlike some commodities, most cheese in the United States is traded through long-term contracts, which generally use the CME spot cheese market price as the reference price and previously used the NCE price. NCE had between 30 and 40 members, including major participants in the cheese and dairy industry, such as large agricultural cooperatives, cheese manufacturers, and processors of cheese. These members accounted for the vast majority of cheese handled and processed in the United States. Likewise, major cheese and dairy industry members participate on CME, including many companies that traded cheese on NCE. CFTC officials estimated that 13 of the 31 CME spot cheese market participants accounted for 60 percent of all cheese produced, processed, or marketed in the United States in 2004. These participants in the spot cheese market represent diverse segments of the cheese and dairy industries, including dairy cooperatives representing many farmers and industry participants that produce, manufacture, and process large quantities of cheese. However, two differences exist between the CME spot cheese market and NCE. First, the names of participants involved in NCE trading were made public. Each member could designate up to five individuals as traders, and the buyer and seller were reported for each trade. Trading at the CME spot cheese market is conducted through a network of professional brokers, the standard practice in many commodities, and the buyer and seller are not publicly reported. However, according to some dairy industry participants, they generally know which brokers represent specific buyers and sellers. Second, trading on NCE occurred only once a week for one 30- minute session. Trading takes place at the CME spot cheese market every weekday for at least 2 minutes and up to 16 minutes, depending on the interest of market participants. Despite the move to CME, the spot cheese market remains a thin market, which in combination with the presence of a small number of traders that make a majority of trades and the spot cheese market’s pricing structure contributes to questions about the potential for price manipulation. A thin market generally has either few transactions; transactions that represent only a small proportion of the total transactions, including those that are priced off that market; or both. CME and CFTC DMO officials, some market participants, and academics generally agree that the CME spot cheese market is a thin market. Little trading occurs on the CME spot cheese market, and the trading that does take place consistently represents a small proportion of the total volume of cheese produced in the United States. According to CFTC officials, from 1998 to 2005, the volume of cheese traded at CME generally represented less than 2 percent of all cheddar cheese and less than 1 percent of all cheese produced in the United States annually. This characteristic is not unique to the CME spot cheese market, as other agricultural commodity markets, such as the CME spot butter market, are also thinly traded. In addition, as shown in table 1, on average only one or two transactions were completed during each trading session in the barrel market, and the average was less than one for most years, indicating that on some days no cheese was traded. The one exception was 1997, when the average number of transactions on the barrel market was more than eight, because the market did not have daily trading at that time. Similarly, on average, fewer than three trades during each trading session were completed in the block market each year. Academic analyses and cheese and dairy industry participants have raised a number of concerns associated with thin markets being susceptible to manipulation. These concerns include the following: Dominant traders may be able to attempt to manipulate prices more easily in thin markets. Prices in thin markets may not reflect supply and demand, even without manipulative behavior by dominant traders. As noted, thin markets raise concerns about the potential for manipulation because of the small number of participants and transactions involved in the market and the ease with which prices can be impacted. For example, in thinly traded markets each individual participant’s activity tends to be more influential than it would be on a market with more transactions and more participants. As a result, it may be easier for a market participant to move prices in a preferred direction over a short period of time with relatively few completed or unfilled transactions. Further, individual transactions to buy and sell cheese that set the market price may not accurately reflect supply and demand. Further, the CME spot cheese market has a small number of traders who make the majority of trades, another factor that contributes to questions about possible price manipulation. Relatively few market participants account for the majority of trading at the CME spot cheese market, as shown in figure 1. Between January 1, 1999, and February 2, 2007, two market participants purchased 74 percent of all block cheese, and three market participants sold 67 percent of all block cheese. During the same time period, four market participants purchased 56 percent of all barrel cheese, and two market participants sold 68 percent of all barrel cheese. Other buyer (7) Other eller (42) Other eller (29) In addition, the CME spot cheese market’s pricing structure, in combination with a thinly traded market and a small number of traders who comprise the majority of trading, contributes to questions about the potential for price manipulation. As on many other financial markets, prices at the CME spot cheese market are based on completed transactions and on unfilled higher bids and uncovered lower offers that are posted by market participants. During a trading session an unfilled bid that is higher than the previous bid or transaction price can result in a higher price. Similarly, an uncovered offer that is lower than the previous offer or transaction price can result in a lower price. For example, on the CME spot cheese market: Between January 1, 1999, and February 2, 2007, the closing price for block cheese fluctuated based on unfilled bids and uncovered offers on at least 17 percent of the trading days. During the same time period, the barrel market closing price fluctuated based on unfilled bids and uncovered offers 28 percent of trading days. Between March 1, 2004, and April 16, 2004, block cheese prices increased from $1.49 to $2.20 per pound, or 48 percent, on the CME spot cheese market based primarily on unfilled bids to buy cheese, with only four carloads of block cheese bought or sold during this period. Between October 26, 2004, and November 19, 2004, block cheese prices rose from $1.57 to $1.80 per pound, or 14 percent, with completed transactions for only three carloads of cheese completed during this period. This pricing structure is not unique to the CME spot cheese market, and price changes based on unfilled bids and uncovered offers may reflect conditions consistent with supply and demand. However, this pricing structure may increase opportunities to ultimately change the price of milk without reference to the actual costs of buying and selling cheese. Finally, although there may be characteristics that raise concerns about price manipulation, certain characteristics of the CME cash cheese market may reduce the risk of price manipulation. According to CME officials and industry participants, the risk of incurring the expenses associated with the actual buying or selling of cheese may deter some market participants from attempting to manipulate prices at the CME spot cheese market. Any CME spot cheese market participant who makes a bid or offer risks acceptance of that bid or offer and the obligation to buy and accept delivery of cheese or to sell and make delivery. Completed transactions for the purchase or sale of cheese can involve a significant expense. While a relatively small number of traders make the majority of trades, market participants represent a significant amount of potential volume of trading. CFTC has found that many large participants in the cheese and dairy industry with diverse interests monitor the CME spot cheese market and are prepared to participate in it. These large industry participants could, for example, buy cheese on the CME spot cheese market if prices fell below a company’s manufacturing costs or sell it if prices rose to a profitable level, potentially countering any attempted manipulation. Several industry participants we interviewed said that they believed that price manipulation on this market would be difficult to sustain, given the number of competing interests. Additionally, the change from once-a-week trading on the NCE market to daily trading on the CME spot cheese market may make sustaining attempted price manipulation more difficult because a trader may have to be active in the market on a daily basis in order to influence prices. Despite allegations of price manipulation, industry participants we interviewed stated that they generally did not believe manipulation was occurring. In addition, industry participants told us that they never stopped using the CME price as a reference price in their long-term contacts. Both CFTC and CME engage in activities that may detect or deter potential price manipulation at the CME spot cheese market. Regular monitoring by CFTC DMO and CME represents a significant change from the level of oversight of NCE, which had received limited monitoring from CFTC and NCE staff. CFTC, as part of its responsibility for the regulation of commodity futures markets, monitors cash markets that affect futures markets, such as the CME spot cheese market. CFTC surveillance staff review trading activities on the market for manipulative activity, including manipulation that may impact the Class III milk futures. Moreover, CFTC Division of Enforcement can act on indications of manipulative activity through CFTC’s authority to enforce the CEA, which specifically prohibits the manipulation of prices of physical commodities in interstate commerce. CME conducts daily surveillance of the CME spot cheese market based on its established rules and internal procedures. Both CFTC enforcement staff and CME investigate and, if appropriate, can take enforcement actions in response to potential manipulative conduct on the CME spot cheese market. However, proving price manipulation is difficult. In recent years, CFTC DMO staff have monitored the CME spot cheese market on a regular basis both to review that prices of related Class III milk futures contracts are consistent with forces of supply and demand and in response to complaints alleging manipulative conduct. CFTC DMO is particularly concerned about manipulative activities in cash markets when prices on those markets could affect the integrity of futures contract prices. The price paid for a Class III milk futures contract is based on the monthly Class III milk price released by USDA, which is heavily influenced by the price of cheese at the CME spot cheese market. Also, because the CEA prohibits manipulating the price of any commodity in interstate commerce, CFTC can take action under its enforcement authority to investigate price manipulation of any commodity, regardless of whether it is related to a futures contract. According to CFTC DMO officials, however, CFTC surveillance staff would be unlikely to monitor commercial activities involving a commodity without a related futures market. CFTC surveillance staff regularly obtain and analyze data on the activities of the CME spot cheese market participants to assist in the detection and also prevention of price manipulation in related futures markets. In 2005, CME began providing CFTC with daily trading data and information on the CME spot cheese market on a monthly basis. CFTC monitors traders with large positions in Class III milk futures and the trades that these large traders make in the CME spot cheese market. As part of its monitoring, CFTC focuses on answering the following questions: 1. Is the Class III milk futures price consistent with supply and demand factors in the cheese industry? 2. How is the monthly Class III milk price released by USDA behaving compared to the CME spot cheese market and other cash prices? 3. Are the largest Class III milk futures traders engaged in trades on the CME spot cheese market that affect the monthly Class III milk price released by USDA? 4. Do the Class III milk futures traders have an incentive to engage in losing trades on the CME spot cheese market in order to benefit a large futures position? In its market surveillance activities, CFTC surveillance staff may use many sources of daily market information. Some of this information is publicly available, including data on the overall supply, demand, and marketing of the underlying commodity; futures, option, and cash prices; and data on trading volume and open contracts. Some of the information is highly confidential, including data from exchanges, intermediaries, and large traders. CFTC Chicago surveillance staff generally review CME spot cheese market transactional data from CME, which include the identities of buyers and sellers and timing of trades, when they see unusual price movements and to summarize the data for informational purposes. CFTC surveillance staff may also interview industry participants, and interviews may include discussions about basic market fundamentals, the traders’ involvement in specific commercial transactions, or the traders’ observations about anything unusual about the CME spot cheese market or other cash transactions. CFTC DMO staff have prepared summary documents analyzing the market four times since 1999, including analyses of participants, volume, and price fluctuations. Generally, they have found that the majority of the cheese industry is represented at the CME spot cheese market and that trading on the market is concentrated among a small number of participants. CFTC has filed no complaints related to price manipulation on this market. These reviews represent another change from NCE, which, according to CFTC officials, CFTC did not monitor regularly. CFTC did review trading activities on NCE in 1997 prior to approving a market for trading in certain milk futures. This review did not identify significant deficiencies or suggest that the market was susceptible to manipulation. In contrast, after a 4-year investigation in which confidential and proprietary information was gathered, University of Wisconsin economists found that the organization of NCE appeared to facilitate market manipulation, but could not definitively conclude that manipulation had occurred, and that NCE was not an efficient price discovery mechanism between 1988 and 1993. Market participants told us that CFTC monitoring of the CME spot cheese market addressed some of their concerns about limited oversight of trading at NCE. In addition to identifying unusual activities or manipulative conduct through its monitoring activities, CFTC also responds to complaints and concerns raised by industry members and the public. CFTC surveillance staff in Chicago collaborate with CME officials to examine trading activities. Since 1999, CFTC Chicago DMO staff have done nine special reviews of trading activity at the CME spot cheese market in response to specific complaints or fluctuations in market prices. These complaints dealt with issues including an allegation that a market participant failed to pay in a timely manner for cheese purchased on the CME spot cheese market, allegations of price manipulation on that market, and concerns about price volatility on that market. According to CFTC officials, the CFTC market surveillance analyst responsible for the Class III milk futures market reviewed these complaints, analyzed the time period or market participants involved in the allegation, and responded to the party that complained. None of these reviews resulted in any legal action taken by CFTC against a market participant. According to trade press reports, CFTC is currently investigating the trading activity of one participant in the CME spot cheese market for potential manipulation of the market. Unless otherwise authorized, CFTC regulations require enforcement investigations to be nonpublic. Therefore, CFTC does not confirm, deny, or comment about possible ongoing investigations. According to CFTC DMO officials, CFTC generally would not take an active role in oversight of the CME spot cheese market without a related futures market because of its interpretation of its responsibilities under CEA and limited resources. However, other federal agencies have responsibilities relating to the manipulation of cash cheese prices even in the absence of a related futures contract. The U.S. Department of Justice (DOJ) has responsibility for investigating possible violations of the antitrust laws and taking appropriate legal action in the courts. DOJ’s authority includes taking action based on unreasonable restraints of trade such as price fixing or manipulation. In addition, the Federal Trade Commission (FTC) is charged by statute with preventing unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. In order to avoid duplicating efforts to pursue allegations of anticompetitive behavior or price fixing, the two agencies developed and maintained a liaison arrangement to determine who would take the lead on any cases involving the CME spot cheese market. Certain other federal and state agencies that observed or monitored trading at NCE no longer do so at the CME spot cheese market. In the past, USDA officials observed trading and published prices established at NCE but do not observe CME spot cheese market trading. Prices are now publicly reported. USDA officials did not provide oversight of NCE and have no oversight role of CME. NCE was also subject to the Wisconsin Department of Agriculture, Trade and Consumer Protection’s jurisdiction over unfair competition and trade practices. According to CME officials, no state agency has a role in overseeing CME or the CME spot cheese market. In addition to monitoring trading in the futures markets and related cash markets, CFTC has general authority, provided by the CEA, over designated contract markets. CME, as a designated contract market, must demonstrate to CFTC that it meets CEA criteria for the prevention of market manipulation, fair and equitable trading, the conduct of trading facilities, and the financial integrity of transactions. In addition to providing market surveillance, CFTC DMO approves and oversees the futures exchanges, including CME, and reviews exchange rules. CFTC also assesses the effectiveness of compliance and market surveillance capabilities and reviews new futures contracts to assess their susceptibility to manipulation. To ensure the market’s financial integrity, CFTC Division of Clearing and Intermediary Oversight reviews the audit and financial surveillance activities of self-regulatory organizations (SRO), including CME. According to CFTC officials, they have not approved CME spot cheese market rules. However, CFTC conducted a rule enforcement review of CME that covered the time period October 2004 to October 2005. This review, which did not specifically include the CME spot cheese market rules, included an examination of the compliance of a number of CME’s programs with CEA, including the audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. CFTC did not make any recommendations for improvements in these areas. Proving actual or attempted price manipulation is difficult, according to CFTC officials. They noted that CEA does not have a specific definition of manipulation. Rather, it has been left to the courts to develop the law through cases or decisions. Accordingly, as established by federal courts and CFTC, proving manipulation requires being able to show the following: The market participant had the ability to influence market prices. The market participant specifically intended to influence prices. Artificial prices existed. The market participant caused an artificial price. Proof of an attempted manipulation requires sufficient evidence of (1) an intent to affect the market price and (2) some overt act in furtherance of that intent. Like the test for manipulation, the test for attempted manipulation depends upon the facts and circumstances of a particular market and its participants. We did not find any studies or court cases that have concluded that there has been manipulation on the CME spot cheese market or NCE. An intent to raise or lower CME spot cheese market prices could be based on a variety of incentives. For example, farmers that produce milk used to manufacture cheese benefit when the price of cheese on the CME spot cheese market is high because the CME spot cheese market influences a broad array of cheddar cheese prices that are included in the pricing formula for Class III milk. Alternatively, a company that largely sells cheese purchased from others could benefit from low CME spot cheese market prices. This is because most cheese plants from which it buys would be using the lower CME cheese prices to set their contract price, but it would sell its cheese at a price not based on CME prices. These factors alone do not imply that price manipulation has occurred—in fact, price manipulation has not been proven—but these incentives appear to contribute to ongoing questions about the susceptibility of the market to manipulation relative to one with more trading or more market participants comprising the majority of trades. Further, identifying actual or attempted manipulation on the CME spot cheese market can be difficult for a number of other reasons. First, because the CME spot cheese market functions as a market to dispose of excess supply or to fill temporary inventory needs, it may not always reflect prices that are consistent with supply and demand in the broader market as market participants attempt to manage short-term inventory needs through the CME spot cheese market. For this reason, determining what constitutes an artificial price can be difficult. In addition, companies may attempt to influence prices without considering their activity to be manipulative. For example, according to one industry participant, traders may act to influence the spread between the prices of barrel cheese and block cheese to keep it in line with general historical trends. Finally, USDA officials and industry participants told us that some market participants used the CME spot cheese market as a forum to “register an opinion” on what they believed cheese prices should be by making bids and offers with the intent to change the price of cheese to more closely align with their opinions of supply and demand conditions. Representatives of two market participants we interviewed said that they did not believe that this activity constituted manipulation on the CME spot cheese market. However, CFTC enforcement officials disagreed and believe that the types of behavior described above may constitute manipulative behavior. CME rules govern its oversight of the CME spot cheese market. CME, as an SRO, is responsible for establishing and enforcing rules governing member conduct and trading; providing for the prevention of market manipulation, including monitoring trading activity; ensuring that futures industry professionals meet qualifications; and examining exchange members for financial strength and other regulatory purposes. CME rules authorize the managing director of regulatory affairs to enforce CME rules and gather all the information necessary to investigate abuses of trading practices. Through this authority, CME monitors trading activities, collects data on its markets, and inspects the books and records of members. In addition, the managing director of regulatory affairs may investigate and recommend institution of disciplinary proceedings for alleged violations of CME rules. CME conducts surveillance and investigations of the CME spot cheese market through its market regulation division. CME’s market regulation division employs market surveillance analysts, one of whom is assigned to monitor the CME spot cheese market, among others. According to CME officials, the market surveillance analyst assigned to the CME spot cheese market monitors daily trading, maintains familiarity with traders and industry news and trends, and reviews large price changes resulting from uncovered bids or offers and determines the identity of market participants. The analyst reviews and analyzes spot call cheese trade activity in relation to Class III milk futures positions. The analyst, along with market regulation staff, handles inquiries and complaints from market participants and firms, contributes to contract specification changes and rule language updates, and regularly participates in problematic delivery-related issues. The analyst physically observes trading at the CME spot cheese market on average three times a week. In addition, the analyst reviews the input of daily trading data into a CME database to ensure that trades are properly recorded and that clearing member firms verify their assigned transactions and provide buyer and seller identification and relevant delivery details. In addition to employing market surveillance staff, CME assigns one investigator to regularly review the CME spot cheese market to identify potential violations of trading practices and determine if trader activity is adversely affecting Class III milk futures. According to CME officials, they have investigated trading activity related to delivery of cheese sold on the CME spot cheese market and have disciplined two traders. However, CME officials told us that CME has only rarely opened formal investigations into traders on the spot cheese market for rules violations. This surveillance is stricter than at NCE, which had rules against manipulating prices but no staff to oversee the market and generally did not investigate trading activities. According to CME officials, CME market regulation staff also review traders’ positions and activities in the CME spot cheese and Class III milk futures markets to determine if a trader’s futures positions would benefit from price changes on the spot cheese market. For example, the market surveillance analyst may look for trading activity on the CME spot cheese market that might directly benefit a trader’s futures positions, such as selling cheese in order to lower prices and benefit a short position in Class III milk futures. The market surveillance analyst for the CME spot cheese market also reviews trading data from both markets for large price changes and market trends. Finally, CME annually provides a dairy forum for CME spot cheese market participants to meet and discuss potential improvements to the spot cheese market. Forum meetings have included discussion of such topics as electronic trading, anonymous trading, daily limits on trading, and technical specifications for products traded. Working committees have been formed based on these meetings, and CME staff told us that they would focus on potential improvements that received majority support as expressed at the forum. According to market participants, regular monitoring and oversight of the CME spot cheese market by CME officials has addressed certain industry concerns about potential price manipulation that existed when NCE operated the spot cheese market. The NASS survey of cheese prices, which is a major determinant of some FMMO minimum milk prices, is not currently audited by USDA, largely duplicates reported CME cheese market prices, and introduces a 1- to 2- week time lag between when data are reported by NASS and when transactions captured in the survey occur. USDA used to rely on the price of 40-pound blocks of cheddar determined on NCE in pricing milk, but developed the NASS survey of cheese prices in response to concerns, raised by industry and others, about a thin market and the potential for price manipulation on NCE. As stated by the Secretary of Agriculture at a hearing before a subcommittee of the U.S. Senate Committee on Appropriations in March 1997, USDA began conducting a national survey of cheddar cheese prices in response to concerns about the accuracy of reported prices at NCE. The NASS survey of cheese prices is intended to capture more transactions than those occurring on the CME spot cheese market. According to USDA officials, the NASS survey of cheese prices has continued to be used in the milk pricing formula. However, USDA’s ongoing reliance on the survey raises three issues. First, USDA does not audit the data reported in the NASS survey of cheese prices to ensure the accuracy of the prices reported. Second, industry participants use the CME spot cheese market price as a reference price, and survey results and CME spot cheese market prices rarely differ significantly. Third, the timing of the survey introduces into certain milk prices a 1- to 2-week time lag between when data are reported by NASS and when transactions captured in the survey occur. Figure 2 provides an overview of how CME spot cheese prices influence milk pricing. USDA began using NASS survey cheese data as an input into milk pricing formulas after NCE closed. Since USDA began using data from the NASS survey of cheese prices in its milk pricing formula, the agency has held hearings in response to industry concerns about the pricing formulas for Class III milk. Some industry participants have put forth a number of proposals related to eliminating the use of the NASS survey of cheese prices in milk pricing, including proposals in 2000 and 2006, that recommended eliminating the use of the NASS survey and instead using CME spot cheese market prices in the milk pricing formulas. In 2000, in hearings on milk order reform, industry opinions varied on the use of CME cheese prices instead of the NASS survey of cheese prices, with some industry participants stating that they preferred the use of the NASS survey of cheese prices. USDA decided to continue to use the NASS survey of cheese prices, stating that the NASS survey prices are based on a much greater volume than using CME prices. As of June 2007, hearings were still being held regarding the more recently submitted proposal, which recommended using CME prices instead of NASS survey prices. A final regulation would be subject to industry approval requirements contained in the statute. USDA officials have told us that historically there has been a lack of consensus in the industry to make this change. Several milk producers and cheese manufacturers we interviewed stated that they generally supported the idea of no longer using NASS survey prices in the milk pricing formulas. In order to assess the potential impact of current proposed changes to the Class III milk pricing formulas, the USDA conducted preliminary economic analyses, which analyzed the change to historical Class III milk prices if CME spot cheese market prices had been used instead of the results of the NASS survey of cheese prices. On the basis of this analysis, USDA concluded that using the CME spot cheese market prices instead of the NASS survey of cheese prices would lead to a difference of little significance. Under the milk marketing orders, NASS collects dairy market prices, such as the NASS survey of cheese prices, for use in USDA’s milk pricing formulas, which raises three issues. First, USDA does not currently audit responses provided by survey participants. Under the Dairy Market Enhancement Act of 2000, mandatory price reporting requirements for dairy products used in setting milk prices were established. Additionally, USDA was authorized to conduct audits of transactions reported by survey participants. Auditing the transactions could help to ensure the accuracy of the information used to establish minimum milk prices under the FMMOs. However, USDA does not currently audit these transactions, which include transactions captured in the NASS survey of cheese prices. Agency officials told us that they had developed a proposed rule to conduct audits of the data. According to a USDA official, the proposed rule is currently under review by the Office of Management and Budget. Recently, USDA disclosed that there had been a reporting error in the data included in its survey of nonfat dry milk prices. According to USDA officials, this error affected milk prices for farmers for at least 2 months and caused a market loss of at least $6.4 million. Without auditing the data provided in the NASS survey of cheese prices, USDA cannot ensure the accuracy of the data that are used in the milk pricing formulas. Second, although USDA officials told us that the NASS survey captured a wider range of cheese prices than using prices from the CME spot cheese market, the survey captures the weekly average CME spot cheese market price because cheese manufacturers use the CME spot cheese market price as a reference price plus or minus a premium or discount depending upon the specifications of the cheese. As a result, price manipulation on the CME spot cheese market, if reflected in the NASS survey, could lead to certain federal order minimum milk prices being artificially high or low. Despite surveying a broader range of transactions, the survey provides limited additional information beyond what is already available directly from the CME spot cheese market and results in a high correlation between the NASS survey of cheese prices and CME spot cheese market prices (see fig. 3). According to a University of Wisconsin study, the NASS survey has a 98 percent correlation with CME spot cheese market prices when adjusted to account for the difference in timing between collecting price information and publishing survey results. USDA has generally not analyzed differences between the NASS survey prices and CME spot cheese market prices such as those in figure 3. Additionally, while industry participants recognize the role of the NASS survey of cheese prices in setting certain minimum federal order milk prices, industry participants we interviewed said the survey did not provide them with useful information. Industry participants told us that small differences between the two price series are likely due to premiums and discounts negotiated into contract prices, such as for transportation costs. The third issue raised by USDA’s use of the NASS survey of cheese prices is that the results are not released for 1 to 2 weeks after certain transactions captured in the survey occur. California Department of Food and Agriculture officials told us that California does not participate in FMMOs. They also told us that California does not rely on the NASS survey, in part because of concerns about the timing of the survey. Additionally, although industry members we interviewed stated that the effects of the time lag may balance out over time, they said that the use of the NASS survey created short-term problems in milk pricing because of the time lag. For example, one industry member said that because of a timing lag that can occur during periods of rapidly declining cheese prices at the CME spot cheese market, USDA minimum milk prices may not fully reflect current milk prices. As a result, cheese manufacturers may be buying milk based on prices calculated using higher cheese prices from the preceding weeks but selling cheese at current lower market prices. This is due in part to the time lag in the NASS survey of cheese prices and could cause, in the short term, losses for the manufacturer. However, dairy farmers may benefit in this example. In periods of rapidly rising cheese prices, the time lag could result in dairy producers receiving less for their milk than if current market conditions were reflected in the minimum milk prices. In this example, cheese manufacturers might benefit. According to USDA officials, the effect of the time lag inherent in the NASS survey of cheese prices on Class III milk prices is diminished by two factors. First, USDA publishes the minimum Class III milk price on a monthly basis, and according to USDA officials, this dilutes the effect of the time lag on the Class III minimum milk price. Second, according to USDA, 75 percent of milk is sold with a premium over the Class III minimum milk price, and these “over-order” premiums reduce the effect of the time lag in the Class III minimum milk price. However, monthly Class III minimum milk prices can sometimes be based on data that do not include a portion of or the entire last week of NASS survey of cheese data for that month. This can be compounded because industry participants sometimes base their cheese prices on the prior week’s CME spot cheese market price. As a result, the effect of the time lag would be present in the monthly Class III milk price. Moreover, according to some industry participants we interviewed, the Class III minimum milk price is used by industry participants as the base price onto which over-order premiums are applied. This means that if the minimum milk price is too high or too low because of the effect of the lag, the lag would be reflected in milk prices set by industry participants who start with the minimum price and add a premium. Therefore, the time lag may result in industry members paying or receiving prices for milk that no longer fully represent current market conditions. The move from NCE to CME changed little about the structure or function of the spot cheese market but has increased oversight. The CME spot cheese market continues to be a surplus market where a few large participants buy and sell cheese and less than 1 percent of the cheese produced in the United States is traded. In addition, market participants continue to use CME spot cheese market prices to set most cheese prices in the United States. As a result, concerns about price manipulation will likely remain. However, monitoring of trading activity by CFTC DMO and CME represents a substantial increase in the level of oversight of the CME spot cheese market as compared to oversight of NCE. This has addressed some concerns about potential price manipulation on the CME spot cheese market. While not guaranteeing that price manipulation will be detected or prevented, regular and targeted reviews may help to ensure the integrity of and confidence in the market. The CME spot cheese market also impacts minimum milk prices through the NASS survey of cheese prices, which largely captures the CME spot cheese price but with a 1- to 2-week lag. USDA developed the NASS survey of cheese prices, in part to address industry and other concerns about a thin market and potential price manipulation. However, despite surveying a broader range of transactions, the industry uses the CME spot cheese market as the primary mechanism for price discovery and for pricing the majority of cheese sold. As a result, the NASS survey continues to capture largely redundant spot cheese market prices. Any small difference between prices from the NASS survey and CME spot cheese prices may be due to factors such as a time lag between data collection and price reporting, premiums or discounts on the CME price, or errors in data collected in the NASS survey of cheese prices. In addition, the NASS survey data are not currently audited by USDA, and a recent error in nonfat dry milk prices has raised questions about the accuracy of the data reported. California, with one of the largest dairy industries in the country, has chosen to use CME cheese prices over NASS survey of cheese prices in its milk pricing formula because officials believe they more accurately reflect current market conditions. The NASS survey of cheese prices largely captures CME price data by surveying producers versus capturing current data directly from CME. A lag of 1 to 2 weeks exists in data collected in this survey. As a result, industry participants may be paying prices for milk that may not be current. As USDA continues to hold hearings on a variety of issues, including the Class III milk pricing formula, we acknowledge that there may be a variety of proposals to consider. To improve the timeliness of reported cheese prices and reduce redundancy that exists in the NASS survey of cheddar cheese, we recommend that the Secretary of USDA direct the Administrator, Agricultural Marketing Service to give serious consideration to all proposals, in consultation with the industry, including the industry proposal to use the CME spot cheese market prices instead of the NASS survey of cheese prices in the minimum federal milk pricing formula. If USDA continues to use the NASS survey of cheese prices, we recommend that the Secretary of USDA direct the Administrator, AMS, to implement in a timely manner a program to audit data reported to NASS in its survey of cheese prices. We provided a draft of this report to CFTC, USDA, and CME. We received written comments from USDA, which are reprinted in appendix II. We also received technical comments from CFTC, USDA, and CME, which have been incorporated where appropriate. In written comments from the Under Secretary of Marketing and Regulatory Programs, USDA agreed with our recommendation intended to ensure that AMS implements a program to audit data reported to NASS in its survey of cheese prices. However, the agency disagreed with our recommendation to proactively consider, in consultation with the industry, the industry proposal to use CME spot cheese market prices instead of NASS survey of cheese prices in the minimum federal milk pricing formula. In response, USDA noted, as we do in the report, that it is in the process of holding a hearing addressing proposed changes to the federal milk marketing order minimum price formulas and that using the CME spot cheese price is among the proposals. According to USDA, it is outside of USDA’s authority to “proactively consider” proposals to change federal milk marketing order provisions. We have, therefore, clarified our recommendation. We were not and are not recommending that USDA take action outside of its current authority and we recognize that USDA must follow its rules of practice and procedure when conducting proceedings to amend marketing orders. Specifically, USDA states that proposals to use the CME price will be given “due consideration, weighing both the supporting and opposing testimony” in the hearing process. Our recommendation is that USDA give serious consideration to all proposals, in consultation with the industry, including the industry proposal to use the CME spot cheese market prices instead of the NASS survey of cheese prices in the minimum federal milk pricing formula. USDA also stated that because concerns remain about potential manipulation at the CME spot cheese market, “use of the NASS price to set FMMO minimum prices seems prudent until an alternative is shown to be clearly superior.” While we recognize that there are potentially a variety of ways to price Class III milk, the use of CME spot cheese market prices has certain merits over using NASS prices. As stated in our report, while concerns remain about price manipulation at the CME spot cheese market, the NASS survey of cheese prices does not address these concerns. The NASS survey of cheese prices largely duplicates CME spot cheese market prices. Use of CME spot cheese market prices instead of NASS survey of cheese prices could reduce redundancy. As USDA itself has found, the long-term difference in using CME spot cheese prices instead of NASS survey of cheese prices in milk pricing is close to zero. This is because, as we note in our report, the cheese industry uses CME spot cheese prices to set contract prices. As a result, CME spot cheese market prices are captured by the NASS survey of cheese prices. Further, industry participants that we interviewed stated that they have not adjusted how they set contract prices due to concerns about manipulation on the CME spot cheese market. Therefore, any pricing concerns about CME would also be reflected in the NASS survey prices. USDA further stated that GAO has not demonstrated that there has been a loss or benefit to cheese makers due to the time lag associated with calculating a monthly average federal minimum milk price. However, the report does include an example of a potential loss to cheese makers. As stated in the report, one industry member we interviewed told us that during periods of rapidly declining cheese prices at the CME spot cheese market, the timing lag may result in USDA minimum milk prices not fully reflecting current milk prices and may result in cheese makers buying milk at prices higher than the prices at which the cheese maker sell its cheese. Additionally, we clarified in the report that industry participants we interviewed that told us the NASS survey made their business more complicated were referring to short-term problems in milk pricing due to the use of the NASS survey and the corresponding time lag. Moreover, the time lag is one reason why California does not rely on the NASS survey of cheese prices. Finally, USDA comments included an overview of minimum milk prices and the manufacturing plant relationship with the FMMO. 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. At that time, we will send copies of this report to the appropriate committees. We will also send copies to the Chairman of CFTC, the Secretary of Agriculture, and the Managing Director, Regulatory Counsel of CME. 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 concerning the report, please contact me at (202) 512-8678 or [email protected], or John Wanska, Assistant Director, at (312) 220-7628 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of the report. Key contributors to this report are listed in appendix III. To review the structure and operations of the Chicago Mercantile Exchange (CME) spot cheese market, we obtained and analyzed information about CME, including internal rules and procedures that govern the market. We compared this information to the National Cheese Exchange’s (NCE) rules and procedures, as well as to federal and academic analyses of the structure and operations of NCE. We obtained and reviewed industry and academic literature regarding market structure. To analyze concerns about price manipulation, we reviewed existing studies that assessed market characteristics associated with price manipulation. In addition, we obtained and analyzed spot cheese market trading data provided by CME. To assess the reliability of the CME data, we reviewed the data and interviewed CME officials, and determined that the data were sufficiently reliable for our purposes. Using the data provided, we calculated summary statistics on volume of trading, number of market participants, and the role of uncovered bids and unfilled offers. We also obtained Commodity Futures Trading Commission (CFTC) and CME officials’ views as well as those of market participants and members of the cheese and dairy industry on the potential for price manipulation at the CME spot cheese market and NCE. We did not attempt to determine whether manipulation has occurred on the CME spot cheese market; instead, we identified the characteristics of this market that are consistent with those of markets considered susceptible to price manipulation. As a part of our review of market monitoring and oversight, we obtained and analyzed information about CFTC, CME, and other oversight and enforcement organizations on their role in monitoring the CME spot cheese market. In addition, we interviewed officials from CFTC’s Division of Market Oversight, Division of Enforcement, and Office of General Counsel to obtain information about CFTC’s role in the CME spot cheese market. We also interviewed CME officials from its Legal and Market Regulation Division, Corporate Development Division, and Products and Services Division to discuss CME’s oversight of the CME spot cheese market. To review how the CME spot cheese market impacts federal minimum milk prices, we obtained and reviewed federal laws and United States Department of Agriculture (USDA) regulations governing the federal milk pricing formulas. We also reviewed academic analysis of the role the spot cheese market has in milk pricing. In addition, we interviewed officials from USDA’s Agricultural Marketing Service and National Agricultural Statistical Service as well as numerous academics who study issues of dairy policy. We also interviewed market participants and members of the cheese and dairy industry on the relationship between the CME spot cheese market and minimum federal milk prices. Members of the dairy and cheese industry included cheese manufacturers, dairy cooperatives, processors of cheese, and milk producers. In addition to those individuals named above, John Wanska, Assistant Director; Marta Chaffee; Emily Chalmers; Jay Cherlow; Alison Martin; Marc Molino; Andy Pauline; and Paul Thompson made key contributions to this report. | The Chicago Mercantile Exchange (CME) is home to the spot cheddar cheese market, which impacts the prices of virtually all cheese traded in the United States, producer milk prices, and milk futures contracts. The spot cheese market, formerly the National Cheese Exchange (NCE) in Wisconsin, has been and continues to be the subject of concerns about price manipulation. GAO was asked to examine (1) the market's structure and ongoing concerns about price manipulation; (2) market oversight and efforts to address potential manipulation; and (3) how the market impacts federal milk pricing. In response, GAO compared the markets at NCE and CME, analyzed trading data, collected information about the Commodity Futures Trading Commission's (CFTC) oversight, and met with industry participants, academics, and agency officials. Because the CMEspot cheese market remains a market in which few daily trades occur and a small number of traders account for the majority of trades, questions exist about this market's susceptibility to potential price manipulation. The structure and operations of the CME spot cheese market are comparable to NCE's, including trading rules, products traded, and market participants. However, there are differences, including daily trading at CME versus once-a-week trading at NCE. CFTC and CME provide oversight of the CME spot cheese market that did not occur on NCE. Both engage in activities that may detect and deter potential price manipulation at this market. CFTC, as part of its responsibility for regulation of commodity futures markets, monitors cash markets, including the spot cheese market, and can act on indications of manipulative activity. In addition, CME conducts daily surveillance and regularly reviews trading data and market trends. According to CFTC and CME officials, they have both made efforts to address allegations of the potential for price manipulation by examining the activities of participants in the spot cheese market. As of June 2007, none of these reviews have led to an instance of CFTC taking legal action against a market participant. CME's spot cheese market impacts federal minimum milk pricing through the NASS survey of cheddar cheese prices, which as shown below are highly correlated to the CME cheese prices. CME spot cheese prices are used to set long-term contracts, which are then captured by the NASS survey of cheese prices--a significant commodity component in USDA's minimum milk pricing formulas. According to USDA, the agency uses the survey, in part, because it captures more transactions than occur at the CME spot cheese market. However, in addition to largely capturing CME price data, it introduces a 1- to 2-week time lag between when data are reported by NASS and when certain transactions captured in the survey occur. Moreover the survey is not currently audited to ensure the accuracy of the information. These factors may contribute to milk prices paid by dairy market participants that are either not completely accurate or not current. |
IRS is in the midst of a major modernization effort, which, if implemented as intended, will change the way IRS receives, processes, stores, and retrieves information needed to administer the tax system and change the way taxpayers and IRS interact. As part of this effort, IRS plans to (1) shift from a paper-based to an electronic tax-processing system, (2) consolidate fragmented telephone assistance into fewer centrally managed locations to handle almost all taxpayer calls, and (3) develop a database that contains all pertinent taxpayer account information and make that information readily available to all employees who need it. These plans are all part of what IRS calls its new business vision. IRS is making organizational changes to accommodate this new vision by (1) moving responsibility for processing electronic returns from 5 service centers to 3 computing centers; (2) consolidating in 5 submission processing centers, the paper-processing activities now done in 10 service centers; and (3) consolidating in 23 sites, the customer service activities now done in over 70 sites. Electronic filing is one of IRS’ first ventures into a more modern environment. This alternative to the traditional filing of paper returns started as a test in 1986 and became available nationwide in 1990. Some taxpayers can file electronically by telephone, but most electronic filing is done through a tax return preparer or an electronic return transmitter. Once received by IRS, electronic returns are automatically edited, processed, and stored—functions that are performed manually for paper returns. Electronic filing benefits taxpayers. The benefits include receipt of their refunds several weeks sooner than if they had filed paper returns and greater assurance that (1) IRS has received their returns, (2) the returns are mathematically accurate, and (3) information on the returns has been accurately posted to the taxpayers’ accounts in IRS’ records. Compared with IRS’ current procedures for processing paper returns, electronic filing has several benefits for IRS. These benefits include reduced costs of processing, storing, and retrieving returns and faster, more accurate processing of returns and refunds. Also, with electronic filing, IRS gets 100 percent of the return information in its computers compared with the approximate 40 percent IRS inputs from paper returns. As part of its future business vision, IRS plans to capture 100 percent of the information on paper returns using new scanning technology. However, the cost of scanning the data from paper returns will most likely be higher than the cost of obtaining it electronically because (1) manual labor will still be required to prepare the paper documents for scanning and (2) IRS test indicate that scanning cannot always correctly read the information on paper returns, thus requiring rework and manual intervention. Therefore, electronic filing would continue to provide a more efficient way of obtaining tax return data than having taxpayers submit paper returns. Our objectives were to assess (1) IRS’ progress in achieving its electronic filing goal, (2) the availability of data needed to develop an electronic filing strategy, and (3) the implications for IRS if it does not reach its electronic filing goal and reduce its reliance on paper. To accomplish our objectives, we did the following: We analyzed IRS data for calendar years 1990 through 1994 on the number and composition of electronic filings. For calendar year 1995, we analyzed such data through May 1995. We determined IRS’ potential shortfall in meeting its 80-million goal for 2001 by using the annual growth rates for 1993 and 1994. We did not use the 1995 growth rate because IRS officials believe the 1995 rate is an aberration, and they expect the growth of electronic filing to resume in 1996. We used IRS data on the average cost to process electronic returns and various types of paper returns in 1993 (the latest available), along with data on the number of returns filed in 1994, to estimate (1) the potential savings if all forms 1040, 1040A, and 1040EZ had been filed electronically in 1994 and (2) the portion of potential savings that IRS realized, given the number of returns that were actually filed electronically in 1994. We did not assess the reliability of IRS’ data on average processing costs for paper and electronic returns. We interviewed officials and staff who had electronic filing responsibilities in IRS’ National Office; 2 of its 7 regional offices (Central and Mid-Atlantic); 5 of its 63 district offices (Baltimore, Cincinnati, Cleveland, Indianapolis, and Richmond); and 4 of its 10 service centers (Andover, Cincinnati, Memphis, and Philadelphia). We judgmentally selected IRS field offices that were involved with unique electronic filing initiatives and/or were convenient to our audit staff. We reviewed information related to the electronic filing program, including IRS’ electronic filing strategy, related legislative proposals, and surveys of preparers and taxpayers done by the AICPA and other organizations. We reviewed IRS’ modernization plans, including documents on the sizing of submission processing centers and discussed with returns processing and information systems managers in IRS’ National Office, IRS’ plans in the event electronic filing falls short of expectations. We did our work between April 1994 and May 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 27, 1995, IRS’ Executive for Electronic Filing and the Site Executives for IRS’ Computing Centers and Submission Processing provided oral comments. Those comments and our evaluation are summarized on pages 17 to 20 and are incorporated in this report where appropriate. Since the inception of electronic filing, IRS’ marketing strategy has been targeted primarily at professional tax return preparers. That strategy has not resulted in the level of electronic filing that will bring IRS to its long-term goal nor has it attracted those taxpayers who file the kinds of returns that contribute most to IRS’ paper-processing workload and costs. One impediment to the growth of electronic filing that IRS has yet to adequately address is its cost to taxpayers and preparers. When electronic filing started in 1986, IRS’ marketing approach was to encourage tax return preparers to provide electronic filing in hope that they would market the service to the general public. IRS’ rationale for this approach was based primarily on the large number of returns prepared by professional preparers—about 57 million for tax year 1993. Because we saw the need for IRS to expand the appeal of electronic filing, we recommended, in January 1993, that IRS identify additional market segments and specify national strategies for attracting those market segments to electronic filing. To that end, an IRS task group, in May 1993, presented a strategy that encompassed 21 initiatives for increasing the number of electronically filed returns. A few of the 21 initiatives have been implemented and have resulted in modest increases in the number of electronic returns. For example, one initiative called for expanding TeleFile—a program that allows taxpayers who meet certain criteria to file 1040EZ returns by telephone. About 680,000 taxpayers in 10 states filed returns using this method in 1995 compared with 149,000 in 1 state in 1993, and IRS plans to expand the program nationwide in 1996. Another initiative called for expanding cooperative arrangements with states that would allow electronic filers to jointly file their federal and state tax returns. As of June 9, 1995, about 1.5 million taxpayers in 29 states had used this program compared with about 635,000 taxpayers in 15 states in 1993. However, other initiatives included in the 1993 strategy have been delayed or dropped. According to the IRS task group, several of these initiatives required legislation. For example, the task group had estimated that IRS could obtain 37 million electronic returns by legislatively mandating that tax return preparers who prepare a large number of individual returns offer electronic filing. That initiative was dropped because, according to IRS and Treasury officials, there was little chance that Congress would pass such legislation. Appendix I provides additional information on those initiatives that the task group said would require legislation. Because several initiatives that were designed to attract large numbers of taxpayers to electronic filing have not been implemented, IRS’ default strategy has been to continue marketing electronic filing to tax preparers. However, that strategy has resulted in a program that primarily attracts individuals who file simple tax returns, are due refunds, and are willing to pay the fees associated with electronic filing to get those refunds sooner. As shown in figure 1 on page 8, the number of electronic returns increased from about 4.9 million returns in 1990, when electronic filing became available nationwide, to a high of 16.4 million returns in 1994, before dropping to an estimated 14.8 million returns in 1995. IRS attributes the decrease in electronic filing in 1995 to steps it took to prevent refund fraud. As a result of these steps, refunds for millions of taxpayers were delayed, thereby reducing the major appeal of electronic filing. IRS officials believe that the decrease is temporary. Even if electronic filing begins growing again, IRS will be hard pressed to reach its electronic filing goal. We estimate that electronic filing, including returns filed on magnetic media, would need to grow at an annual rate of about 32 percent to reach 80 million returns in 2001. That rate contrasts with the 14 percent annual growth rate IRS achieved in 1993 and 1994. As shown in figure 1, if annual growth were to continue at 14 percent, we estimate that only about 33 million returns would be filed electronically in 2001. Not only is the number of electronic returns relatively low, but the returns being filed electronically are generally those that contribute least to IRS’ paper-processing workload and operating costs. Electronic filing has not yet attracted a representative number of taxpayers who file individual income tax returns on the more complex Form 1040 and business returns. Since electronic filing began, IRS has focused its marketing efforts on individual income tax returns. Accordingly, those returns, which accounted for about 56 percent of all returns filed in 1994, accounted for 86 percent of those filed electronically. Despite the focus on individual returns, electronic filing is not attracting those taxpayers who represent the largest segment of individual filers and those who file the most costly individual income tax form to process on paper. As a result, potentially significant cost savings may be going unrealized. On the basis of IRS’ 1993 service center processing cost estimates (the latest available), it cost IRS $4.53 to process a paper Form 1040, $3.95 to process a paper Form 1040A, and $3.36 to process a paper Form 1040EZ.The most costly of the three (Form 1040) accounted for about 59 percent of all individual returns (paper and electronic) processed in 1994, yet Form 1040 accounted for only about 20 percent of the individual returns filed electronically. On the basis of IRS’ processing cost estimates for paper returns and its estimated average cost of $3.08 to process each electronic individual return, we estimated (1) the total potential processing savings that could have been achieved if all individual income tax returns had been filed electronically in 1994 and (2) the portion of those potential savings that went unrealized. Figure 2 shows that the greatest amount of unrealized savings, about $90 million, was for returns filed on Form 1040. Because paper returns filed by businesses are more expensive to process than paper returns filed by individuals, according to IRS data, they would seem to represent a potential source of significant savings if filed electronically. IRS estimated, for example, that in 1993 it cost $6.97 to process each partnership return (Form 1065), $6.95 to process each corporate income tax return (Form 1120), and $6.19 to process each Employers Quarterly Federal Tax Return (Form 941). In 1994, about 6 percent of all business returns were filed electronically (2.4 million out of 42 million), while the participation rate for individual returns was about 12 percent (14 million out of 115 million). Of the 2.4 million electronically filed business returns, all but about 46,000 were filed on magnetic media. IRS officials said that the lower participation rate for business returns reflects, in part, the priority IRS has attached to increasing the number of electronically filed individual returns. That priority is reflected in IRS’ May 1993 strategy. The more traditional marketing aspects of IRS’ strategy were focused on getting individual returns filed electronically. For business returns, IRS’ strategy was to rely on legislative mandates. More specifically, the 1993 strategy included an initiative that called for developing a legislative proposal that would (1) mandate electronic filing of many business returns, including those filed by fiduciaries (Form 1041), partnerships, and corporations and (2) require the electronic transmission of Employers Quarterly Federal Tax Returns by businesses with 10 or more employees. IRS has since decided to pursue mandates only as a last resort but has not developed an alternative strategy for getting large numbers of business returns filed electronically. IRS has not been successful in dealing with a major impediment to greater taxpayer and preparer participation in electronic filing, i.e., its cost. For most taxpayers, the only way to file electronically is through a tax return preparer or electronic filing transmitter at a cost of from $15 to $40. This cost is in addition to any costs associated with preparing the return. In January 1993, we reported that electronic filing appealed primarily to taxpayers who most needed their refunds and that other taxpayers due refunds were unwilling to pay the going fees for that benefit. Cost is even more of an impediment to taxpayers owing money because those taxpayers see little, if any, benefit to filing electronically. We know of little that has changed since 1993 to alter that opinion. As a result, less than 2 percent of the individual income tax returns filed electronically in 1995 were from taxpayers owing money. In response to a recommendation in our January 1993 report and one of the initiatives in IRS’ May 1993 strategy, IRS has (1) increased the number of walk-in sites that offer free electronic return preparation and transmission and (2) provided additional support for similar services at sites staffed by volunteers. As of April 29, 1995, about 246,000 taxpayers had availed themselves of these free services. The free electronic filing at IRS and volunteer sites is generally available to low-income taxpayers who file less complex returns. Cost is at least one factor that deters electronic filing by a potentially more lucrative market of individual taxpayers—those with home computers. Since 1992, taxpayers using tax preparation software could file returns from home computers and transmit them from home through an approved computer service. However, these filers must pay a fee of about $15 and must still send paper, including a signature document (Form 8453) and wage and withholding statements (Forms W-2), to IRS. Only about 1,400 taxpayers had filed their returns through this program as of May 5, 1995. For those taxpayers who prepare their returns on computers but are unwilling to pay to transmit the returns electronically, the result is inefficient and counterproductive. The taxpayer prepares the return on a computer and then converts it to paper for mailing to IRS, which then employs a labor intensive, error prone process to input that information back into a computer. IRS has completed a draft strategy for increasing the number of taxpayers filing from home computers. Part of the strategy focuses on eliminating the fees these taxpayers incur for having a third party transmit their returns to IRS. Cost also deters some preparers from participating in the electronic filing program. In September 1994, the Chairman of the AICPA’s Tax Practice and Procedures Committee provided us with summary information on members’ experiences with electronic filing. He said that some practitioners have been filing electronically for several years with positive experiences, while others discontinued doing so because IRS’ current electronic filing program “did not fit into their ‘office routine’ or because they or their clients did not receive any additional benefit from the program to offset the additional cost.” He said that many practitioners are concerned with the additional input, transmitting, and monitoring time required with the current electronic filing program and the fact that electronic filing is not yet a paperless system. Among the paper documents, the most problematic, according to the AICPA, is the signature document. That document, which is used to affirm that the information on the electronic return is accurate, must be signed by the taxpayer and filed with IRS within 24 hours after IRS has acknowledged acceptance of the electronic return. IRS has recognized for years the potential benefit of paperless electronic filing but thought that legislation was needed to authorize an alternative to the paper signature document. Information on IRS’ efforts to obtain such legislation is presented in appendix I. In April 1995, however, IRS’ Office of Chief Counsel concluded that IRS had regulatory authority to prescribe signature alternatives. An IRS official said that IRS plans to test signature alternatives in 1996. IRS recognizes that it needs to increase the appeal of electronic filing to attract more taxpayers. IRS also recognizes that it does not have unlimited staff or funds to apply to that effort. However, IRS’ ability to effectively target its limited resources is hampered by inadequate data on the relative costs and benefits of processing different types of returns electronically versus on paper. Business and complex individual returns would seem to offer opportunities for significant cost reductions if filed electronically. However, IRS does not have sufficient data to determine (1) what it would cost to get those returns filed electronically, including the costs of any incentives that might be needed to prompt certain groups of taxpayers to file electronically and (2) how that cost compares to the expected benefits from electronic filing. As discussed earlier, IRS has data on some of the costs incurred in processing returns. However, IRS does not have data on other costs that can vary depending on how a return is filed. Those costs include (1) costs to store and retrieve returns and to administer certain fraud controls, such as those established to assess the suitability of preparers and transmitters who apply to participate in the electronic filing program and (2) certain nonservice center costs incurred in resolving taxpayer account errors that are made during IRS’ manual processing of paper returns (such as the costs associated with handling the extra telephone calls generated by those errors). Without better data on the relative costs and benefits of electronic filing as well as data on why taxpayers do not file electronically and what it would take to get them to do so, IRS cannot make sound decisions on such things as the feasibility of offering incentives (such as a tax credit) to encourage greater participation in the program. IRS awarded a contract in May 1995 that may provide at least some of the needed cost/benefit data. Among other things, the contract calls for a systematic analysis of the costs and benefits of each step in the electronic filing process. We believe this aspect of the contract is critical to helping IRS focus its resources on those taxpayers or returns that provide the greatest opportunity for reducing overall operating costs. Data on the cost and benefits of electronic filing versus paper filing for various taxpayers or returns, coupled with estimates of the number of electronic returns IRS can expect to receive from these market segments, should provide IRS with a foundation for focusing future electronic filing marketing strategies. It is not clear whether the contractor will be doing any taxpayer focus groups or surveys to determine what changes IRS needs to make to better motivate taxpayers to participate in electronic filing. IRS’ most recent taxpayer opinion data on electronic filing were collected in 1991 and those did not include data from businesses. Unless IRS obtains more current information from taxpayers, it may have difficulty reliably estimating the number of electronic returns it can expect to receive from different market segments. A complicating factor in any cost/benefit analysis is IRS’ plan to change the way it processes paper returns in the future. Instead of the current manually intensive process by which tax return data are keypunched into the computer, IRS plans to scan paper returns. If scanning reduces the cost of processing paper returns, as expected, it could alter any analysis of the relative costs and benefits of electronic filing. In deciding on 5 submission processing centers and 23 customer service centers and in determining the number of persons needed to staff those centers, IRS relied, in large part, on expectations that it would be receiving a minimum of 61 million electronically filed returns by 2001. Using IRS’ return filing projections for 2001, we estimated that submission processing centers would thus be expected to process about 163 million paper returns. If fewer returns are filed electronically or if the returns filed electronically do not substantially decrease IRS’ paper-processing workload, IRS will have to process more paper, which would decrease productivity and increase costs. The need to process more paper could also cause IRS to revise its plans for the submission processing centers. Staffing and equipment needs could be expected to increase at the sites if more paper returns have to be processed. A National Office official told us that if another submission processing site is needed, site preparation costs alone would amount to more than $17 million. A substantial increase in the number of paper returns could also affect IRS’ plans for its 23 customer service centers and the availability of staff to work in compliance positions. The customer service centers are responsible for handling taxpayer telephone and correspondence contacts, many of which are a byproduct of questions that arise from processing taxpayers’ returns. Because of the substantially higher error rates associated with paper returns, according to IRS data (23 percent versus 2 percent for electronic returns), customer service centers would likely need to field more questions if IRS receives more paper returns than it has projected. And, if IRS needs more staff to process paper returns and provide customer service, it may have fewer staff to redeploy to compliance positions, thus decreasing the amount of additional tax revenue anticipated from such a redeployment. IRS National Office officials told us that they had not developed contingency plans for the possibility that electronic filing will fall short of expectations. They believe that IRS will be successful in achieving the level of electronic filing needed to support the projected workloads for the submission processing and customer service centers. In the event of a shortfall, they believe IRS will have time later to develop alternative plans. IRS has developed a contingency plan for the document imaging system that is to eventually replace IRS’ current paper-processing system. The purpose of that plan is to ensure that the project office overseeing implementation of this automated system can help submission processing centers process tax documents if the automated system does not meet prescribed efficiency rates. The plan does not indicate how IRS’ plans for the new imaging system would have to be revised if IRS receives more paper returns than the system is being designed to handle. The plan, given its focus on submission processing, also does not address the impact of a shortfall in electronic returns on IRS’ plans for customer service. We believe that contingency plans are needed now. IRS is beginning to implement its customer service vision and is preparing to pilot the imaging system. In conjunction with those efforts, IRS needs to identify and take into account the impact of possible shortfalls in electronic filing. The longer IRS waits, the fewer its options become and the less time it will have to fully consider alternatives. IRS’ ability to effectively process tax returns and assist taxpayers in the future largely depends on how successful IRS is in converting to an electronic environment and reducing its reliance on paper. Electronic filing of tax returns is a critical part of that conversion. However, without some dramatic changes in IRS’ current electronic filing program over the next 6 years, many of the benefits available from electronic filing could go unrealized. The number of electronic returns has been growing at a pace that will leave IRS far short of its 80-million goal in 2001. Even more important to the ultimate success of electronic filing, in our opinion, is the fact that the returns being filed electronically are generally the less complex returns that are the least costly for IRS to process when filed on paper. The heavy representation of less complex returns may be influenced, at least in part, by IRS’ goal of 80 million returns. Focusing solely on this goal could cause IRS to expend its limited resources on initiatives that are directed toward groups of taxpayers or types of returns that provide the greatest opportunity to increase the number of electronic returns but not the greatest opportunity to reduce IRS’ paper-processing workload and operating costs. Although a marketing strategy that focuses on reducing paper and costs may generate fewer than 80 million returns, it could have a more significant impact on IRS’ overall operations. The contract IRS awarded in May 1995 may provide cost/benefit data IRS can use to reassess its strategy. That information may help IRS identify effective steps to make electronic filing more attractive to those taxpayers and tax return preparers who are now put off by its cost. If the growth and impact of electronic filing fall short of expectations, IRS’ paper-processing workload will increase. More paper means more errors, which, in turn, would create a need for more taxpayer contacts. Depending on the extent of the electronic filing shortfall, IRS may need to increase the number and/or size of submission processing and customer service centers and adjust plans for equipping and staffing the centers. However, IRS is not prepared to make those adjustments because it has no contingency plans. To help better ensure the success of IRS’ modernization, we recommend that the Commissioner do the following: Identify those groups of taxpayers who offer the greatest opportunity to reduce IRS’ paper-processing workload and operating costs if they were to file electronically and develop strategies that focus IRS’ resources on eliminating or alleviating impediments that inhibit those groups from participating in the program, including the impediment posed by the program’s cost. Adopt goals for electronic filing that focus on reducing IRS’ paper-processing workload and operating costs. These goals could be used in addition to the existing electronic filing goal to assess IRS’ progress in achieving the intended benefits of electronic filing. Prepare contingency plans for the possibility that the electronic filing program will fall short of expectations. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designated representative. Responsible IRS officials, including IRS’ Electronic Filing Executive and Site Executives for Computing Centers and Submission Processing, provided IRS’ comments in a July 27, 1995, meeting. These officials provided a few factual clarifications that we have incorporated in this report where appropriate. The officials also said that they generally agreed with our report recommendations. They stated that they recognized that much work needed to be done to increase the number of electronic returns and identified plans or actions that were under way that they believe address the recommendations. We agree that IRS has developed plans and is taking action to increase the number of electronic returns. However, we remain concerned that unless those actions or plans are supported by the type of analysis and goal setting that we are recommending, IRS may not be effectively targeting its limited resources for marketing the electronic filing program. On our first recommendation on identifying taxpayers who offer the greatest opportunity to reduce IRS’ paper-processing workload and costs, IRS officials said that (1) they strongly believe that the electronic filing program already focuses on those taxpayers who offer the greatest opportunity to reduce IRS’ paper-processing workload—essentially individual taxpayers—but had not yet prepared a business case to support that belief, (2) they were expanding TeleFile nationwide for the 1996 filing season to make electronic filing available to more individual taxpayers, and (3) research was under way to help make electronic filing more appealing to taxpayers and to help IRS expand the program to more individual taxpayers. In addition, IRS believes its current focus on individual taxpayers is appropriate because the bulk of its processing costs stem from having to process large numbers of individual returns in a short time period. IRS officials also said they are working with some large businesses on electronic filing of employment tax returns. These returns represent a large portion of all business returns filed. Although the actions IRS mentioned may help expand the electronic program, we believe the second and third items discussed above will most likely have an effect on those taxpayers that are already attracted to IRS’ electronic filing program—those individual taxpayers who file relatively simple returns. The expansion of TeleFile in 1996, for example, will have no impact on those individual taxpayers that file more complex tax returns. As we discuss on page 6, the expansion IRS refers to is a geographic one—going from 10 states to all states in the 1996 filing season. The TeleFile program will continue to focus on those taxpayers who file the simplest individual tax return (Form 1040EZ). IRS’ comment regarding research to make electronic filing more appealing refers to analysis being done to profile (1) those taxpayers who currently file electronically and (2) those who could file electronically, but currently do not. IRS believes this profiling will assist in marketing electronic filing to those individual taxpayers who do not currently use electronic filing. We agree that such an analysis may be helpful as a marketing tool for district offices. However, it is uncertain how this analysis will help alleviate some of the current impediments to electronic filing for many individual taxpayers, such as the cost to the taxpayer. With respect to our second recommendation on adopting goals for electronic filing that focus on reducing IRS’ paper-processing workload and costs, IRS officials provided several examples of actions that they believed indicated that they have adopted such goals. These examples included (1) the contract to conduct cost and marketing analyses that we discuss on page 14, (2) another contract that was awarded to develop a strategy to reach taxpayers who could file from home computers, and (3) IRS’ plans to eliminate processing of signature documents for electronic returns. We agree that some of the actions IRS mentioned may reduce paper-processing workload and costs. However, these actions are steps IRS is taking to achieve its existing performance goal of 80 million returns. The intent of our recommendation is for IRS to develop other performance goals based on the analysis done in response to the first recommendation. IRS’ current performance goal provides little incentive to identify and pursue opportunities for reducing the paper-processing costs associated with more complex returns that may not represent a large number of returns. The analysis called for in our first recommendation would put IRS in a better position to develop specific goals for receiving certain types of returns electronically based on the their contribution to reducing overall paper-processing costs. For example, goals such as “receive 75 percent of all corporate returns electronically by 2001” or “reduce the number of paper returns processed (in terms of number of pages rather than number of returns) by 50 percent,” might result in different decisions on how IRS should focus its limited marketing resources than those decisions currently being made. On our third recommendation regarding contingency planning, IRS agreed that it needed to prepare for the eventuality of receiving fewer electronic returns in 2001. However, IRS representatives said that contingency planning is not the only way to prepare for this eventuality. IRS officials said IRS is using a program management approach to phase in operations under its new business vision. IRS officials expected this approach to provide the flexibility for adjusting program plans to address any significant shortfall in the number of electronic returns received. In addition, IRS officials said that the contract for procuring new scanning equipment for paper returns is flexible. Therefore, IRS expects to have an option to buy additional equipment if it needs to process more paper returns than it originally estimated. We reviewed a November 29, 1994, memorandum from IRS’ Modernization Executive to the heads of offices that are involved in IRS’ modernization program. That memorandum described the program management approach that IRS refers to above and a program control process for helping to ensure that IRS achieves its modernization goals. According to the memorandum, the program control process will include risk assessments that are to (1) identify impediments to delivering various aspects of IRS’ business vision and (2) prompt the development of mitigation strategies to address identified risks. IRS would be responsive to our recommendation if it succeeds through its program management approach in (1) promptly developing mitigation strategies if more paper tax returns have to be processed in future years than IRS currently expects and (2) specifying alternative actions for processing paper returns and implementing its customer service vision. As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution for 30 days. At that time we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. We will also make copies available to others on request. The major contributors to this report are listed in appendix II. If you or your staff have any questions about this report, you can reach me at (202) 512-8633. In May 1993, the IRS Electronic Filing Strategy Task Group issued a report that included 21 initiatives directed at increasing the use of electronic filing. Five of those initiatives cited the need for legislation. As discussed below, none of that legislation has been enacted and, in some cases, IRS has decided not to seek legislation. One of the 21 initiatives was directed at increasing the number of balance due returns filed electronically. Critical to the success of this initiative, according to the task group, was legislation that would allow credit card payments of tax obligations. Such a provision was included in section 4122 of H.R. 11, the Revenue Act of 1992, which was passed by both houses of Congress but vetoed by the President. A similar provision was included in other bills, none of which were enacted. Most recently, IRS included this proposal in a package of legislative initiatives sent to the Assistant Secretary of the Treasury for Tax Policy in January 1995. In February 1995, Treasury’s Office of Fiscal Assistant Secretary raised several questions about the potential costs associated with this proposal and how those costs would be funded. As of June 26, 1995, IRS and Treasury had not resolved these cost issues. The task group estimated that 46 million more electronic returns would be received if (1) preparers of 100 or more individual returns were required to offer electronic filing and (2) businesses with 10 or more employees were required to file their returns electronically. The business returns specifically identified by the task group were Form 1041 (U.S. Fiduciary Income Tax Return), Form 1065 (U.S. Partnership Return of Income), Form 1120 (U.S. Corporation Income Tax Return), Form 1120S (U.S. Income Tax Return for an S Corporation), forms 5500 and 5500 C/R (Annual Return/Report of Employee Benefit Plan), and Form 941 (Employer’s Quarterly Federal Tax Return). “The Service has proposed that the Secretary be given regulatory authority to require that tax returns be filed other than in paper form, including electronically or by magnetic media. . . . Broad regulatory authority to require that returns be filed other than in paper form is appropriate and essential to the Service’s ability to modernize its systems, streamline its operations and, in general, deliver quality services at the least cost. However, in view of the potential burdens on taxpayers and preparers in complying with electronic or magnetic media filing requirements, we currently are considering whether legislative refinements to this proposal may be necessary to clarify the intended scope and timing of the conversion to a non-paper based system.” The proposal was eventually dropped because IRS and Treasury officials believed that Congress would not pass legislation that would enable IRS or Treasury to dictate who would have to file electronically. The task group noted that “In virtually every study conducted on electronic filing, the issue of processing paper documents has been identified as impacting negatively upon IRS’ ability to realize electronic filing’s full savings potential.” The task group further said that “Eliminating the requirement to prepare and submit paper documents could have a significant impact on reducing the cost electronic filers pass on to their customers.” This initiative called for eliminating the paper documents associated with electronic filing by proposing legislation that would (1) allow alternatives to the paper signature document and (2) eliminate the submission of paper attachments to the electronic return. H.R. 11, referred to earlier, included a provision (section 4933) that would have addressed the first of those two legislative needs by authorizing the Secretary of the Treasury to prescribe alternative methods of verifying returns on a trial basis. IRS’ latest proposal, included in its January 1995 submission to the Assistant Secretary for Tax Policy, was broader. It would have authorized the Secretary of the Treasury to permit alternative methods of (1) verifying, signing, and subscribing returns and other statements and (2) submitting written declarations, statements, or other documents required by the Internal Revenue Code. In April 1995, IRS’ Office of Chief Counsel concluded that IRS had regulatory authority to prescribe alternative methods for signing and submitting tax returns and other written documents. An IRS official said that IRS plans to test signature alternatives in 1996. The task group determined that “a full scale, high-powered promotional campaign” was needed to “maximize the number of electronic returns.” Because of the anticipated scope of the promotional campaign, the task group recommended that IRS obtain an appropriations rider for paid advertising. IRS has taken no action to get such a rider because of concerns that a paid advertising campaign might jeopardize current free public service advertising. To encourage greater participation in electronic filing, the task group proposed that IRS initiate legislative action to provide tax incentives for businesses and preparers. The group suggested consideration of such incentives as a more accelerated depreciation schedule for electronic filing equipment and a higher percentage of investment tax credit. IRS has decided not to pursue such legislation. As noted in this report, IRS does not have the data needed to determine what kind of incentives would be most effective and what level of incentives makes sense given the benefits of electronic filing. Daniel J. Meadows, Evaluator-in-Charge Linda Standau, Senior Evaluator Laurie Housemeyer, Evaluator Robert I. Lidman, Regional Assignment Manager The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Internal Revenue Service's (IRS) plans to maximize electronic filing, focusing on: (1) IRS progress in broadening the use of electronic filing; (2) the availability of data needed to develop an electronic filing strategy; and (3) the implications for IRS if it does not significantly reduce its paper-processing workload. GAO found that: (1) IRS will fall far short of its 2001 goal of 80 million electronic returns if the increase in electronic filing continues at its present pace; (2) IRS believes the decrease in the number of returns filed electronically in 1995 was due to its actions against electronic filing fraud; (3) IRS is having little success in increasing the electronic filing of individual 1040 and business tax returns which constitute the bulk of returns and take the most time to process manually; (4) the transmittal fees for electronic filing tend to deter filers unless they need their tax refunds quickly; (5) IRS does not have the data needed to determine whether greater electronic filings of 1040 and business returns would reduce its administrative costs; (6) IRS has contracted to gather some data on why taxpayers do not use electronic filing more and how many returns it could expect if it could motivate people to file electronically; (7) IRS plans to use scanning more to process paper returns, which should reduce some costs; and (8) unless IRS can increase electronic filing, its customer service and paper processing workloads may overwhelm its planned staffing and alter various aspects of its modernization efforts. |
To accomplish its mission, HUD administers community and housing programs that affect millions of households each year. Among other things, the department provides affordable rental housing opportunities and helps homeless families and chronically homeless individuals and veterans. The department also administers mortgage insurance programs for single-family housing, multifamily housing, and health care facilities. HUD is organized into the following five main organizational components: Housing/Federal Housing Administration: Programs within this office are responsible for contributing to building healthy communities, maintaining and expanding housing opportunities, and stabilizing credit markets in times of economic disruption. This office also regulates certain aspects of the housing industry. Community Planning and Development: The office’s mission is to provide decent housing, a suitable living environment, and economic opportunities for people of low and moderate income. To accomplish this, it engages in partnerships with all levels of government, the private sector, and nonprofit organizations. Fair Housing and Equal Opportunity: The office’s mission is to administer and enforce federal laws that prohibit discrimination in housing, such as the Fair Housing Act and the Civil Rights Act of To accomplish this, the office establishes and enforces policies 1964.intended to ensure that all Americans have equal access to housing of their choice. Public and Indian Housing: Programs within this office are responsible for creating opportunities for residents’ self-sufficiency and economic independence. Toward this end, this office currently oversees a housing choice voucher program to subsidize housing for approximately 2.2 million low-income families; a public housing program that subsidizes about 1.3 million housing units for vulnerable low-income families; and block grants and guarantee programs for Native American groups. Government National Mortgage Association (Ginnie Mae): This HUD-owned corporation’s mission is to provide support for affordable housing by bringing global capital into the housing finance market while minimizing risk to the taxpayer. While Ginnie Mae does not issue loans or mortgage-backed securities, it guarantees investors timely payment and interest on mortgage-backed securities supported by federally insured or guaranteed loans. HUD also consists of a number of program offices, such as the Office of Healthy Homes and Lead Hazard Control and the Office of Faith-Based and Neighborhood Partnerships. In addition, the department has administrative offices that report to executive leadership through the Chief Operating Officer, such as the Office of Strategic Planning and Management and the Office of the Chief Information Officer (CIO). A simplified view of the department’s organization structure is provided in figure 1. HUD’s Deputy Secretary is responsible for managing the department’s daily operations, annual operating budget, and approximately 8,700 employees. As part of this role, the Deputy Secretary conducts meetings with stakeholders to discuss the Secretary’s priorities. During these meetings, the scope, milestones, risks, and status of action items related to priority issues are discussed. IT plays a critical role in the ability of the department’s organizational components to perform needed business functions. For example, HUD’s IT environment consists of multiple systems that, among other things, are intended to help the department coordinate with lending institutions to insure mortgages, collect and manage state and local housing data, process applications for community development, and process vouchers for different rental assistance programs. Its systems also support the processing of applications for, and the management of, more than 50 grant programs administered by the department. However, according to the department, its IT environment has not been sufficient to effectively support its business operations because its systems are overlapping and duplicative, not integrated, necessitate manual workloads, and employ antiquated technologies that are costly to maintain. For example, the department has reported that its environment consisted of: Over 200 information systems, many of which perform the same function and, thus, are overlapping and duplicative. Specifically, different systems perform the same task to separately support grants management, loan processing, and subsidies management. Stove-piped, nonintegrated systems that result in identical data existing in multiple systems. For example, two organizational components store about 80 percent of similar data in separate databases that provide information on rental assistance participants. Manual processing for business functions due to a lack of systems to support these processes. For example, specific Public and Indian Housing IT projects are intended to replace existing ad hoc analyses performed in spreadsheets and databases with systems that automate and standardize those functions. Antiquated technology (15 to 30 years old) and complex systems that are costly to maintain. For example, the department relies on different obsolete programming languages and operating systems, which require specialized skills to operate and maintain. Further, contractors engaged by HUD to assess the department’s environment reported in January 2011 that unclear reporting relationships hindered the enforcement of IT policies; contractor performance information was not used to inform management decisions; technical standards were lacking or not enforced; and data management practices did not support business needs. In October 2011, the Secretary of HUD delegated responsibility for the management of IT resources and for meeting requirements established by the Clinger-Cohen Act of 1996 to the department’s Chief Information Officer (CIO). Among other duties, the CIO was charged with promoting the effective and efficient design and operation of all major IT processes for the department; designing, implementing, and maintaining processes (consistent with the roles and responsibilities of governance boards) for maximizing the value and assessing and managing the risks of IT acquisitions; and advising the Secretary and governance boards regarding whether to continue, modify, or terminate programs or projects. To guide the department’s efforts in this area, the CIO developed a management framework and policies, including a policy for governance, based on the IT investment management framework developed by GAO and other federal guidance. In addition, to establish management and governance capabilities, the Office of the CIO chartered four investment review boards in 2011: The Executive Investment Board is to be made up of senior executives, including the department’s Secretary (chair), Deputy Secretary, Chief of Staff, Chief Operating Officer, Chief Financial Officer, General Counsel, and CIO. As the department’s highest-level board, the executive board is charged with responsibility for, among other things, overseeing and approving HUD’s high-cost, high-risk projects, allocating resources, and monitoring enterprise risk. The Customer Care Committee is made up of executives including the CIO, the Chief Procurement Officer, Chief Human Capital Officer, and deputy assistant secretaries. The responsibilities of this committee include reviewing and submitting investment recommendations to the Executive Investment Board. The Investment Review Subcommittee is made up of business area personnel from across the department, including representatives from the Office of the CIO, Fair Housing and Equal Opportunity, and Public and Indian Housing, who focus on investment management oversight with respect to business cases and budget information for the Office of Management and Budget (OMB). The Technical Review Subcommittee consists of personnel from within the Office of the CIO, including the Chief Technology Officer, the Chief Architect, and the Chief Information Security Officer, and is focused on providing technical, project, and architecture subject matter expertise. The hierarchy of HUD’s investment review boards is depicted in figure 2. The CIO and the investment review boards are supported by staff in the Office of the CIO. Through coordination with the other organizational components, the office manages IT resources and provides support for the department’s infrastructure, security, and ongoing projects. The office also provides project management guidance and technical expertise, and supports the department’s efforts to govern IT investments. In 2012, to improve the Office of the CIO’s ability to implement its authorities as required by Congress and OMB, the department initiated a reorganization of the office to, among other things, streamline IT governance practices, improve the alignment of IT investments with mission needs, and ensure customer satisfaction through enhanced service delivery and continuous performance management. To date, HUD has taken steps to complete the effort, including determining the specific offices, divisions, and branches that make up the restructured office. Specifically, the department established three Deputy CIOs with responsibility for managing the following offices created within the Office of the CIO: the Office of Business and IT Resources Management, which is responsible for human and financial resource management, including funds control, budget execution, internal controls, and acquisition management for the Office of the CIO; the Office of Infrastructure and Operations, which is responsible for providing data center service, technical support, training, service delivery assistance for the network, desktop computers, and telephone and e-mail services to HUD staff in headquarters and field offices; and the Office of Customer Relationship and Performance Management, which is responsible for meeting HUD’s programmatic needs through customer engagement, marketing, product development, and capital planning. In particular, the Office of Customer Relationship and Performance Management consists of three divisions responsible for IT management functions, including enterprise program management, investment management, and enterprise architecture.view of HUD’s restructured Office of the CIO, including the Office of Customer Relationship and Performance Management and the related divisions and branches that directly support the department’s IT governance functions. GAO assessed best practices to develop the IT investment management framework to provide a method for evaluating and assessing how well an agency is selecting and managing its IT resources. The framework consists of five progressive stages of maturity that an agency can achieve in its investment management capabilities. The maturity stages are cumulative; that is, in order to attain a higher stage, an agency must institutionalize all of the critical processes at the lower stages, in addition to the higher stage critical processes. Each maturity stage is composed of critical processes that must be implemented and institutionalized; these critical processes are further broken down into key practices that describe the types of activities that an organization should be performing to successfully implement the critical processes. Only after implementing key practices for each stage’s critical processes are organizations positioned to mature their investment management and move from managing individual projects to helping the organization evaluate the effectiveness of its overall portfolio of investments. Efforts to build a foundation for IT governance involve establishing specific critical processes, such as those for instituting investment boards, selecting investments, and providing investment oversight. Further, certain key practices must be performed by an organization in order to implement and institutionalize the critical processes effectively. For example, one key practice associated with the critical process of instituting the investment board involves documenting policies and procedures to direct board activities. Table 1 provides a summary description of the specific critical processes discussed in this report, along with examples of related key practices. Since 2011, the department has taken steps to build a foundation for IT governance, including instituting investment review boards, establishing elements of a process for selecting investments, and providing investment oversight. However, the department’s governance activities do not yet fully address key practices. In particular, its boards are not operating as intended and its processes for investment selection and oversight lack essential elements. HUD faces risk that its governance decisions will not reflect the needs of the department and that it will be unable to realize planned improvements to its IT environment and systems. The establishment of decision-making bodies or boards is a foundational component of effective IT investment management. According to the IT investment management framework developed by GAO, an organization should, among other things, establish one or more investment boards to manage and select projects, including an enterprise-wide investment board composed of senior executives that is responsible for defining and implementing the organization’s investment management process. In cases where additional investment boards are chartered to support the enterprise-wide investment board, the enterprise-wide board should remain responsible for the investment management process and be actively involved in all IT projects and proposals that are high cost or high risk or have significant scope and duration. The authorities, guiding policies, roles, responsibilities, and operations of each board should be defined to ensure that consistent and effective investment management practices are implemented across the organization. We have previously reported that effectively implementing a governance framework involves having a robust implementation plan that specifies—in addition to goals and objectives—milestones for the effort. Consistent with the IT investment management framework developed by GAO and as described previously in this report, HUD’s Office of the CIO chartered four investment boards in 2011 with defined authorities, roles and responsibilities, and operations for managing and selecting the department’s IT projects. Also during that year, the department issued an IT management framework that was intended to provide guidance to direct the investment boards in fulfilling their investment management responsibilities. However, the department has not ensured that its investment boards are fully operating according to their designated authority and responsibility. Specifically, HUD chartered an enterprise-wide investment board—the Executive Investment Board—that was to be composed of senior leaders from across the department, act as the highest decision-making authority, and have direct purview of the department’s most complex, costly, and visible IT projects. Nonetheless, as of October 2014, this board had never met. According to officials from the Office of the CIO, operating without a functioning Executive Investment Board reflects the Secretary and Deputy Secretary’s preferred approach to investment management. The officials stated that the Deputy Secretary has assumed the board’s designated authority and roles and responsibilities. The officials added that the Deputy Secretary determines the department’s IT priorities and selects, as needed, specific individuals to participate in discussions regarding which projects should receive funding. As discussed above, these were the Executive Investment Board, which is to act as the enterprise-wide board; the Customer Care Committee, which is to review and submit investment recommendations to the executive board; the Investment Review Subcommittee, which is to focus on investment management oversight; and the Technical Review Subcommittee, which is to focus on providing subject matter expertise. The lack of a functioning Executive Investment Board has affected the ability of the department’s other active investment boards–the Customer Care Committee, Investment Review Subcommittee, and Technical Review Subcommittee–to fully operate in accordance with their assigned responsibilities. Specifically, according to the department’s investment review board charters, the Executive Investment Board was to establish key criteria for these boards to use in identifying (1) which IT projects best support HUD’s strategic goals and provide value to the department and (2) which projects were underperforming and should be considered for termination. However, because the Executive Investment Board has not met or conducted any business, such criteria were not established. As a result, instead of making funding recommendations based on criteria representing enterprise-wide goals for the fiscal year 2014 budget cycle, the Customer Care Committee, for example, recommended a set of IT projects to the Deputy Secretary for funding. According to officials from the Office of the CIO, the recommended projects were based on considerations such as the priorities of individual board members or programmatic concerns. The officials from the Office of the CIO considered this approach to be appropriate because, in their view, it helps to ensure that the concerns and goals of each member of the Customer Care Committee are considered during decision making. Regarding criteria for identifying underperforming projects, the officials stated that the department’s investment boards rarely terminate IT projects because they provide needed services that must continue until a replacement project can be found and implemented. Further, HUD’s active investment boards are not fully adhering to the operating procedures outlined in their charters concerning meeting frequency and documentation requirements. For example, according to their charters, two of the boards—the Customer Care Committee and Investment Review Subcommittee—are expected to hold monthly meetings and document and distribute the results of the meetings to stakeholders. However, the Customer Care Committee had documented meeting minutes for just 3 months in fiscal year 2014, and the Investment Review Subcommittee had not documented any of its meetings during this time period. In addressing this matter, officials from the Office of the CIO told us that the investment boards meet as needed to fulfill their responsibilities. Moreover, HUD has not yet developed all of the policies that support its IT management framework. Specifically, the Office of the CIO’s framework identifies 11 key policies that the office was to develop to influence and determine actions and decisions in IT management areas such as acquisitions, capital planning, and project planning. To date, the Office of the CIO has developed 8 such policies, including those previously described and policies for IT governance and enterprise architecture. However, 3 of the planned policies—for performance, privacy, and risk management—have not yet been developed, and HUD has not set a time frame for doing so. Officials from the Office of the CIO stated that they had taken a phased approach to developing the policies and did not intend to have completed the 3 outstanding policies by this time. However, without a timeline supporting this approach or a date by which the 3 outstanding policies will be completed, the department lacks assurance that it will take timely action to implement the additional policies needed to fully establish the IT management framework. Additionally, the department’s IT management framework has not been updated to reflect significant changes to HUD’s project planning and management practices and OMB requirements for conducting reviews of projects. Officials from the Office of the CIO stated that the framework had not been updated because the department’s investment management practices have evolved every year and a definitive set of practices had not been identified. The officials added that updating the framework had not been a priority because it was written at a sufficiently high level to remain relevant. They stated that they hope to make annual updates to the framework to ensure that it remains current. However, a date by which an updated version of the framework will be completed that incorporates, among other things, OMB requirements, has not been established. Until HUD’s investment boards operate according to their designated authority and responsibilities and criteria are established to guide investment decision making, the department cannot ensure that, instead of individual interests, a corporate responsibility is reflected in IT decision making. Additionally, the department cannot ensure that projects will be selected or terminated based on their ability to meet strategic goals and bring value to the entire organization. Further, without complete and current policies and procedures to guide its investment boards, the department lacks assurance that its investment management practices will be implemented consistently and effectively across the department. According to the IT investment management framework developed by GAO, to support well-informed investment decision making, organizations should document and implement a well-defined process for selecting new proposals and reselecting ongoing investments. Documenting and implementing the process is a basic step toward achieving mature IT project selection. Elements of such a process include key practices, such as those discussed in the IT investment management framework and cost estimation guidance developed by GAO—practices for identifying, evaluating, and prioritizing IT proposals for funding. Specifically, with respect to proposal evaluation, agencies should define how data (including cost estimates) are to be developed, verified, and validated, including detailed information to explain the basis for the cost estimate and how the estimated funding will be spent; criteria for how proposed projects are to be analyzed in terms of benefits, cost, schedule, and project risk; and a scoring mechanism that compares proposed projects to one another in terms of investment size (cost), project longevity (schedule), technical difficulty, project risk, and cost-benefit analysis, in order to help the boards analyze and prioritize projects based on their strengths and weaknesses. Further, final selection decisions should be made by senior decision makers and should be documented and supported by the evaluation actions described above. In addition, another key practice involves predefining a method for reselecting ongoing projects for continued funding, including establishing predetermined criteria for analyzing ongoing operations and maintenance projects. As recommended by the guidance GAO developed, HUD has established practices for identifying new IT proposals. The Office of the CIO has taken steps to identify new IT proposals by developing standardized templates for proposed IT projects. Among other things, the templates address how proposed projects will meet business needs by requiring information about strategic and agency priority goals to be addressed by projects and descriptions of specific business needs or requirements that projects are intended to support. However, the department has not yet fully addressed key practices for evaluating and prioritizing IT proposals. With regard to IT proposal evaluation, the department has not documented how data supporting proposed projects are to be developed, verified, and validated. Specifically, the office has not established detailed requirements or standardized guidance for how sponsors of proposed projects are to develop key elements of proposals. For example, the office has not yet defined how project cost estimates should be created or evaluated, including what detailed information is required to explain the basis for the estimate and how the estimated funding will be spent. In addition, the office has not developed procedures for verifying and validating the data in proposals or required project sponsors to provide supporting documentation that the Office of the CIO could use to verify or validate the data submitted. During fiscal years 2014 and 2015, for example, the office did not validate whether cost information submitted was based on any standardized cost estimation practices. In addition, in evaluating IT proposals, the investment management division does not require deficiencies in IT proposals to be addressed before proposals can be recommended for funding and has not implemented procedures to track whether deficiencies were addressed and whether scores were improved as a result. Further, while the Office of the CIO has established and used criteria to analyze proposed projects in terms of benefits, the criteria do not address how cost, schedule, or project risk are to be analyzed. The office established criteria for scoring proposals that are used by staff within the office and subject matter experts to score and prioritize proposals for selection and inclusion in the department’s IT budget each year. According to the criteria, to receive a high score in the mission benefits category, IT proposals should identify one or more benefits of the project that directly link to HUD’s mission and clearly define a consistent method by which benefits are measured. However, while the Office of the CIO requires that schedule milestones for contracts be provided, it has not established requirements for the reporting of planned schedules or criteria for analyzing project schedules. Further, regarding risk, although business cases are to report how projects will reduce certain department risks, the Office of the CIO has not established criteria for evaluating proposals based on project risk, including whether all relevant project risks have been identified or adequate plans for mitigating risk have been developed. Although the Office of the CIO developed and is using a scoring mechanism, it does not allow the department to compare projects to one another in terms of investment size (cost), schedule, technical difficulty, project risk, or cost-benefit analysis in order to consider relative strengths and weaknesses when prioritizing projects. For example, in analyzing reported mission benefits in business case proposals, the investment management division scores an IT proposal based on whether it has identified mission benefits. Similarly, with regard to risk, the Office of the CIO does not incorporate analyses of project risk into its scoring. The IT management division scores a proposal based on whether it identifies technical risks the department faces that the project intends to reduce and whether there is a clear description of a strategy or plan for how such risk may be reduced. However, proposals that went beyond that requirement to identify specific project-related risks and plans for mitigating them could receive the same score as proposals that did not identify any project-related risks. Thus, proposed projects are not compared in terms of their relative benefits, risks, or potential return on investment. Further, scores are not lowered if proposals are incomplete; that is, scores are based only on the data that were reported, and any items left incomplete are not factored into the scoring. As a result, a partially complete proposal could potentially be given a similar or an even higher score than a proposal that included all of the requested information. Moreover, the extent to which IT proposals selected by senior decision makers are supported by key evaluation practices is unclear, and the decisions are not consistently documented. In particular, officials from the Office of the CIO stated that senior executives on the boards make final decisions about which projects to fund based on qualitative factors that are not standardized. Board members are not provided with additional information such as analyses comparing the relative costs, time frames, benefits, or risks of projects being considered. Further, the Office of the CIO documents board members’ agreement on a final list of projects to be funded, but does not document the rationale used, including explanations for why projects with lower priority scores may have been funded, why any other exceptions to the initial funding priority were made, or whether supporting analysis was used by the various boards to reach a final decision, as called for by GAO’s investment management framework. Finally, the Office of the CIO has not yet established a predefined method for reselecting ongoing projects for continued funding or defined criteria for analyzing projects that are in the operations and maintenance phase. While the office collects different data in business cases for projects in operations and maintenance, it ranks and scores such projects along with newly proposed projects. Projects are prioritized based upon their total scores—without considering whether projects are new or ongoing. Consequently, a poorly performing project that had a detailed business case proposal meeting established criteria could receive a high score and be ranked high on the list of priorities. Moreover, because the office has not established a reselection method that includes predetermined criteria for analyzing ongoing projects for continued funding, decisions to reselect projects are not consistently based on key practices such as analysis of progress or project outcomes or assessments of the potential risk or return of continuing to invest in a project. While the Office of the CIO or the investment boards may discuss ongoing projects’ progress in investment selection deliberations, without a consistent method and predefined criteria for making decisions about reselecting ongoing projects, HUD may continue to invest in projects that are not performing as needed. Officials from the Office of the CIO acknowledged that they have not yet developed a standard and well-documented selection process for new IT proposals or for reselecting ongoing investments that fully addresses key practices, including outlining requirements for cost estimates. Officials from the Office of Strategic Planning and Management stated that new guidance for cost estimation is under development and that more robust practices will be used to create cost estimates for the fiscal year 2016 budget process. The officials attributed weaknesses in the selection process to, among other things, efforts to minimize the burden on those requesting funding, which result in limiting requirements for submitting detailed information to support project proposals; lack of an established priority for developing life-cycle cost estimates for projects (until recently); changes in senior leadership, departmental priorities, and approaches; lack of departmental oversight of the decision-making process by senior executives; and reliance on qualitative, judgmental data and inadequate consideration of key quantitative measures, such as return on investment. Until HUD documents a complete selection process that incorporates key practices for identifying, evaluating, and prioritizing investments, the department is at risk that its selection practices will lack the standardization, transparency, and consistency needed to ensure effective decision making. In addition, key stakeholders may not have common understanding of the practices or qualitative factors considered in decision making, and executives may miss opportunities to consider the relative risks and returns and strengths and weaknesses of proposed investments. As a result, given that the final decisions are not data driven; HUD is at greater risk of not selecting the appropriate mix of IT investments that best meet its organizational and technology needs and priorities for improvement. As with investment selection, organizations should have a documented, well-defined process for overseeing ongoing investments once they have been selected. Effective investment oversight and evaluation involves, among other things, documenting the process for oversight, including predefined criteria and checkpoints for reviewing the progress ongoing projects have made in meeting cost, schedule, risk, and benefit expectations; comparing actual performance against estimates; and identifying areas where future decision making can be improved. Specifically, key practices call for predefined thresholds for project performance designed to increase oversight of underperforming projects. In addition, once the project has transitioned from the development phase to the operations and maintenance phase, organizations should conduct post-implementation reviews to compare actual investment results with decision makers’ expectations for cost, schedule, performance, and mission improvement outcomes. The lessons learned from these reviews can be used to modify future investment management decision making. Since 2011, the Office of the CIO has established elements of a process for managing individual projects after they are selected. Specifically, revisions made in 2014 to the office’s project planning and management framework require project managers to develop management plans that are intended to outline, among other things, performance expectations for projects once they are selected and initiated. The office has also assigned specific investment oversight responsibilities to two of the department’s investment boards—the Technical Review Subcommittee and the Investment Review Subcommittee. Finally, once projects are completed, the project planning and management framework requires the Office of the CIO to conduct post-implementation reviews no later than 1 year after systems are implemented to evaluate results of completed projects. Nonetheless, the office has not yet institutionalized all of the established practices, and in some cases, has not established key practices. For example, to fulfill its oversight responsibilities, the Technical Review Subcommittee is supposed to collect certain cost, schedule, benefit, and risk data for each IT project at specific life-cycle checkpoints established by the project planning and management framework; conduct reviews at each checkpoint designed to ensure that IT projects are planned, budgeted, and scheduled in alignment with HUD’s strategic goals and approach to technology management; and provide support to other boards, such as technical and architecture analysis, in monitoring and analyzing investment performance. As required, the Technical Review Subcommittee collects data on each IT project’s cost, schedule, benefits, and risk at established life-cycle checkpoints and conducts reviews at each checkpoint. During the reviews, the subcommittee analyzes projects’ compliance with project documentation requirements and technical and architectural standards. However, the subcommittee is not yet positioned to fully execute its oversight responsibilities due to certain limitations. First, the project planning and management artifacts and data required for these reviews have recently been revised and the related project management practices have not yet been institutionalized. Officials in the Office of the CIO stated that efforts to institutionalize the new process and strengthen the subcommittee’s oversight function for all investments are under way, but the office has not yet established expected time frames for when these efforts will be completed. Moreover, efforts by the Office of the CIO to improve project oversight practices may continue to be constrained by project management deficiencies we identified in our 2013 report, including practices designed to provide data that could be used for investment oversight. Second, the subcommittee has not consistently used data collected about projects to monitor progress against the expectations established. In August 2014, officials from the Office of the CIO stated that the subcommittee had begun conducting assessments for cost and schedule; however, they could not produce the results of any of these assessments or provide any evidence that such reviews had actually assessed performance against expected benefits or risks. Moreover, the Office of the CIO’s documented policies and procedures requiring reviews by the subcommittee do not establish cost-, schedule-, or performance-based thresholds that would automatically trigger remedial action or referrals to other investment boards. Officials from the office acknowledged that practices for monitoring progress had not yet matured and that the performance data currently collected and maintained at the project level needed improvement. Moreover, because of this immaturity, current efforts to monitor progress are limited. Further, without such thresholds, project oversight may not be consistent or troubled projects may not receive additional oversight by the investment boards. Officials from the Office of the CIO also acknowledged that the office has not yet established and documented a well-defined process for investment oversight and attributed weaknesses in oversight to, among other things, limitations in its ability to develop reliable cost, schedule, and benefit estimates to use for monitoring progress and evaluating performance. Until HUD addresses gaps in its processes for monitoring progress of projects and documents policies and procedures to sustain and consistently implement oversight practices, it cannot ensure that its management of IT will achieve desired results. As another investment oversight mechanism, the Investment Review Subcommittee is responsible, under its charter, for monitoring investment and portfolio performance and taking action to (1) terminate investments consistently experiencing variances in cost or performance or (2) bring them back within acceptable cost or performance limits. However, to date, the Investment Review Subcommittee has not fulfilled these responsibilities. Officials from the Office of the CIO acknowledged that the subcommittee has not performed these functions and said that they are reviewing the roles and responsibilities of the subcommittee to determine whether changes are needed. The officials also stated that, as part of early actions to define an oversight process, the Office of the CIO is working to implement more mature practices and developing an investment-level view of performance, including a strategy for identifying performance expectations. Specifically, the officials provided plans to develop an enterprise-wide portfolio performance management process, which includes implementing a new portfolio management tool with portfolio and project management functionality planned to be operational by February 2015. Officials from the Office of the CIO attributed weaknesses in oversight to, among other things, lack of a consistent, enterprise-wide way to collect and compare actual cost, benefit, schedule, or risk to estimates. Without progress reviews that compare investments against estimated cost, estimated schedule time frames, and expected benefits using predefined thresholds, HUD will not have insight into whether the projects are meeting mission needs during their development or after they are completed. Finally, the Office of the CIO has not consistently conducted post- implementation reviews to evaluate results of projects after they are completed. Although the office’s project planning and management process calls for such reviews no later than 1 year after system implementation, the office had not scheduled or conducted any such reviews until recently. In August 2014, officials from the Office of the CIO reported that the Technical Review Subcommittee had begun undertaking post-implementation reviews of its approximately 200 operational systems. They explained that, after conducting several initial reviews, the subcommittee determined that the data in system documentation available to the office were insufficient to support these reviews. As a result, the Chief Technology Officer collected additional data needed to support post-implementation reviews of all 200 operational systems. According to officials from the Office of the CIO, the reviews are scheduled to be completed by the end of November 2014. When explaining why post-implementation reviews had not been conducted until recently, officials in the Office of the CIO said that, among other reasons, relatively few IT projects had been completed. Nonetheless, while many of HUD’s recent modernization projects remain under way and have not reached a point at which post-implementation reviews would be appropriate, establishing effective practices to collect and maintain the data needed to support such reviews remains important. The Office of the CIO will not be positioned to conduct effective post- implementation reviews until it identifies the data needed for such reviews and requires that it be collected consistently for all projects. Officials from the Office of the CIO acknowledged that the office experienced deficiencies in capturing and communicating lessons learned and translating them into revised decision-making processes. Without post- implementation reviews, HUD will not be able to compare the outcomes of completed projects with expectations. OMB guidance requires agencies to identify and communicate anticipated cost savings and portfolio improvements realized. Specifically, the guidance requires agencies to identify and report cost savings gained from, for example, retiring low-value and duplicative investments, eliminating costly support contracts, moving to shared services such as cloud computing, and reducing IT commodity spending. Additionally, agencies are directed to seek operational efficiencies such as automating or streamlining processes and providing mobile technologies that result in improved services to taxpayers. OMB’s guidance also calls for agency leadership to use high-quality data in these efforts. Among other things, OMB’s guidance on performance reporting calls for agencies to ensure that supporting documentation is maintained and readily available, data are verified as appropriate to the needed level of accuracy, and data limitations are explained and documented. We have also reported that it is important to have assurance that the data collected and reported by agencies are complete and accurate. Specifically, we have reported that agencies should explain the procedures used to verify or validate their data and ensure that data are sufficiently complete, accurate, and consistent. HUD’s reported cost savings and operational efficiencies were not supported by data that were complete, accurate, and consistent. To date, through various mechanisms such as its fiscal year 2014 expenditure planinformation, the Office of the CIO identified 14 instances of cost savings and operational efficiencies reportedly accomplished through selected investments and governance decisions. From its varied efforts, HUD reported about $23 million in cost savings during fiscal year 2014. Sources of the savings identified included and reports to OMB, as well as in response to our requests for initiatives to consolidate commodity IT; decisions to eliminate several system-support contracts (resulting in annual cost avoidance); projects selected and implemented to automate manual processes and program reporting requirements; and actions to deactivate three legacy systems. However, the information reported from these four sources was deficient in the following ways. Data were not validated: HUD did not take steps to verify or validate the data. Specifically, officials from the Office of the CIO reported that they did not verify or validate data reported or require that those reporting cost savings verify or validate the data provided. Supporting data were not provided: The Office of the CIO could not provide documentation needed to substantiate that the cost savings data reported were reliable. Specifically, neither the list of deactivated systems nor the fiscal year 2014 expenditure plan provided the basis for savings reported, links to supporting documentation for those calculations, or clear information about when the savings were achieved. In addition, although certain reported savings could be traced to OMB requirements for reporting on specific governance activities and others could be presumed to have been generated from the investment selection process funding specific projects, it was unclear whether other savings resulted from specific governance decisions because HUD did not provide meeting minutes or other documentation of governance decisions authorizing or recognizing the savings or efficiencies. Regarding the lack of data validation, officials from the Office of the CIO told us that they accept data as reported because they lack the resources needed to validate the data submitted. With regard to the lack of adequate supporting documentation, CIO officials acknowledged that not all governance decisions result in savings or efficiencies and that clearly linking cost savings and efficiencies to specific governance decisions is a challenge. However, the Deputy CIO recognized that Office of the CIO officials could do a better job of documenting specific decisions made by investment review boards in meeting minutes. Additionally, the quality of the information reported about actions to deactivate legacy systems was questionable for the following reasons: Data were not complete or accurate: HUD reported that it had deactivated 19 systems. However, the agency’s reported cost savings associated with deactivated systems were not complete. For example, savings for 10 of the systems were either listed as “unknown,” or information about estimated or actual savings associated with deactivated systems was missing. Further, 2 of the systems reported as deactivated remained operational but were moved off external contracts to in-house support. Data were not consistently reported: Specifically, the period of time over which certain savings should extend was not consistently specified. For example, the 2014 expenditure plan attributed to a mapping system for grants management reported savings of an estimated $50,000 for each grantee every 5 years. However, for the other deactivated systems, the data did not clearly show for how many years estimated savings or actual savings would accrue. HUD also reported during fiscal year 2014 that it had achieved specific operational efficiencies from selected IT projects under way or completed. Specific sources of reported efficiencies identified included the following: The Office of the CIO reported that selection of and investment in human capital management systems had resulted in a number of quantified business benefits such as reductions in hiring time; improved data processing accuracy and quality; improved timeliness of performance reviews and overall communication delivery; increases in assessments of employee training needs; and an increase in the response rate for exit surveys for outgoing employees. The office also reported operational efficiencies achieved through investments in specific projects but did not quantify the benefits reported to have been generated by those systems: The Integrated Budget Forecasting Model and its functionality designed to continually monitor short-term funding needs and automatically detect excess funding on contracts were associated with reductions in payment delays, fewer disruptions caused by inaccurate projections of needed funding, and increased ability of multifamily housing staff to perform timely recaptures of overpayments to housing authorities and cancel excess account balances. The Federal Housing Administration Transformation effort was reported to have increased data quality and streamlined delivery to financial services customers. Implementation of a modernized enterprise-wide integrated acquisitions management system was reported to have reduced inefficiency and processing time and improved service delivery by eliminating duplication in the acquisition/procurement process. However, as with reported cost savings, the quality of the reported information on operational efficiencies achieved is questionable. In this regard, the Office of the CIO could not provide evidence that operational efficiencies achieved had been verified or validated. It also could not provide supporting documentation to substantiate the reliability of the data about reported efficiencies or to show that they were supported by data that were complete, accurate, or consistent. The questionable quality of HUD’s reported cost savings and operational efficiencies may be attributable, in part, to specific governance weaknesses previously discussed in this report. Among other things, insufficient requirements for collecting data in IT proposals about expected benefits or reporting of progress made toward those goals may limit the information available about savings and efficiencies for individual IT projects. In addition, the lack of comprehensive information for IT investment management leaves the Office of the CIO dependent upon ad hoc reporting efforts and searches for data reported for other purposes to identify cost savings and operational efficiencies. Finally, deficiencies in documentation of governance decision making may limit the office’s capacity to attribute cost savings and operational efficiencies to its IT governance practices. According to officials from the Office of the CIO, including the Acting Deputy CIO for Customer Relationship and Performance Management and the investment management division director, HUD lacks a systematized view of cost savings and a formal written policy for identifying and reporting on cost savings and operational efficiencies. They explained that savings are not documented in one place, are not tracked, and are measured in different ways for different projects. Further, the Office of the CIO does not systematically assess whether planned savings and efficiencies (including those associated with management of its enterprise architecture) have been achieved. Lacking a process for identifying savings and efficiencies from all of its governance decision making, the Office of the CIO cannot obtain a comprehensive view of savings and efficiencies planned for or accomplished by its portfolio of IT investments and, thus, does not have assurance that investments are delivering expected benefits. The office may also be missing opportunities to expedite investments that are producing greater than expected savings and efficiencies. Finally, without comprehensive data about expected or actual savings and efficiencies, the department will be limited in its ability to gauge the effectiveness of its overall governance efforts and report to Congress on the progress it is making in improving its IT environment. HUD has made important progress in establishing IT governance practices. Specifically, the Office of the CIO has established investment review boards and guiding policies for governance. Additionally, the office has partially implemented processes for selecting and overseeing investments. The need to address long-standing shortcomings in HUD’s IT management capability and improve the overlapping, duplicative, antiquated, and costly-to-maintain systems it uses to support the department’s mission make it critical that the Office of the CIO fully implement and sustain effective IT governance practices. Lacking boards that operate as intended, as well as complete and current policies for IT management, the department faces risk that its governance efforts will fall short of ensuring effective decision making. Further, maturing selection processes to ensure consistent application of selection criteria, comparison of proposed projects based on key factors, and adequate documentation of the entire process has the potential to bolster HUD’s investment management and better position leaders to implement more strategic management of the investment portfolio. Developing and sustaining robust processes for monitoring the progress of investments and evaluating their performance against expected outcomes would also aid the Office of the CIO in better understanding what it is obtaining for the investments made in IT each year. Until investment management practices are fully implemented, HUD cannot be assured that its IT investments are providing planned functionality efficiently and effectively and the department may be missing opportunities to improve the quality and outcomes of IT investments. Finally, in the absence of capability to estimate and monitor governance- related cost savings and operational efficiencies, HUD has limited ability to monitor the outcomes of its IT governance activities. To ensure that HUD fully implements and sustains effective IT governance practices, we recommend that the Secretary of Housing and Urban Development direct the Deputy Secretary and the department’s Chief Information Officer to place a high priority on taking the following actions: Ensure that the executive-level investment review board meets as outlined in its charter, documents criteria for use by the other boards, and distributes its decisions to appropriate stakeholders. Fully establish and maintain a complete set of governance policies, establish time frames for establishing policies planned but not yet developed, and update key governance documents to reflect changes made to established practices. Fully establish an IT investment selection process that includes (1) articulating how reviews of project proposals are to be conducted; (2) planning how data (including cost estimates) are to be developed and verified and validated; (3) establishing criteria for how cost, schedule, and project risk are to be analyzed; (4) developing procedures for how proposed projects are to be compared to one another in terms of investment size (cost), project longevity (schedule), technical difficulty, project risk, and cost-benefit analysis; and (5) ensuring that final selection decisions made by senior decision makers and governance boards are supported by analysis, consider predefined quantitative measures, and are consistently documented. Fully establish a well-defined process that incorporates key practices for overseeing investments, including (1) monitoring actual project performance against expected outcomes for project cost, schedule, benefit, and risk; (2) establishing and documenting cost-, schedule-, and performance-based thresholds for triggering remedial actions or elevating project review to higher-level investment boards; and (3) conducting post-implementation reviews to evaluate results of projects after they are completed. Further, to establish an enterprise-wide view of cost savings and operational efficiencies generated by investments and governance processes, we recommend that the Secretary of Housing and Urban Development direct the Deputy Secretary and Chief Information Officer to place a higher priority on identifying governance-related cost savings and efficiencies and establish and institutionalize a process for identifying and tracking comprehensive, high-quality data on savings and efficiencies resulting from IT investments and the IT governance process. We received written comments on a draft of this report from the Department of Housing and Urban Development (reproduced in app. II). In its comments, the department stated that it concurred with our recommendations and intends to provide more information, including timelines for planned actions, once the final report has been issued. We are sending copies of this report to interested congressional committees. We are also sending copies to the Secretary of Housing and Urban Development. 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 Valerie C. Melvin at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Our objectives were to determine (1) to what extent the Department of Housing and Urban Development (HUD) has implemented key information technology (IT) governance practices, including effective cost estimation, and (2) what, if any, cost savings or operational efficiencies HUD has reported achieving as a result of its IT governance practices. To address our first objective, we reviewed and analyzed documentation on HUD’s IT governance practices. This documentation included HUD’s IT Governance Policy that called for the establishment of an IT management framework and four investment review boards; the IT Management Framework and Governance Concept of Operations that identified key IT policies and processes to support IT governance and investment decision making; and charters that established the roles, responsibilities, authorities, and operations of the department’s investment review boards. We also reviewed documents showing how HUD determines which IT projects will be recommended and then selected to receive funding, including business cases, the criteria for assigning scores to competing investments, and master lists of final scoring results. Additionally, we reviewed available meeting minutes and presentations from HUD’s investment review boards related to investment decision making. Further, we reviewed documents regarding the Office of the Chief Information Officer’s (CIO) recent efforts to establish an enterprise-wide cost estimation methodology, including a cost element dictionary and memorandum to provide guidance for formulation of HUD’s fiscal year 2016 IT budget. To assess HUD’s IT governance practices, we compared the evidence collected from our document reviews and analysis against critical processes in the information technology investment management framework developed by GAO that were most relevant to HUD’s efforts. These processes establish basic capabilities that lay the foundation for implementing more mature governance capabilities in the future, specifically instituting governance boards and establishing processes for selecting and overseeing investments. In addition, we identified supplementary criteria for assessing cost-estimating practices that were derived from GAO’s Cost Estimating and Assessment Guide.determined that the information provided by the Office of the CIO was sufficiently reliable for addressing this objective. To address our second objective, we obtained and evaluated HUD- reported information on achieved cost savings and operational efficiencies accomplished through selected investments and governance decisions. Various sources of reported savings and efficiencies included the department’s fiscal year 2014 expenditure plan, which identified recent accomplishments and associated benefits from IT modernization efforts, a list of systems that had been deactivated since the beginning of fiscal year 2010 that identified resultant actual or estimated annual cost savings, and reports submitted to the Office of Management and Budget on cost savings achieved through the consolidation of commodity IT and cost avoidance achieved through decisions to eliminate system-support contracts. Because reporting of savings and efficiencies was fragmented and not clearly attributed to governance decision making, we summarized the savings and efficiencies included in disparate Office of the CIO reports and asked officials to determine whether the information, as summarized, was accurate and complete. The officials confirmed that the list of savings we compiled from various reports accurately depicted its governance- related savings and efficiencies; however, we determined that the data provided were questionable because the information was not complete, accurate, consistent, or verified. Further, although requested, the Office of the CIO could not provide documentation to substantiate the information that it reported. As a result, we determined that the information provided by the office to report governance-related cost savings and operational efficiencies was not sufficiently reliable for the purposes of our review. Specifically, the data provided were not consistent and complete, and the Office of the CIO did not provide supporting documentation we could have used to assess the reliability of the information, such as documentation showing how reported cost savings and operational efficiencies were achieved or how, if at all, they related to specific governance decisions. To address both objectives, we interviewed officials from the department’s Office of the CIO, including the Deputy Chief Information Officer (formerly the Acting Chief Information Officer), the Acting Deputy CIO for Customer Relationship and Performance Management, the Acting Chief Technology Officer, the Acting Chief IT Transformation Officer, the Investment Management Division Director, and the Acting Enterprise Architecture Director, to obtain information on HUD’s IT governance process. We also interviewed HUD officials from the department’s Office of Strategic Planning and Management Office, including the Acting Director. We conducted this performance audit from February 2014 to December 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 objective. 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 above, Mark T. Bird (Assistant Director), Donald A. Baca, Kami J. Corbett, Amanda C. Gill, Lee A. McCracken, and Roger M. Smith made significant contributions to this report. | HUD relies on IT to deliver services and manage programs in support of its mission of strengthening communities and ensuring access to affordable housing. However, the department has experienced shortcomings in its IT management capability and limitations in the systems supporting its mission. A Senate report accompanying HUD's fiscal year 2012 appropriation mandated GAO to evaluate, among other things, the department's institutionalization of IT governance. In response, GAO reported on HUD's IT project management in June 2013. GAO's objectives for this second review were to determine (1) the extent to which HUD implemented key IT governance practices, including effective cost estimation, and (2) what, if any, cost savings or operational efficiencies HUD has reported achieving as a result of its IT governance practices. To accomplish this, GAO compared HUD's approach to IT governance with best practices and the department's policies and procedures. GAO also analyzed reported cost savings and operational efficiencies, along with any available supporting documentation. The Department of Housing and Urban Development (HUD) has partially established elements of key practices for effective information technology (IT) governance, as identified by GAO's IT investment management guide. However, several shortcomings remain: Investment boards, policies, and procedures were not fully established: HUD chartered four review boards to manage the department's IT investments; however, the executive-level board, which is to be responsible for overall definition and implementation of the investment management process, has never met. Instead, the department's Deputy Secretary makes decisions about which investments to fund. The lack of an operational executive-level board has affected HUD's other active investment boards, which are operating without criteria the executive-level board was to have established for evaluating proposed investments. In addition, HUD has not yet developed all of the policies that it has identified as needed to support its IT management framework. Specifically, the department has not set a schedule for developing policies for IT investment performance, privacy, and risk management. Office of the Chief Information Officer (CIO) officials explained that operating without an executive-level board represents the preferred investment management approach of HUD's Secretary and Deputy Secretary. Process for selecting investments lacks key elements: HUD has developed elements of a process for selecting investments based on defined criteria; however, it has not fully defined and implemented practices for identifying, evaluating, and prioritizing proposed IT projects for funding, as recommended by GAO's IT investment management guide. CIO officials acknowledged that they have not yet fully developed a standard and well-documented process and attributed weaknesses to a variety of factors, including changes in leadership, priorities, and approaches. Process for overseeing investments has not been fully developed: The department has not consistently compared the performance of projects to pre-defined expectations, established thresholds to trigger remedial action for underperforming investments, or reviewed projects after implementation to compare actual investment results with decision makers' expectations. These weaknesses were attributed by CIO officials to, among other things, the lack of a consistent, enterprise-wide way to collect and compare actual data with estimates. Until effective governance practices are institutionalized, there is risk that HUD's investments in IT may not reflect department-wide goals and priorities or effectively support the department's mission. While HUD has reported governance-related cost savings and operational efficiencies, the data to support such reports were not always accurate, consistent, or substantiated. This is due, in part, to the lack of a department-wide approach, as called for in Office of Management and Budget guidance, to identify and collect cost-savings information. Thus, it is unclear to what extent HUD has realized savings or operational efficiencies from its IT governance. GAO recommends that HUD ensure that its investment review boards operate as intended and complete and update associated policies; fully establish processes including key elements for selecting and overseeing investments; and fully establish a process for identifying, collecting, and reporting data about cost savings and efficiencies. HUD agreed with GAO's recommendations. |
The Personal Responsibility and Work Opportunity Reconciliation Act was intended to provide states the flexibility to design cash assistance programs that encourage work and end welfare dependence. Although the act greatly affected AFDC and SSI, few changes were made to Medicaid to help ensure continued health care coverage for low-income families and children. Since its inception in 1935, AFDC—a state and federally funded entitlement program administered by HHS’ Administration for Children and Families and the states—guaranteed cash assistance to needy families with children. The new welfare reform law replaced AFDC with a block grant program, Temporary Assistance for Needy Families (TANF), that ended open-ended federal funding and eliminated the entitlement to cash assistance for eligible families. Unlike the former AFDC program, TANF and the Administration for Children and Families have placed few requirements on how states design and administer their programs. But to encourage work and discourage long-term dependency on public assistance, TANF requires that adults begin working within 2 years of receiving benefits and places a 5-year lifetime limit on benefits. The Balanced Budget Act of 1997 modified several provisions of the welfare reform law that affected SSI eligibility criteria for aliens and Medicaid eligibility for disabled children. SSI—a federal income assistance program that provides monthly cash payments to needy aged, blind, or disabled persons—is administered by the Social Security Administration.The welfare reform law eliminated SSI eligibility for most aliens and tightened the eligibility criteria for children to qualify for disability assistance, with projected savings of more than $21 billion over a 6-year period, according to Congressional Budget Office estimates. The Balanced Budget Act, in part, reinstated Medicaid coverage for those aliens and disabled children who were enrolled in SSI when the welfare reform law was enacted on August 22, 1996. While major changes were made to cash assistance programs, relatively few changes were made to Medicaid—a federal-state funded program that the states administer under broad guidance from HCFA. Welfare reform, however, had the potential to directly affect Medicaid eligibles who, prior to the reform, were automatically enrolled in Medicaid based on their eligibility for cash assistance under AFDC. This population accounted for less than 40 percent of the total Medicaid population in 1996. To ensure continued Medicaid coverage for low-income families, the law generally set Medicaid eligibility standards at AFDC levels in effect on July 16, 1996. By setting Medicaid’s eligibility standards at this level, the law ensured that low-income families who would have been eligible for Medicaid before welfare reform continued to qualify for services regardless of the states’ cash assistance reforms. In addition, the Balanced Budget Act established the State Children’s Health Insurance Program and authorized over $20 billion over a 5-year period in federal matching funds to expand health care coverage to uninsured, low-income children who do not qualify for Medicaid. The Balanced Budget Act offers states several options regarding this program. States can use their federally set allotments to (1) expand their existing Medicaid programs to include children who do not qualify under the state’s March 31, 1997, Medicaid rules; (2) create or expand a separate children’s health insurance program; or (3) use a combination of Medicaid and State Children’s Health Insurance Program funds to increase health coverage for children. Although the new welfare reform law provided states with certain choices regarding Medicaid eligibility and administration, the states that we visited chose welfare reform options that sustained Medicaid coverage for their previously eligible populations. Medicaid-related options involve income and resource criteria for determining eligibility, aspects of program administration, sanctions for noncompliance with TANF work requirements, and continued Medicaid coverage for certain aliens residing in the United States at the time of the law’s enactment. Table 1 shows the Medicaid-related choices that the nine states we visited made. In the first year of welfare reform implementation, states generally chose to maintain the linkages formerly in place between their Medicaid and cash assistance programs. In some states, financial eligibility criteria for Medicaid and cash assistance had begun to diverge prior to welfare reform, as a result of state welfare experimentation. This divergence was consistent with the flexibility that the 1996 federal welfare reform law offered states. The Congress included a provision in the welfare reform law to protect Medicaid eligibility for low-income families. This provision—which requires states to use AFDC’s July 16, 1996, standards as the criteria for determining Medicaid eligibility—also provides several exceptions, only one of which allows states to impose more restrictive standards. Specifically, the law permits states to (1) increase their AFDC July 16, 1996, income and resource standards by as much as the year’s consumer price index; (2) use less restrictive methodologies for calculating family income and resources than used on July 16, 1996; or (3) lower their AFDC July 16, 1996, income standards but not below May 1, 1988, levels. At the time of our visits, none of the nine states indicated that they intended to lower their AFDC income standards from July 16, 1996, levels, which could have disqualified some individuals from the Medicaid program. Florida, however, increased its income standard. States desiring to modify their standards or methodologies are required to submit their amended Medicaid state plans to HCFA. However, because of Medicaid’s historic linkage to cash assistance, choices that states must make regarding eligibility for TANF can also affect Medicaid participation rates for low-income families. For example, states must choose who will be eligible for TANF and how much income and resources TANF recipients may have. Less generous standards could discourage people from going to welfare offices where they could receive information on Medicaid eligibility. The welfare reform law gives states the option to continue using their July 16, 1996, AFDC categorical and financial standards for both programs or to develop separate standards for TANF. Four of the nine states we visited reported having separate income or resource standards for Medicaid and TANF. (See table 1.) Officials in these states told us they began using different standards for their Medicaid and cash assistance programs under time-limited welfare demonstration projects that began before the passage of federal welfare reform legislation. State officials indicated that their attempts to identify the proper mix of incentives that would encourage work and discourage welfare dependency frequently led to more generous Medicaid income limits that allowed working families to remain eligible for Medicaid—as was the case in California and New Jersey. (App. II provides more detail on income and resource standards for the nine states.) In addition to experimenting with income and resource standards before welfare reform, states experimented with different methodologies for determining financial eligibility and the amount of cash assistance a family could receive. AFDC regulations allowed states to disregard (not count) certain types of income and resources. For example, states could disregard $265 of a family’s monthly income—$90 for work-related expenses and $175 per child for child care expenses—when determining income eligibility for AFDC and Medicaid. While TANF does not require states to use this or any of the other former AFDC determination methodologies, the welfare reform law requires states to continue using their AFDC July 16, 1996, methodologies for determining Medicaid eligibility. Five of the nine states we visited told us they have different income and resource determination methodologies for their Medicaid and welfare programs. For example, New Jersey officials told us they use more liberal Medicaid income and resource determination methodologies as incentives to encourage cash assistance recipients to begin working. The state disregards 100 percent of the first month’s earnings and 50 percent of subsequent months’ earnings to redetermine continued Medicaid eligibility for welfare families who have begun to work. Also, by disregarding the first $1,000 of personal property, the state has effectively raised its Medicaid resource standard to $2,000—the limit for individuals applying for Work First, New Jersey’s TANF program. In contrast, Wisconsin counts all income in determining whether an applicant is below the 115-percent federal poverty level and eligible for the state’s TANF program—Wisconsin Works, or W-2—but adheres to its July 16, 1996, AFDC rules to determine Medicaid eligibility. Prior to welfare reform, federal law provided that a single state agency be responsible for making both AFDC and Medicaid eligibility determinations. As a result, local public assistance caseworkers were generally responsible for accepting applications and determining eligibility for both AFDC and Medicaid. Welfare reform gave states the option to continue using a single agency to determine eligibility for Medicaid and TANF or to assign those duties to separate agencies. Additionally, the law gave states the option of using a single application for both programs or separate forms. All but one of the states we visited planned, at least in the near term, to maintain the administrative and application linkages between the two programs. All nine states use a common application for the programs, and only Wisconsin has separate agencies for determining applicant eligibility. State officials, including those in Wisconsin, believe that common applications are less burdensome for families seeking assistance and simplify the interview process for caseworkers. Florida officials, for example, told us that the state has used a common application for its assistance programs since 1992. Following the passage of federal welfare reform, Florida further streamlined the application process by converting its state unemployment offices into one-stop public assistance centers. At these centers, Florida residents can complete a single application to apply for Medicaid, job search assistance, child care, housing, and emergency assistance. There are 65 such centers located throughout the state. Wisconsin officials told us that although a single state agency will no longer determine applicant eligibility for Medicaid and TANF, the state will continue to use a single application for both programs. Wisconsin’s Department of Workforce Development determines eligibility for W-2 and the Department of Health and Family Services determines Medicaid eligibility. Wisconsin officials explained that both agencies use the same electronic application and have access to information in the state’s client database. Wisconsin’s interactive application guides caseworkers and applicants through the interview, prompting workers to input data sufficient to identify the full array of services and benefits applicants may receive. Under the new welfare reform law, states can sanction TANF recipients for not complying with cash assistance rules. States may reduce or terminate recipients’ cash assistance or temporarily terminate Medicaid coverage for an adult head of a household. The law cites “refusing to work” as a reason for terminating Medicaid but does not permit states to terminate Medicaid benefits for pregnant women, infants, or children who are not a head of a household. The law also limits the length of a Medicaid sanction to when the recipient begins complying with the state’s rules. None of the nine states we visited denied Medicaid as a program sanction for noncompliance with state work rules. In our interviews with state officials, few thought it appropriate to use Medicaid as a sanction for noncompliance with TANF work requirements. Four of the nine states we visited intended to provide state-funded medical assistance for aliens not eligible for federal assistance. Before welfare reform, aliens who were legally admitted to the United States were generally eligible for Medicaid coverage on the same terms as citizens.The Personal Responsibility and Work Opportunity Reconciliation Act recategorized all aliens into two broad categories: qualified and nonqualified. States generally had the option of providing Medicaid coverage to all qualified aliens who were in the country on August 22, 1996, except that refugees, asylees, and aliens whose deportations are being withheld are eligible for the first 5 years on the same terms as citizens. With certain notable exceptions, those qualified aliens who entered the country after August 22, 1996, were prohibited from being eligible for Medicaid for 5 years. The Balanced Budget Act of 1997 amended the provisions related to eligibility of qualified aliens for Medicaid and certain other federal programs. For example, it provided that qualified aliens who were receiving SSI on August 22, 1996, would continue to qualify for SSI and for Medicaid on the same basis as nonaliens. In addition, the act lengthened the period during which refugees, asylees, and aliens whose deportation has been withheld would remain eligible for Medicaid from 5 years to 7 years. The Balanced Budget Act did not, however, lift the 5-year ban on using federal funds for qualified aliens who entered the country after August 22, 1996. The original limitations of the welfare reform law on qualified aliens’ eligibility for Medicaid and other federal programs were controversial. Although the limitations were seen as a major cost-saving measure, there were concerns, especially in states with large numbers of aliens, about the continuing subsistence and health care needs of these people. All nine states we visited informed us that, even before passage of the Balanced Budget Act, they intended to continue Medicaid coverage for qualified aliens already enrolled. In addition, four of the nine states indicated that they intended to provide state-funded medical assistance for aliens not eligible for federally funded assistance. Table 2 shows which groups of aliens not eligible for federal assistance will receive state-funded medical services in these four states. Although state statute requires California to provide its low-income residents—regardless of citizenship status—prenatal and long-term care, proposed changes to state regulations would eliminate state-funded nonemergency services for nonqualified aliens who are not eligible for federal assistance as well as for aliens paroled into the United States for less than 1 year and for those aliens who immigration law considers as nonimmigrants. In December 1996, California’s Department of Health Services proposed regulations that would make state policies regarding aliens consistent with federal welfare reform law. The Department proposed and filed regulations to end state-funded nonemergency prenatal care by December 1, 1997. Advocates challenged the regulatory change, and the regulations were enjoined by a California Superior Court. The Department also filed regulations that would eliminate state-funded long-term care services but did not set a date for terminating funding. California officials told us they are uncertain if and when state funds for either group will be terminated. The state estimates that about 2,800 aliens apply each month for Medi-Cal—California’s Medicaid program—and it is likely that most will be subject to the 5-year federal ban on nonemergency medical assistance.Because the state has not amended its laws redefining Medi-Cal eligibility for aliens, the state-funded program will cover services for those aliens who lost eligibility for nonemergency medical assistance due to federal welfare reform’s restrictions on aliens. According to California’s November 1997 Medi-Cal estimates, the state-funded program may incur an additional $25.3 million during the state’s 1998-99 fiscal year and as much as $56.9 million annually by the state’s 2001-02 fiscal year. In July 1997, the Connecticut legislature authorized state medical assistance expenditures for aliens admitted into the United States on or after August 22, 1996, who are subject to the 5-year ban but who meet other Medicaid eligibility criteria and have been state residents for at least 6 months. Connecticut’s state-funded medical assistance package will not cover long-term care or community-based services. The legislature also only authorized funding for 2 years. According to state estimates, about 350 aliens qualify for state-funded medical assistance. The Florida legislature passed the Humanitarian Aid to Legal Residents Act of 1997 to provide medical and financial assistance and Food Stamp benefits to elderly and disabled aliens who were state residents on June 30, 1997. Annually, about 12,000 aliens legally enter Florida, many of whom are over 65 years of age with no other means of support and would not be able to become United States citizens due to mental or physical incapacity. State legislators were particularly concerned with the well-being of aliens who would be subject to the welfare law’s 5-year ban on federal assistance. The New York legislature was similarly concerned about the fate of elderly and other aliens who are subject to the 5-year federal ban. New York’s Welfare Reform Act of 1997 provides state-funded medical assistance for aliens who were enrolled in Medicaid on August 4, 1997, and in nursing homes or residential care facilities licensed by the state’s Office of Mental Health or by the Office of Mental Retardation and Developmental Disabilities. State officials estimate that it will cost about $32 million annually to care for the approximately 1,000 aliens who are in those qualifying nursing homes and residential care facilities. New York also provides prenatal care for all aliens and does not distinguish between those who are or are not subject to the 5-year ban. State officials were unable to estimate the cost of these services. Because of the Medicaid-related welfare reform options that states exercised, the states we visited reported few structural changes for their Medicaid beneficiaries. In addition to questions about what options states would exercise in the first year of welfare reform, there were concerns about the potential adverse impact of the new law’s more restrictive SSI criteria on children’s Medicaid eligibility. Moreover, the Balanced Budget Act of 1997 largely mitigated the concerns about lost Medicaid coverage in most states. However, we found that in one state we visited, about 1,700 children who lost SSI eligibility due to welfare reform were inappropriately terminated from Medicaid. Despite limited structural changes, some states we visited were concerned about the impact on their administrative processes as they manage Medicaid programs using July 16, 1996, AFDC eligibility criteria or contract with private firms to determine applicant eligibility for cash assistance and work with welfare clients. Although some state officials expressed concerns about the anticipated costs resulting from these new administrative requirements and associated changes to their information systems, most could not provide firm cost estimates at the time of our visits. The 1996 welfare reform law enacted several provisions that affected SSI eligibility for children. First, the law changed the definition of childhood disability from an impairment comparable to one that would prevent an adult from working to an impairment that results in “marked and severe functional limitations.” Second, the law eliminated the individualized functional assessment (IFA) process as a basis that the Social Security Administration could use for determining childhood disability. Third, the law revised how maladaptive behavior (behavior that is destructive to oneself, others, property, or animals) is considered when assessing whether a child has a mental impairment. For example, before welfare reform, a child could qualify for SSI if the impairment kept the child from functioning similar to other children of the same age. The welfare reform law specified that a child’s impairment, or combination of impairments, could only be considered disabling when it results in marked and severe functional limitations. Soon after welfare reform’s enactment, HCFA took steps to lessen the administrative burden on states of performing SSI-related Medicaid eligibility redeterminations. Medicaid regulations require states to redetermine Medicaid eligibility for individuals losing SSI. Advocates were concerned that because of the large number of individuals potentially losing SSI, states would inappropriately terminate Medicaid for individuals who might qualify for coverage under alternative eligibility categories. To address these concerns and allow states to better manage their resources, HCFA nearly tripled the time frames for states to complete Medicaid redeterminations related to welfare reform. The Balanced Budget Act softened the immediate impact of these SSI eligibility changes on children’s Medicaid coverage and extended the deadline for terminating cash payments for these children. For example, the act specifically authorized a new Medicaid eligibility category exclusively for children losing SSI due to welfare reform and who were receiving benefits on August 22, 1996. Previously, under welfare reform, the Social Security Administration had until August 22, 1997, to use the new criteria to redetermine the eligibility of about 300,000 children whose disability had been based on maladaptive behavior or an IFA determination. By extending the deadline to February 22, 1998, the act gave the Administration more time to complete its redeterminations. Despite federal efforts to lessen the potential impact of Medicaid eligibility redeterminations for those losing SSI, the process did not always go smoothly. On October 1, 1997, Georgia inappropriately terminated Medicaid coverage for about 1,700 children who no longer met the SSI disability criteria. Eight days later, advocates filed suit on behalf of the children, contending that the state (1) had not continued Medicaid coverage for children meeting the criteria for the newly created eligibility category, (2) had not appropriately redetermined the children’s eligibility for alternative Medicaid categories before terminating coverage, and (3) was not continuing Medicaid coverage during the SSI appeals process. Georgia officials attributed the inappropriate terminations to its inability to obtain requested data from the Social Security Administration on a timely basis and to administrative and automated-system weaknesses in recognizing the children’s continued eligibility under the newly authorized category. HCFA and Georgia officials informed us that the children who lost Medicaid coverage have been reinstated. In addition, the state is continuing to manually redetermine Medicaid eligibility for those disabled children losing SSI eligibility, while remedies to its systems problems are being developed. The provision of the welfare reform law that protects Medicaid eligibility for low-income families also carries administrative implications for the states. Some state officials expressed concern about aspects of the welfare reform law that could require changes to their administrative processes. Specifically, some viewed the requirement to use AFDC’s July 16, 1996, criteria to determine Medicaid eligibility and the new authority to contract with private firms for welfare eligibility determination—but not for Medicaid—as problematic. In some cases, HCFA-approved amendments to a state’s Medicaid plan can resolve program eligibility differences. For example, according to Florida’s Welfare Reform Administrator, the state had developed a simplified application process that it now uses for its TANF program—Work and Gain Economic Self-sufficiency (WAGES)—as well as for Medicaid and Food Stamp benefits. Under WAGES, Florida raised its cash assistance resource standard to $2,000 and liberalized its resource determination methodology. According to Florida officials, to maintain consistent eligibility criteria for WAGES and Medicaid, the state amended its Medicaid state plan, incorporating the WAGES program’s $2,000 resource standard and determination methodology. In other cases, extensive changes to automated administrative systems may be needed. For example, as part of several of its welfare demonstration projects, Iowa tested the impact of having consistent eligibility criteria for its Family Investment Program (FIP), the state’s cash assistance program for families; Medicaid; Food Stamp benefits; child care; and foster care and adoption assistance. The state also tested the impact of time-limited benefits and work incentives. Demonstration project participants were allowed to keep more income and resources than cash assistance recipients not involved in the demonstration. Upon acceptance of the TANF block grant, Iowa officials separated FIP eligibility from Medicaid so that work-related income and resource incentives, as well as financial penalties for noncompliance with FIP rules, would not infringe upon clients’ Medicaid entitlement. Iowa officials are now considering the cost implications of separating the programs and the systems modifications that might be needed. Florida and Wisconsin officials also discussed with us similar systems issues that they must resolve as they implement their welfare reform programs. States that opt to fully contract out—or privatize—TANF case management services may face additional administrative issues, including duplicate application procedures. The new welfare reform law specifically allows states to contract with private firms for conducting TANF activities— including determining applicant eligibility—but the law does not specifically include Medicaid or other federal means-tested programs in that provision. Concerned about the law’s silence regarding Medicaid, Texas and Wisconsin appealed to HCFA and to the Department of Agriculture’s Food and Consumer Service, which administers the Food Stamp program, for policy changes that would allow states to unify and contract out their eligibility determination processes for the Medicaid and Food Stamp programs as well as TANF. As recently as June 1997, Texas planned to solicit public and private sector bids to design and implement the Texas Integrated Eligibility Services (TIES) project. Under TIES, Texas wanted to reengineer and consolidate eligibility determination services for all of the state’s assistance programs into one overall system that contractors could manage. When Texas officials queried federal officials about the possibility of using private contractors to interview and determine applicant eligibility for TANF, Medicaid, and Food Stamp benefits, they received letters from HHS that questioned the advisability of proceeding with the state’s plans. One HHS letter stated that Medicaid’s authorizing legislation and the Food Stamp Act preclude private contractors from evaluating applicant information and certifying eligibility. Texas officials told us that because of HHS’ interpretation and other concerns that the state legislature had with the TIES project, the legislature subsequently limited the bid solicitation to developing new social service eligibility determination processes and the information management systems to support them. Wisconsin officials considered HHS’ interpretation problematic and appealed the decision. As part of the state’s welfare reform, Wisconsin allowed its counties and local governments to decide whether they would administer the W-2 program or allow the state to competitively select private organizations that would perform case management services. Nine of Wisconsin’s 72 counties—including Milwaukee County—opted to allow the state to contract out for services. State officials told us that because of HHS’ interpretation, public assistance applicants in those nine counties are interviewed twice: once by the private contractor for W-2 services and once by a county or local government employee for Medicaid and Food Stamp benefits. In both instances, case managers use the state’s interactive, universal application to conduct the interviews. State officials told us that they are continuing to work with HCFA to streamline the application process in privatized counties. As designed, a single case manger would help W-2 participants coordinate the necessary supportive services—such as medical and transportation assistance, child care, and Food Stamp benefits—and track the recipient’s progress or recommend appropriate sanctions for willful noncompliance. Wisconsin officials believe that dividing program responsibility between private contractors and public employees dilutes the state’s ability to monitor recipients’ progress and compliance as well as its ability to realize administrative efficiencies. Welfare reform poses additional Medicaid education and enrollment challenges for states. The historic link between Medicaid and cash assistance provided states a strong avenue for ensuring that individuals who were qualified for cash assistance were also enrolled in Medicaid. But as welfare rolls shrink, there is concern that those who qualify for Medicaid may not enroll. To help ensure that Medicaid-eligible individuals enroll in the program, the states we visited are beginning to consider how to adapt or create new education and enrollment strategies. Welfare reform expands the number of Medicaid beneficiaries whose eligibility is not tied to cash assistance. Medicaid eligibles who do not receive cash assistance are difficult to identify and enroll in the program. Prior to welfare reform, significant numbers of pregnant women and children qualified for Medicaid based on their age, family income, or both, rather than their link to AFDC or SSI. For these expansion populations, states were already faced with developing strategies to identify and enroll them in Medicaid. More recently, the Balanced Budget Act’s State Child Health Insurance Program increased—at state option—the availability of federal funding for health care coverage for uninsured children. These various initiatives will, in all likelihood, result in many states rethinking the methods they use to reach and enroll eligible populations in state health programs. Although the welfare reform law preserved Medicaid eligibility for families who would have previously qualified for Medicaid, data show that eligible children in low-income families who do not receive cash assistance are much less likely to enroll in the Medicaid program than those who receive cash assistance. As more former welfare recipients join the ranks of the working poor, some fear that many who are eligible for Medicaid may not be aware of their eligibility and, therefore, may not enroll in the program. We estimate that in 1996, about 23 percent of—or 3.4 million—children who are eligible for Medicaid were uninsured by public or private coverage. Of the states we visited, only Iowa and Georgia provided us with estimates of the percentage of the Medicaid-eligible children enrolled in their programs. Iowa estimated that as of March 1997, more than 80 percent of its Medicaid-eligible children were enrolled; Georgia estimated that as of May 1997, roughly 75 to 80 percent of its Medicaid-eligible children were in the state’s program. The other states did not have estimates of the number of Medicaid-eligible children who are—or are not—enrolled in their Medicaid programs. Some provisions of the welfare reform law may also serve as a deterrent for families seeking Medicaid. For example, some state officials and beneficiary advocates believe that the new 5-year lifetime limit on the receipt of cash assistance could deter people who are eligible for Medicaid benefits from applying, fearing that Medicaid benefits will count against their time limit. Advocates are also concerned that under state diversionary programs—which provide welfare applicants one-time payments or work-related direct support services, such as child care or transportation assistance, in lieu of ongoing cash assistance—individuals may not be advised about their Medicaid eligibility. In Wisconsin, the only state we visited with a statewide diversionary program in place, caseworkers screen for eligibility for all assistance programs, including Medicaid, during the applicant’s first visit. According to state officials, in the nine counties that have privatized W-2 case management services, individuals who are provided diversionary assistance are informed of their potential Medicaid eligibility and directed to a county worker for further information. State officials told us that county workers are stationed in the contractors’ offices. All nine states we contacted had a variety of outreach efforts, including outstationed eligibility workers in selected hospitals and health clinics. Most of the states we visited recognized the need to adapt or create new education and enrollment approaches to ensure that eligible individuals continue to enroll in Medicaid. States with extensive education and enrollment programs already in place—such as Florida and Georgia—are considering what changes in the focus of their messages may be needed to reach new groups of Medicaid-eligible individuals. Of the states we visited, Wisconsin appeared to be the furthest along in restructuring its education and enrollment strategies to improve the likelihood that Medicaid-eligible individuals would enroll in the program. According to Florida officials, before the new welfare reform law, the state targeted its education and enrollment efforts toward current and potential beneficiaries in remote locations. At the time of our visit, they had made some revisions to reflect welfare changes. To inform beneficiaries of the new law, the state included—with monthly benefit cards—notices that outlined welfare reform’s changes and the potential effects on Medicaid benefits. To help ensure that non-English speaking individuals were knowledgeable about how the new law might affect their benefits, these notices and other written information were also printed in Spanish and Creole. Florida also used community presentations and public service announcements to inform individuals about the state’s medical assistance programs and where to apply for benefits. The state has also expanded its use of Medicaid “outstations.” According to state officials, beneficiaries can now receive information and apply for medical assistance at one of the state’s 65 one-stop centers located throughout the state as well as from hospitals and community health centers. State documents reveal that although one-stop center staff are primarily responsible for TANF-related activities, they also accept and process Medicaid applications and arrange for employment-related support services such as transitional Medicaid benefits, child care, and transportation. Prior to welfare reform, Georgia had in place an education and enrollment program that many recognized as innovative. Since it began its “Right From the Start” Medicaid outreach project in July 1993, Georgia has aggressively sought Medicaid-eligible individuals. To educate and inform the public about Medicaid eligibility, Right From the Start targets its efforts toward working families unfamiliar with entitlement programs, pregnant women, households receiving food stamps, and children under 19 years of age. Officials we interviewed indicated that the state plans to enhance its program to target parents. The state also has partnered with businesses and community-based organizations to gain community recognition and form local referral networks. In one Hispanic community, the state’s efforts to serve the community led to a cable television spot. Outreach efforts also have led to the state’s participation in many community activities, including health fairs, immunization programs, and the state fair. With a statewide, toll-free number and extended staff work hours—including evenings and weekends—Georgia has also been able to educate and enroll individuals who might otherwise not have had the time or access to enroll in Medicaid. In addition, in cooperation with a shoe store, Georgia placed informational flyers on Medicaid in women’s and children’s shoe boxes. State officials told us, following welfare reform, they plan to update their Medicaid brochures and possibly some of the state’s activities so that families are informed of their continuing entitlement to Medicaid. According to state documents, Wisconsin has begun to focus on maintaining enrollment for Medicaid-eligible individuals in a post-welfare-reform environment and on helping Medicaid beneficiaries make appropriate use of health care resources. To encourage clients to sign up for Medicaid, the state has created brochures for distribution to potential and current beneficiaries at county offices and other locations. The state also uses hotlines and advocates to respond to beneficiary questions and concerns about access to Medicaid. Since July 1997, the state has been planning for and is beginning to outstation eligibility workers at additional provider sites to process Medicaid applications and conduct on-site eligibility redeterminations. Given that Wisconsin’s welfare and Medicaid programs are now separately administered, the state has developed an initiative to explain eligibility changes to its staff and to Medicaid providers. The state plans to use newsletters, Medicaid handbooks, and training to inform health care professionals who serve Medicaid eligibles of eligibility issues. The state also has toll-free numbers that providers and beneficiaries can call to obtain assistance. Moreover, the state provides public and private entities that work with current or potential Medicaid beneficiaries enhanced support and information on program eligibility in light of welfare reform. The state is also building upon the statewide functions of its managed care enrollment contractor to include assistance for community agencies that work with Medicaid eligibles and encounter questions and concerns regarding Medicaid eligibility. While the 1996 welfare reform law reshaped federal cash assistance programs, the law also provided states with Medicaid-related options—options that could have reduced the number of people who would be eligible for Medicaid. However, the states we visited made few structural changes to their Medicaid programs during the first full year of welfare reform, thereby demonstrating their desire to maintain Medicaid benefits already in place. The Balanced Budget Act also reinstated Medicaid eligibility for many aliens and disabled children; however, implementation of the act’s provisions was not always smooth and error-free, as was the case when children were inappropriately terminated from Medicaid in at least one state. States that we contacted—especially those that have done more to separate their welfare and Medicaid programs—raised concerns about the resulting changes that will be needed for their administrative systems as they develop separate eligibility determination processes. While it is unclear how extensive or expensive these system adaptations will be, this is an issue that will bear watching over time—particularly to ensure that Medicaid eligibility determinations and redeterminations made apart from welfare decisions are accurate. Some states also believe that the welfare reform provision allowing them to privatize cash assistance eligibility determinations, while being silent on Medicaid and other federal means-tested programs, is problematic for states that wish to delegate all client case management services to private contractors. Finally, welfare reform poses additional challenges for states to educate and enroll individuals who are eligible for Medicaid. States we visited generally recognized the need to educate beneficiaries of their Medicaid eligibility apart from their eligibility for welfare and to protect Medicaid beneficiaries from inappropriate terminations. State officials also recognized the importance of adapting their education and enrollment efforts to better identify and enroll Medicaid-eligible individuals now that the automatic link between cash assistance and Medicaid no longer exists. However, implementing effective approaches to identify and enroll potential Medicaid beneficiaries and to prevent inappropriate terminations will be a continuing challenge for states. We provided a draft of this report to the Administrator of HCFA. We also provided a draft to Medicaid and welfare officials in each of the nine states we visited and to independent experts and researchers from the American Public Welfare Association and The George Washington University’s Center for Health Policy Research. A number of these officials provided technical or clarifying comments, which we incorporated as appropriate. Others offered additional perspectives, which are summarized below. In discussing our report findings, HCFA officials acknowledged that, in some cases, states beginning to use the welfare reform law’s new flexibility also found increased administrative complexity for their Medicaid programs. HCFA officials pointed out, however, that this tension between the states’ desire for administrative ease and the Congress’ intention to preserve Medicaid eligibility for selected populations was not unexpected. Recognizing the potential new costs accompanying this policy change, the Congress provided additional funds to help states make the necessary initial administrative adjustments. The Director of the Center for Health Policy Research commented that—beyond our discussion of issues associated with redetermining Medicaid eligibility for individuals losing SSI—additional attention is needed on the issue of appropriately functioning Medicaid redetermination procedures. Because the basis of Medicaid eligibility frequently changes—particularly for children—and the states’ welfare reform initiatives could speed up this “churning” process, the procedures that states use to redetermine eligibility need to ensure uninterrupted coverage for those who qualify under alternative categories. She also noted that if the Medicaid redetermination systems cannot work properly, policymakers may need to devise other methods. In terms of outreach and enrollment initiatives in a post-welfare-reform environment, Wisconsin officials offered a perspective on its own program that is pertinent to other states. They stated that their experience in developing an outreach plan for Medicaid is a dynamic one that is being continually adjusted as new issues are identified and new stakeholders become involved. The landscape continues to change as the transition is made from AFDC to TANF, as significant changes are made to state administrative and automated systems, and as the new State Children’s Health Insurance Program is designed and implemented. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of HCFA, the directors of the state programs we visited, and interested congressional committees. Copies of this report will also be made available to others upon request. If you or your staff have any questions about the information in this report, please call me at (202) 512-7114. Other contributors were Enchelle D. Bolden, Shaunessye D. Curry, Barbara A. Mulliken, Karen M. Sloan, and Craig H. Winslow. To describe the Medicaid-related welfare reform options contained in the Personal Responsibility and Work Opportunity Reconciliation Act and the states’ approaches to those options, we analyzed the law and interviewed officials from HCFA’s former Medicaid Bureau and Office of Research and Demonstration in Baltimore, Maryland. (In a subsequent reorganization, HCFA established the Center for Medicaid and State Operations.) We also interviewed issue area experts, including those representing the American Public Welfare Association and The George Washington University’s Center for Health Policy Research. We judgmentally chose nine states—California, Connecticut, Florida, Georgia, Iowa, New Jersey, New York, Texas, and Wisconsin—to include in our study because of the amount of their Medicaid expenditures, varying beneficiary demographics, diverse geographic locations, and differing degrees of welfare reform experience. These states accounted for over 46 percent of fiscal year 1996 Medicaid expenditures and included states among the highest (Connecticut) and lowest (California) per capita Medicaid expenditures. These states also collectively accounted for 78 percent of the aliens receiving federal cash assistance, according to the Social Security Administration’s 1996 statistics. Although these states are illustrative of the actions states are taking nationwide, the results of our 9-state survey cannot be projected to all 50 states. To collect consistent information on (1) states’ Medicaid-related choices, (2) implications of those choices on Medicaid eligibles and state administrative procedures, and (3) steps states have taken or plan to take to educate and enroll Medicaid eligibles, we developed a standardized protocol. We pretested the protocol in Iowa and Florida and revised the protocol based on those tests. The revised protocol was our primary data collection instrument, which guided our site visits to the nine states and our interviews with high-level officials having knowledge of Medicaid and welfare eligibility policies and procedures. We completed our on-site visits in June with subsequent follow-up contacts through January 1998. We also discussed the implications of the states’ actions with representatives from several advocacy groups including the Children’s Defense Fund, the National Health Law Program, and the National Immigration Law Center. We also used the protocol to collect information on the nine states’ Medicaid beneficiary education and enrollment efforts. We identified the states’ current methods, planned program changes, as well as the Medicaid education and enrollment challenges they face. We also reviewed current materials to identify the type of Medicaid information states used to educate Medicaid eligibles. We further discussed with representatives from the Southern Institute on Children and Families, the National Governor’s Association, and the Center on Budget and Policy Priorities their concerns about beneficiary education and enrollment. Income and resource standards were among the financial criteria that welfare officials used to determine applicant eligibility for AFDC and for Medicaid coverage that accompanied cash assistance. These standards represented the upper limits of earned and unearned income, such as child support, as well as the value of assets a family could have to qualify for cash assistance. Because each state sets its own standards, the amount of income and assets families could have and still qualify for AFDC varied among the states. Table II.1 shows the income and resource standards for the nine states we visited. Seven states reported having the same income or resource standards for their Medicaid and TANF programs. Five states—Connecticut, Florida, Georgia, Iowa, and Texas—have common income and resource standards for their programs, while New York uses a common income standard and California uses a common resource standard. Officials in these states thought it important and administratively efficient to maintain some comparability between the programs, at least during this first year of welfare reform. Two states—California and New Jersey—have more generous income standards for Medicaid than for their cash assistance programs. A California family of three may have a monthly income of $934 plus allowances for work and child care expenses and be eligible for Medi-Cal—the state’s Medicaid program. To qualify for CalWORKS, the state’s TANF program, the same family may have no more than $735 in income. A New Jersey family of three may have a monthly income of $1,822, which is 185 percent of the state’s need standard, and qualify for Medicaid. However, applicants for Work First New Jersey, the state’s TANF program, are limited to a monthly income of $954, which is 150 percent of the state’s $636 maximum benefit payment for a family of three. In contrast, we found that Wisconsin’s welfare experimentation led to less generous income and resource standards for Medicaid than for W-2, the state’s TANF program. Under W-2, families may have assets up to $2,500, vehicle equity up to $10,000, and earned income up to 115 percent of the federal poverty level—about $1,278 per month for a family of three. Under Medicaid, however, family resources are limited to $1,000, vehicle equity to $1,500, and net income to less than $520 per month (based on the state’s former AFDC need and payment standards). Welfare Reform: States’ Efforts to Expand Child Care Programs (GAO/HEHS-98-27, Jan. 13, 1998). Welfare Reform: State and Local Responses to Restricting Food Stamp Benefits (GAO/RCED-98-41, Dec. 18, 1997). Social Service Privatization: Expansion Poses Challenges in Ensuring Accountability for Program Results (GAO/HEHS-98-6, Oct. 20, 1997). Supplemental Security Income: Review of SSA Regulations Governing Children’s Eligibility for the Program (GAO/HEHS-97-220R, Sept. 16, 1997). Child Support Enforcement: Strong Leadership Required to Maximize Benefits of Automated Systems (GAO/AIMD-97-72, June 30, 1997). Welfare Reform: Three States’ Approaches Show Promise of Increasing Work Participation (GAO/HEHS-97-80, May 30, 1997). Welfare Reform: Implications of Increased Work Participation for Child Care (GAO/HEHS-97-75, May 29, 1997). Welfare Reform: States’ Early Experiences With Benefit Termination (GAO/HEHS-97-74, May 15, 1997). Food Stamp Program: Characteristics of Households Affected by Limit on the Shelter Deduction (GAO/RCED-97-118, May 14, 1997). Health Insurance for Children: Declines in Employment-Based Coverage Leave Millions Uninsured; State and Private Programs Offer New Approaches (GAO/T-HEHS-97-105, Apr. 8, 1997). Welfare Waivers Implementation: States Work to Change Welfare Culture, Community Involvement, and Service Delivery (GAO/HEHS-96-105, July 2, 1996). Health Insurance for Children: Private Insurance Coverage Continues to Deteriorate (GAO/HEHS-96-129, June 17, 1996). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Medicaid-related actions states have taken in the first year of welfare reform, focusing on: (1) the Medicaid related options the welfare reform law gave states and the approaches states have taken; (2) the implications of these states choices for Medicaid eligibles and for the states' administrative processes; and (3) steps states have taken or plan to take to educate and enroll Medicaid eligibles, in view of their changing eligibility for cash assistance programs. GAO noted that: (1) during the first full year of welfare reform, the nine states GAO reviewed chose welfare reform options that generally sustained Medicaid coverage for their previously eligible populations; (2) the options provided to states included establishing different income and resource (asset) standards for their Medicaid and cash assistance programs, administering the two programs separately, imposing Medicaid-related penalties for welfare recipients not complying with state work rules, and discontinuing Medicaid coverage for aliens; (3) four of the nine states GAO visited had separate income or resource standards for their Medicaid and cash assistance programs; (4) according to officials in these states, eligibility standards had been separated as part of state welfare reform; (5) consistent with the options offered states by the welfare reform law, these separate standards often provided more generous income or resource limits for Medicaid than for welfare recipients, thus protecting eligibility for medical assistance; (6) to foster administrative efficiencies for states and public assistance applicants, all nine states chose to continue using a common application for their welfare and Medicaid programs and eight chose to continue using a single agency at the local level to determine applicant eligibility; (7) while the welfare reform law offered states the option of witholding Medicaid as a sanction for noncompliance with state work rules, as well as discontinuing Medicaid coverage for most aliens, none of the nine states chose to do so; (8) the intial choices that these states made resulted in little structural change in their Medicaid programs; (9) there were initially some concerns that new Supplemental Security Income (SSI) eligibility restrictions for certain aliens and disabled children would affect their Medicaid eligibility; (10) however, subsequent legislation modified and reversed, to some extent, the provisions that restricted SSI eligibility for these populations; (11) welfare reform also poses new challenges for states' Medicaid beneficiary education and enrollment activities; (12) even prior to welfare reform, significant numbers of children were eligible for Medicaid but not enrolled; and (13) welfare reform increases the number of Medicaid eligibles who do not receive cash assistance--individuals who are often difficult to identify and enroll in Medicaid. |
The costs of natural gas, its transportation and storage, and subsequent local delivery are incorporated into monthly gas bills. According to the Department of Energy (DOE), residential customers in 1997 were billed $34.6 billion for natural gas deliveries, or $617 per customer. Figure 1 shows the separate components of the natural gas delivery system from the wellhead, where natural gas is extracted, to the burner tip, where the fuel is used in a home or business. Before customer choice programs, the services shown in figure 1 were arranged for or directly provided by local gas utilities. Historically, gas utilities contracted with interstate and/or intrastate pipeline companies for the natural gas and transportation services (called upstream capacity) necessary to transport gas from the producer’s field to the start of the gas utilities’ local distribution system, called the city gate. To guarantee the availability of upstream pipeline and storage space, gas utilities contracted with pipeline companies for priority upstream capacity, called firm capacity, to meet the peak day requirements of their customers. The purchasing of firm capacity by gas utilities was often done at the behest of state regulators, who wanted to ensure that gas flowed to homes, schools, and businesses on the coldest days of the year, regardless of additional demands placed on the gas delivery system. Once gas reached the city gate, gas utilities provided for the local distribution of gas through their network of local pipelines. Local gas utilities also provided other gas-related services, such as billing and metering. Customer choice programs allow residential and small commercial customers to choose their own provider of gas within this delivery system. Under a customer choice program, nonutility gas suppliers, called gas marketers, purchase gas and arrange for its transportation to the local gas utility. Customers then purchase, from a gas marketer, gas that is shipped along the local gas utility’s network of distribution pipes to their home or business. The gas utility still charges customers regulated rates for the costs of local gas distribution and the related services it provides, such as billing and metering. Until recently, customer choice opportunities were limited to large industrial and large commercial customers, such as factories and electric utilities that use gas for power generation. These opportunities allow these gas users to contract competitively for gas, either directly with gas producers or with gas marketers, as well as with interstate pipelines for upstream capacity. According to DOE, average gas prices paid by electric utilities and industrial gas customers have fallen 36 and 24 percent, respectively, between 1990 and 1995, adjusted for inflation. DOE noted that these customers may have the option of multiple servers as well as the capability of using fuels other than natural gas, which allows them to be more aggressive in negotiating contracts and services. While natural gas deregulation has resulted in lower prices for natural gas, it has also at times been associated with greater price uncertainty. According to DOE analysts, prior to deregulation, many gas utilities’ supply contracts were long-term—often for 20 years or more—with little variability in price. With deregulation, gas utilities began to purchase gas on the spot market, which can sometimes be highly volatile. For example, in our report on natural gas price volatility during the winter of 1996-97, we found that residential gas prices in New Mexico were 68 percent higher in January 1997 than in December 1996. For some gas utilities we spoke with, price spikes have sometimes resulted in discontented customers and drawn the attention of state regulatory authorities. While state regulators allow gas utilities to recover their upstream costs, including those for interstate transportation and storage and the cost of gas, without profit or loss, regulators in some states can disallow the recovery of costs when they believe gas utilities have made imprudent gas-purchasing decisions. For some gas utilities, extending customer choice programs to their residential and small commercial customers has given them an opportunity to reduce their regulatory risk and improve their public image with their customer base. Other gas utilities view gas marketers’ participation in customer choice programs as a way to increase the demand for gas and therefore help expand their distribution system. Still other gas utilities view customer choice programs as part of a process of change that will result in the increasing importance of nonutility energy companies that market natural gas, electricity, and even oil-based products in an increasingly competitive environment. Some observers believe that mergers, acquisitions, and alliances are bringing diverse energy companies together across energy markets. Several gas utilities have established marketing affiliates that are already active in both gas and electricity markets. As of July 31, 1998, 43 gas utilities in 16 states had customer choice programs under way for residential and/or small commercial natural gas users. In addition, gas utilities in 11 other states and the District of Columbia were beginning or considering customer choice programs for residential or small commercial gas users. In general, the customer choice programs under way are relatively new, as most of these programs are less than 3 years old and several are less than 1 year old. Despite the likelihood of future growth, participation in current programs is generally low. According to our survey of gas utilities, roughly 553,000 residential gas users, about 4 percent of the customers eligible to participate in customer choice programs, are participating in them. The figures for national participation in small commercial programs could not be determined because data were unavailable. Participation rates in customer choice programs vary dramatically; in some programs, over half of all eligible customers participated, while other programs are still awaiting their first participant. Customer participation rates are determined by a variety of factors, such as the potential to save money through the purchase of gas from a gas marketer rather than through a gas utility. Other factors reported to us by gas utilities, gas marketers, and state regulators as influencing customers’ participation include efforts by these parties to make customers aware of the program, and program rules, such as caps on participation, that can limit overall customer participation. Gas marketers told us their participation in customer choice programs is influenced by the potential for them to earn a profit on their gas sales. Their potential to earn profits can be affected by program rules, such as whether gas marketers can contract for their own transportation services to transport gas to a local gas utility. As shown in figure 2, small-volume customer choice programs—allowing choice for residential and/or small commercial customers—are concentrated in midwestern and eastern states. As of July 31, 1998, New York had 10 active customer choice programs, followed by Michigan, which had 5. New Jersey and Pennsylvania each had four customer choice programs under way, and Ohio, Illinois, and Maryland each had three active programs. States not considering or beginning small-volume customer choice programs. States considering or beginning small-volume customer choice programs (includes District of Columbia). States with small-volume customer choice programs under way as of July 31, 1998. Figure 2 also shows that 11 additional states and the District of Columbia are considering or beginning small-volume customer choice programs. Among these initiatives, a recent Georgia law allows Atlanta Gas Light to begin a customer choice program for the 1.4 million residential and commercial customers in its service area in November 1998. Iowa will allow a statewide choice of gas suppliers in February 1999. In addition, in 1999, gas utilities in Montana will begin customer choice programs that will offer a choice of gas suppliers to most of their residential and commercial gas users. The other states that are considering or beginning programs are likely to begin customer choice programs in 1999 or 2000. In addition, gas utilities and state regulators in Ohio, Illinois, Massachusetts, Michigan, New Jersey, Virginia, and Wyoming are expanding existing customer choice programs. The American Gas Association (AGA) reported that once all these programs are under way, 33 percent, or 18.1 million, of the 54 million households in the United States with natural gas service will be able to choose their gas supplier. AGA also estimated that more than 40 percent of the country’s commercial customers can now, or soon will be able to, buy gas from a nonutility supplier. Thirty-four of the 43 local gas utilities we surveyed reported that they had residential customer choice programs under way as of July 31, 1998.Thirty-one of these utilities reported that they began their customer choice programs in 1996 or later. In California, three residential customer choice programs began in 1991. Of the 34 residential customer choice programs, 14 had specific ending dates and may be considered pilot programs. Pilot programs may be limited to one town or county within a gas utility’s service area and can restrict the number of customers eligible to participate in the program. State regulators may direct gas utilities to limit eligibility to less than all customers in their service area so they can gain experience in administering a choice program before broadening it. Thirty-five gas utilities also reported that they had small commercial choice programs under way as of July 31, 1998. Twenty-eight of these programs began in 1996 or later, while 7 began in 1988 through 1995. Of the 35 small commercial customer choice programs, 15 had specific ending dates and may be considered pilot programs. Thirty-two gas utilities reported that they had both residential and small commercial customer choice programs under way as of July 31, 1998. The 34 gas utilities that reported residential customer choice programs under way as of July 31, 1998, provide over 21 million residential customers with gas service. Of these customers, over 15 million were eligible to participate. However, only about 553,000, or roughly 4 percent, of those eligible to participate had actually selected a gas marketer as their new supplier of natural gas. Table 1 provides information, by state, on the 34 residential customer choice programs. Table 1 shows that, by state, the number of eligible participants and the participation rate vary widely among residential customer choice programs. For example, residential customer choice programs in California and New York have by far the largest number of eligible participants, but their programs, collectively, have relatively low participation rates. Eleven of the 12 residential programs in these states had participation rates of under 1 percent. The four residential customer choice programs in Pennsylvania account for about one-third of all such participants nationwide. Residential customer choice programs in Ohio, Michigan, and Maryland also account for a large percentage of the total participation nationwide. Across individual programs, participation rates varied greatly. For instance, as of September 9, 1998, 70 percent of the 82,000 residential customers eligible to participate in Nebraska’s KN Energy choice program were participating. In contrast, as of August 31, 1998, none of the 380,000 eligible residential customers were participating in the Public Service Company of New Mexico’s program because of the unavailability of gas marketers. (See table I.1, in app. I, for the number of participants and participation rates for each of the 34 residential customer choice programs in our survey.) National figures for participation in small commercial programs could not be determined. Several gas utilities that responded to our survey kept information for commercial customers but did not keep separate information for small commercial customers. Also, several programs had different gas usage requirements for small commercial participation, making comparisons among programs unreliable. For instance, some programs were open to all commercial customers regardless of annual gas usage, while others set annual limits on gas usage for participation. To the extent that information was available, table I.2, in appendix I, identifies small commercial customer choice programs by state, the number of eligible participants, participants, and participation rates. According to state regulators, gas utility representatives, and gas marketers we spoke with, residential participation rates in customer choice programs are determined by many factors. An important factor is the potential of residential customers to save money by purchasing gas from a gas marketer rather than from a gas utility. Savings are defined as the difference between what the gas utility would charge and what the gas marketer charges for gas delivered to a utility’s city gate. As discussed in the next section, gas utilities told us that customers’ savings come from a combination of gas marketers’ savings on upstream transportation and storage costs and on the cost of gas. In some states, customers are also achieving savings because natural gas sold by marketers is subject to fewer state and local taxes than gas sold by local gas utilities. To the extent gas marketers pay lower taxes, they can charge lower prices. State regulators, gas utilities, and gas marketers told us that other factors influencing customers’ participation include efforts to make customers aware of choice programs through education and outreach activities. In Massachusetts, Bay State Gas Company was able to achieve a relatively high rate of customer participation partially through public education efforts coordinated through a collaborative process with state regulators, consumer representatives, and gas marketers. Bay State Gas Company offered customer choice to all its residential customers in Springfield, Massachusetts, in the summer of 1997. The collaborative promotion campaign that followed involved direct mail and billing statement inserts from the gas utility, media advertising in 10 newspapers, four television stations, and nine radio stations, and individual campaigns by gas marketers. As of July 31, 1998, almost 28 percent of the residential customers in the Springfield area had selected a gas marketer under the program. Another collaborative effort took place under Columbia Gas of Ohio’s program. In this program, Columbia Gas of Ohio offered customer choice to about 160,000 residential and 11,500 small business customers in its Toledo, Ohio, service area beginning in April 1997. The gas utility also collaborated with state regulators, consumer representatives, and gas marketers to find the best way to continue, improve, and expand the choice program. Public education efforts for this program began with a 14-day advertising moratorium, during which gas marketers voluntarily refrained from contacting or enrolling customers. During this moratorium, only Columbia Gas of Ohio, the Public Utility Commission of Ohio (PUCO), and the Ohio Consumers’ Council could contact customers and inform them of the choice program. The moratorium and subsequent educational campaigns included print, television, radio, billboard and mail advertising, news releases, and community events. As of July 31, 1998, 53,985 residential customers, or 34 percent of all eligible customers, had chosen a gas marketer under the program. Other programs may have encouraged participation by making it easier for customers to participate. For example, in Nebraska and Wyoming, KN Energy allowed customers to select gas suppliers through mail-in balloting. For these programs, KN Energy sent ballots to all eligible residential and commercial customers in order for them to select a gas marketer. Balloting took place during 2-week open seasons. While potential savings and customer education and outreach efforts can increase customers’ participation, program rules, such as caps on participation, can limit overall participation. For instance, some programs limit eligibility to less than all the customers in their service area so that gas utilities can gain experience in administering a program prior to broadening it. Thirteen gas utilities in our survey reported that eligibility was limited to fewer than half of all the residential customers in their service area. For example, under the SEMCO Energy Gas Company’s Battle Creek Division program in Michigan, participation is capped at 1,000 residential customers, which is only 3 percent of the 32,400 residential customers in the utility’s service area. Under the Baltimore Gas and Electric Company’s customer choice program, while all residential customers were eligible, participation was capped at 50,000 residential customers, which was only 9 percent of the 530,000 residential customers in the utility’s service area. State regulators, gas utilities, and gas marketers told us that gas marketers’ participation in customer choice programs is influenced by the potential for the gas marketers to earn a profit on their gas sales. They also said that limits on customers’ participation in some areas may be such that a marketer cannot expect to make a profit. For instance, some programs limit customers’ eligibility, and gas marketers may not offer service in these programs because they may be unable to recover administrative and marketing costs. One marketer told us that it will not participate in a choice program that has fewer than 100,000 eligible customers if the service area is remote and the marketer cannot combine its marketing effort for a remote area with its efforts to sell gas to other customers in adjacent programs. Generally, residential customer choice programs that had fewer eligible customers had fewer marketers offering gas services. For example, the Central Illinois Light Company’s choice program limits participation to 10,081 customers, which is 6 percent of the 183,058 customers in its service territory. This choice program is served by only one marketer. Geographical factors can also discourage marketers’ participation. For example, in the New Mexico customer choice program, no gas marketers are currently active for residential customers. The New Mexico Public Utility Commission and gas utility representatives in the state reported that marketers did not see the potential for financial benefit in the program, given the relatively low cost of gas in the state. One gas marketer that left the residential choice program in New Mexico told us the administrative and advertising costs it incurred in attracting residential customers exceeded the profits it could make in selling gas to these customers. The potential for gas marketers to earn profits may also be affected by program rules, such as whether gas marketers can contract for their own transportation services to transport gas to the gas utility. Under two residential customer choice programs in New York—New York State Electric and Gas and Rochester Gas and Electric—only one gas marketer was participating in each program, and the marketers were required to assume existing pipeline contracts. The New York Public Services Commission reported that gas marketers may not be participating in some state customer choice programs because their profit margins are too thin. The commission issued an order on November 3, 1998, that would allow, by April 1, 1999, gas marketers participating in any customer choice program in the state to contract for their own transportation services. Other program rules and fees may also limit gas marketers’ participation. For instance, several customer choice programs require gas marketers to sign up a minimum number of customers, called aggregation requirements, in order to participate as marketers. If these aggregation requirements are set at a high enough level, they can limit gas marketers’ participation. For example, in California, gas marketers must meet a 250,000-thermaggregation minimum in order to be able to offer services in the state’s customer choice programs. In a January 1998 report, the California Public Utility Commission recommended eliminating this aggregation requirement because it hindered marketers’ participation. Under the Central Illinois Gas Company program, gas marketers are required to post a $300 bond per customer served. According to the utility, a gas marketer complained that the bond is a barrier to marketers’ participation. This program is currently served by only one gas marketer—the utility’s marketing affiliate. Gas marketers have told us that other utilities require that marketers post performance bonds or security deposits per customer served and that these costs can constitute a financial barrier to entry for them. One gas marketer told us that a $10 per customer security deposit requirement constituted a $200,000 “entry fee” if the marketer wanted to supply gas to 20,000 customers in a customer choice program. Table I.3 in appendix I lists the number of gas marketers participating in current small-volume customer choice programs. Although customer choice programs are relatively new, some information on the impacts of these programs exists. Several gas utilities in our survey reported that program participants achieved savings and greater service options with no apparent reduction in service reliability. While gas utilities reported few reliability problems with gas marketers’ deliveries, some noted that customer choice programs are less than 3 years old and the reliability of gas marketers’ deliveries has yet to be tested. Most gas utilities in our survey did not provide an estimate of customer savings, in part because their programs were in their initial stages of operation and information on savings were unavailable from gas marketers. Savings estimates ranged from 1 to 15 percent on total gas bills and were estimated to come from lower transportation and storage costs, the lower cost of gas, and savings on state and local taxes. Most gas utilities in our survey have set up independent marketing arms, called affiliates, to sell gas as a separate service to residential and small commercial gas users. For several of the customer choice programs that we surveyed, these marketing affiliates have large market shares, raising concerns about how competitive these programs are and thus their potential to reduce prices to customers. In many states, state regulators permit gas utilities to create their own gas marketers, called marketing affiliates, to compete with other nonutility gas marketers for customers in customer choice programs. These marketing affiliates are wholly or partly owned by the gas utility or its parent company. For several customer choice programs that we surveyed, these marketing affiliates had large market shares, raising concerns among state regulators about how competitive these programs are and thus their potential to reduce prices. Of the 38 utilities that responded to our survey, 33 had marketing affiliates that offer gas services, while 5 did not have marketing affiliates. Of the 33 gas utilities with marketing affiliates, several had substantial customer participation, largely because of the customer sign-ups initiated by the marketing affiliates. For instance, the concentration of the affiliates’ market share has been relatively high in three of the four Pennsylvania residential customer choice programs. The affiliate for the Equitable Gas residential choice program served all 42,000 residential customers participating in the gas utility’s choice program as of August 31, 1998. As of July 31, 1998, the Peoples Natural Gas affiliate served 79 percent of all residential customers participating in the utility’s program. As of September 10, 1998, the National Fuel Gas affiliate served 63 percent of all residential customers participating in the utility’s program. These choice programs account for a significant portion of residential customers’ participation nationwide—159,000, or 27 percent, of residential participants in customer choice programs. Only the affiliate for the Pennsylvania Columbia Gas program did not have the largest market share. Another large customer choice program with a relatively high affiliate market share is the East Ohio Gas choice program. For this program, the East Ohio Gas marketing affiliate served 83 percent of the 32,000 participating residential customers as of March 31, 1998. All the programs mentioned above that have high market concentrations also require that gas marketers use the gas utility’s existing upstream transportation and storage. The marketing affiliate in the fourth Pennsylvania program—the Columbia Gas of Pennsylvania program—had only the third largest market share among marketers in the program, and the program allows marketers the option of using the gas utility’s existing upstream transportation and storage or contracting for their own. In our review of the three Ohio customer choice programs, we found the only program that required gas marketers to use the gas utility’s existing upstream transportation and storage—the East Ohio Gas program—also had the highest market concentration by its affiliate. The two other Ohio programs—the Cincinnati Gas and Electric program and the Columbia Gas of Ohio program—gave gas marketers the option to use the gas utility’s existing upstream transportation and storage or to contract for their own. Anticompetitive factors are a concern among state regulators we interviewed. Gas marketers and regulators have raised concerns about the marketing affiliates of gas utilities operating in their parent company’s service area. Concerns include the potential for a gas utility to subsidize its affiliate with rate-payer funds or to extend to its affiliate preferential treatment over other marketers for any services or information. In many states, regulators have instituted affiliate rules or codes of conduct aimed at preventing and penalizing abuses in relationships between gas utilities and their affiliates. Three gas utilities in our survey reported reliability problems with marketers, and 11 gas utilities reported problems with marketers’ conduct. In one case, the problem reported was a failure by a gas marketer to deliver gas to the gas utility for local distribution when required. While some gas utilities reported few reliability problems with gas marketers’ deliveries, some utilities and state regulators noted that customer choice programs are less than 3 years old and the reliability of gas marketers’ deliveries has yet to be tested. A study by the staff of the Public Utility Commission of Ohio (PUCO) found that while marketers demonstrated their ability to deliver directed quantities of gas to city gates during the 1997-98 winter, that winter was unseasonably warm, and marketers’ ability to supply quantities of gas at or above peak conditions was not tested. The report concluded that because of limited information, the PUCO staff could not state with any certainty that marketers’ ability to deliver daily quantities under severe weather conditions would mirror their performance during the 1997-98 winter. While some gas utilities have concerns about gas marketers’ reliability, particularly if gas marketers are allowed to arrange for their own transportation of gas to a utility’s city gate, gas utilities can use enforcement mechanisms to ensure the reliability of service. All of the gas utilities responding to our survey reported that they have the authority to either suspend marketers from programs or levy penalties on marketers for failing to deliver gas according to set delivery schedules. In addition to the mechanisms available to gas utilities to ensure gas marketers’ reliability, the emergence of a secondary market for released capacity gives gas marketers access to pipeline transportation. As noted earlier, in 1992, FERC issued Order 636, which, among other things, allowed holders of firm capacity reservations to release unused capacity back to pipeline companies for resale to others. While this market has been somewhat limited because of a FERC-required price cap on the resales of pipeline contracts, FERC has recently proposed to remove this price cap. In a May 1998 report, DOE concluded that “the unused capability of the interstate pipeline system for transportation service appears to be substantial.” DOE reported that during the 1996-97 heating year, 37 percent of the nation’s gas pipeline system capacity went unused. Thirty-one gas utilities in our survey responded that gas marketers were offering residential and small commercial customers additional service choices. Most of these choices provide residential and small commercial gas users with an opportunity to reduce their exposure to wide swings in the price of gas. Among the service choices, gas marketers most often offered customer choice participants the option of buying their gas at a fixed price—30 of the 31 utilities responding to our survey. Six gas utilities responded that gas marketers were offering customers the option of a fixed monthly bill. Gas utilities also noted that gas marketers were offering customers nongas services, such as free carbon monoxide detectors and the option to buy electricity and other fuels, such as propane and fuel oil. For 27 of the programs we surveyed, gas marketers were allowed to bill the customer directly for marketer-provided services. Competition for residential and small commercial natural gas users is gradually emerging in the United States. Regulators, gas utilities, and gas marketers are currently experimenting with ways to create small-volume customer choice programs that attract gas marketers, offer savings to customers, and ensure the reliability of service. While efficient, competitive programs that fully tap the potential for customer savings and ensure reliable service are taking time to develop, the speed of this development may be sensitive to certain key features of program design. Key program design features include customer education efforts, the removal of barriers to entry for gas marketers, and the arrangement of the upstream transportation of gas that increases the potential for customer savings while ensuring reliability. Given geographical limitations and the savings already achieved through past deregulation efforts, some gas utilities, state regulators, and state legislatures may struggle with ways to find additional savings for customers. However, in other states, opportunities for savings exist, and collaborative efforts among regulators, utilities, and marketers in a few programs have shown that key design features can be successfully addressed. Competition for residential and small commercial gas users may also provide an incentive for those utilities wishing to continue selling natural gas to find ways to reduce the prices they charge and offer additional services. In this way, even those customers choosing not to switch to marketers may benefit. Customer choice programs provide gas utilities with the opportunity to position themselves for a more competitive environment. Some observers believe that the changing regulatory environment and competition across energy markets will favor utility companies that are creating energy marketing affiliates or forging alliances with other complementary energy companies. We provided the Department of Energy with a copy of a draft of this report for review and comment. We met with the Director and staff of the Natural Gas Division, Energy Information Agency, as well as staff of the Policy Office, to obtain the Department’s comments. The Department agreed with the facts presented and provided some technical clarifications where appropriate. The Department’s comments are presented in appendix III. Through interviews with industry experts at DOE, AGA, and local gas utilities, we determined there were 43 gas utilities that offered customer choice programs for residential and/or small commercial gas users. To identify the initial experiences of competition in retail gas markets and to identify the impacts of these initiatives on small-volume customers, we surveyed all natural gas utilities in the United States that had customer choice programs under way as of July 31, 1998, for residential or small commercial customers. We designed and mailed a questionnaire to all 43 utilities that covered areas of customers’ and gas marketers’ participation, the regulation of gas marketers, customer savings, and quality of service. We surveyed gas utilities because they were the most available source of information for the rules of customer choice programs and the levels of customer’s and gas marketers’ participation. We received responses from 38 of the 43 gas utilities. Information presented in the report on customers’ and gas marketers’ participation, program rules, and projected customer savings are based on these 38 responses. The results of the survey are shown in appendix II. In addition, we conducted follow-up telephone interviews with questionnaire respondents to clarify and add to the information gathered in the questionnaires. In addition to the questionnaire, we conducted case studies on individual programs in Ohio, Massachusetts, and New Mexico. We reviewed customer choice programs in Ohio because industry observers noted that the state had among the most developed programs in the country. We selected programs in New Mexico and Massachusetts for review because of their proximity to, and long distance from, natural gas production areas, respectively. We interviewed natural gas utility officials, gas marketers, state regulators, and industry experts in these states. We also reviewed existing evaluations of gas utility customer choice programs from state regulators, DOE’s Energy Information Agency, and AGA. We performed our review from March through November 1998 in accordance with generally accepted government auditing standards. As arranged with your offices, we will send copies of this report to the appropriate Senate and House committees. We will also make copies available to others on request. Please call me at (202) 512-3841 if you have any questions about this report. Major contributors to this report are listed in appendix IV. The tables in this appendix list selected results from our survey of 43 gas utilities that had small-volume customer choice programs under way as of July 31, 1998. Table I.1 identifies participating customers and participation rates for residential customer choice programs. Table I.2 identifies participating customers and participation rates for small commercial customer choice programs. Table I.3 identifies the number of gas marketers selling gas to small-volume customers in these customer choice programs. Table I.4 identifies customer choice programs’ rules on the treatment of upstream capacity. The table identifies whether gas marketers are allowed to arrange, at least in part, for their own upstream transportation and storage of gas or whether they are required to use transportation services previously contracted for by the gas utility. Finally, table I.5 identifies whether gas utilities with small-volume customer choice programs charge fees to recover costs associated with their programs. These costs may include program implementation costs, such as advertising and customer education expenses and unused upstream capacity. Table I.1: Participation in Residential Customer Choice Programs (continued) Apr. 1, 1997 Apr. 1, 1998 Apr. 1, 1997 Apr. 1, 1997 Apr. 1, 1996 Apr. 1, 1997 (continued) Information unavailable. Apr. 1, 1998 Apr. 1, 1997 Mar. 1, 1998 (continued) Information on small commercial customers was unavailable from the gas utility. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. Bay State Gas Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico (continued) Brooklyn Union-Brooklyn, Queens, Staten Island Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. Cincinnati Gas and Electric Co. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Gas utility not offering small commercial customer choice program, as of July 31, 1998. Gas utility not offering residential customer choice program, as of July 31, 1998. Information unavailable from gas utility. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico Brooklyn Union-Brooklyn, Queens, Staten Island (continued) Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. Cincinnati Gas and Electric Co. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Capacity assignment is not an issue in New Mexico, given the location of gas fields in the state. Pacific Gas and Electric Co. San Diego Gas and Electric Co. Southern California Gas Co. Central Illinois Light Co. The Peoples Gas Light and Coke Co. Northern Indiana Public Service Co. Bay State Gas Co. SEMCO Energy Gas Co.-Battle Creek Div. Michigan Consolidated Gas Co. SEMCO Energy Gas Co. New Jersey Natural Gas Co. Public Service Electric and Gas Co. Public Service Company of New Mexico Brooklyn Union-Brooklyn, Queens, Staten Island (continued) Central Hudson Gas and Electric Corp. Consolidated Edison Company of New York, Inc. Corning Natural Gas Corp. New York State Electric and Gas Corp. Niagara Mohawk Power Corp. Orange and Rockland Utilities, Inc. Rochester Gas and Electric Corp. National Fuel Gas Co. Peoples Natural Gas Co. Wisconsin Gas Co. Information not provided. We mailed a questionnaire to 43 gas utilities that had either, or both, residential or small commercial customer choice programs under way as of July 31, 1998. The questionnaire, reprinted below, contained 41 questions covering customers’ and marketers’ participation, marketers’ certification and regulation, customer savings, and quality of service. We received responses from 38 gas utilities. For most of the questions in the reprinted survey, we identified the number of gas utilities that marked each box in each question. For the questions on customers’ and marketers’ participation, we included the results in the tables in appendix I and referred the reader to these tables. For some questions on marketers’ participation and the estimates of customer savings, we identified the range of responses. Also, several gas utilities did not respond to all of the questions, so some questions have fewer total respondents than others. Charles W. Bausell, Jr., Assistant Director Timothy L. Minelli, Evaluator-in-Charge Philip G. Farah, Senior Economist Lynne L. Goldfarb, Publishing Advisor Lynn M. Musser, Senior Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on: (1) initial participation in natural gas customer choice programs; and (2) the effect of these recent customer choice initiatives on residential and small commercial customers. GAO noted that: (1) 43 gas utilities in 16 states have customer choice programs for either or both residential and small commercial natural gas customers; (2) gas utilities in 11 other states and the District of Columbia are beginning or considering customer choice programs; (3) as of July 31, 1998, roughly 553,000 residential gas users were participating in customer choice programs in the United States, representing only about 4 percent of the residential customers eligible to participate in these programs; (4) national figures for participation in small commercial programs could not be determined because data were unavailable; (5) while overall participation in residential customer choice programs is generally low, participation rates vary dramatically among programs; (6) customer participation rates are determined by a variety of factors, such as the customers' potential to save money by purchasing gas from a marketer rather than a gas utility; (7) gas marketers told GAO that their participation in customer choice programs is influenced by their potential to earn a profit on their gas sales; (8) customer choice programs for residential and small commercial customers are relatively new, with most being less than 3 years old and several less than 1 year old; (9) as a result, information on these programs' impacts on customers is limited; (10) gas utilities that responded to GAO's survey reported that customers achieved savings and greater service options with no apparent reduction in reliability; (11) while gas utilities reported few problems with the reliability of gas marketers' deliveries, some noted that since customer choice programs are less than 3 years old, the reliability of gas marketers' deliveries has yet to be tested; (12) most gas utilities did not provide an estimate of customer savings because their programs were in their initial stages of operation and information on savings was unavailable from gas marketers; (13) savings estimates GAO did receive ranged from 1 to 15 percent on total gas bills and were estimated to come from lower transportation and storage costs, lower gas costs, and savings on state and local taxes; (14) most gas utilities in GAO's survey have set up independent gas marketers, called marketing affiliates, to sell gas as a separate service to residential and small commercial gas users; and (15) these marketing affiliates have large market shares, raising concerns among some state regulators about how competitive these programs can be and, thus, their potential to reduce prices. |
According to The 2015 Annual Homeless Assessment Report to Congress, veterans make up about 9.2 percent of the total U.S. population, and, they comprise about 10 percent of all homeless people. Ninety-one percent of homeless veterans are men, and according to a literature review conducted for the Department of Labor, three major health risks contributed to veteran homelessness: mental health problems, substance abuse, and chronic illnesses. VA and HUD both play a role in assisting homeless veterans. VA provides a broad range of benefits, including health care and housing, to homeless veterans and certain members of a veteran’s family. HUD is the primary federal agency that provides funding for emergency shelters, permanent housing, and transitional housing to assist the homeless and those at risk of homelessness, including veterans. VA views the authority to enter into EULs as an important component of both VA’s mission to end veterans’ homelessness and manage its real property assets. VA’s Fiscal Year 2017 “EUL Consideration Report,” provided in its budget submission to Congress, describes its management of unutilized and underutilized real property using its EUL authority and how EULs align with VA’s initiative to eliminate veteran homelessness. VA is one of the largest non-defense federal property-holding agencies; VA officials stated that in fiscal year 2016, VA held about 155-million square feet and leased 25-million square feet of building assets, about 11.5-million square feet (or 6.4 percent) of which were unutilized or underutilized. Previously, VA was authorized to lease its unutilized or underutilized real property to public or private entities for any use that contributed to VA’s mission. This EUL authority expired on December 31, 2011. According to VA officials, from the EUL program’s inception through December 2011, VA entered into 100 EULs, 9 of which VA subsequently terminated or disposed of the property. In 2012, VA received authority to enter into EULs, but only for supportive-housing, through December 2023. Supportive-housing provides on-site and community-based support services for the veterans or their families who are homeless or at risk of homelessness. Additionally, VA received authority to accept cash payments or to enter into an EUL without receiving payment. VA can execute EULs for terms of up to 75 years. VA’s Office of Asset Enterprise Management (OAEM) administers the EULs, with support from the VA’s local facility staff. In addition, the lessee (such as a non-profit organization, public-housing authority, or a development corporation) play an important role in financing, developing, constructing, rehabilitating, operating, and maintaining the supportive- housing EUL for homeless veterans. The EUL process consists of four phases: development, execution, operational, and if applicable, disposal (see fig. 1). VA officials estimated that it takes 2 to 2.5 years from the time VA identifies unneeded property to the time doors open at a supportive-housing EUL. HUD-VASH, GPD, and SSVF provide different types of housing assistance to fulfill different levels and areas of need. These programs provide supportive services and housing subsidies to eligible veterans, including those who live at EUL housing sites. HUD-VASH provides permanent supportive-housing assistance for homeless veterans, prioritizing chronically homeless and highly vulnerable veterans who have a high level of housing and service needs, such as those with high barriers to employment and self-sufficiency. In contrast, GPD provides transitional housing and SSVF focuses on short-term, crisis intervention when providing homeless prevention and rapid rehousing; both of these programs also provide supportive services for veterans who do not have as high a level of needs as those in the HUD-VASH program. See app. III for participant program eligibility. HUD and VA established the HUD-VASH program in 1992. HUD, through public-housing authorities, allocates subsidized housing vouchers to eligible homeless veterans and their families while VA provides case management and other services. Through the program, the public-housing authority pays the subsidy to the landlord directly and the veteran family pays the remainder of the rent. A majority of the HUD-VASH vouchers are tenant-based, meaning that the vouchers move with the veterans. With the partnering VAMC’s support, HUD allows public-housing authorities to make their HUD- VASH vouchers project-based (i.e., tied to a specific housing unit and not to a tenant). Separately, in fiscal years 2010, 2014, 2015, and 2016, HUD awarded project-based vouchers to specific projects through competition. Between fiscal year 2008 and 2016, HUD allocated about 82,500 tenant-based vouchers to public-housing authorities and about 4,800 project-based vouchers through competition to specific projects. Overall, Congress appropriated approximately $75 million each year from 2008–2010 and 2012–2015, $50 million in 2011, and $60 million in 2016 for the HUD-VASH program. Congress originally authorized the GPD program in 1992 and reauthorized the program in December 2001. The program was permanently authorized in 2006. The GPD program generally provides transitional housing paired with intensive services and support to address a veteran’s barriers to achieving permanent housing. The program provides beds to homeless veterans in a supervised drug- and alcohol-free setting. Through GPD, VA awards grants to community agencies, including non-profit organizations and state and local government agencies. The grants fund up to 65 percent of the cost for acquiring, renovating, or constructing supportive-housing facilities or service centers and purchasing vans for outreach and transportation. GPD also provides funding for programs that provide services to homeless veterans. These services include case management, mental health treatment, and substance abuse treatment to help homeless veterans increase their residential stability, skill levels or income, and independence. VA designates GPD liaisons to oversee the program, provide case management, and determine veterans’ program eligibility. Congress generally increased its appropriation for the GPD program over the years, to about $220 million in fiscal year 2015. Congress authorized SSVF in 2008, but the program first became operational in fiscal year 2012. SSVF provides rapid rehousing to prevent or address “literal” homelessness for very low income veterans and families. Through SSVF, VA awards grants to service providers, which are required to provide outreach, case management, VA benefit assistance, and provide or coordinate efforts to obtain other eligible benefits and community services for the veterans. Additionally, service providers provide temporary financial assistance such as rent, utility payments, childcare, and transportation. Funding for SSVF has expanded from the initial appropriation of $60 million in fiscal year 2011 to about $300 million annually since fiscal year 2013. As of September 2016, VA had developed 35 active supportive-housing EULs for veterans who were homeless or at risk of homelessness with low cost rental housing and coordinated access to medical, rehabilitative, and mental healthcare, as well as other services on VA campuses. The 35 EULs are located in 18 states. Most of them provide permanent or transitional housing while 5 EULs focus on senior and assisted living (see fig. 2). According to VA reports, supportive-housing EULs were developed for homeless and at-risk veterans; however, the population served was expanded to include senior veterans capable of independent living and veterans requiring assisted-living with supportive services. As of September 2016, almost half (17 of 35) of the active supportive- housing EULs had operated for more than 5 years. Based on our analysis of VA data, these EULs include both “legacy” projects—those that VA completed prior to the BURR initiative—and those from the BURR initiative (see table 3 for more details on these projects). In 1999, VA and the Housing Authority of the City of Vancouver established one of the first supportive-housing EULs, consisting of 124 units. Additional supportive-housing EULs resulted in 2,391 total housing units as of September 2016. About 74 percent of these units provide permanent housing, which includes seniors’ supportive-housing and assisted-living facilities (see table 1). According to VA officials, its four newest facilities opened in 2016 in Bedford and Northampton, Massachusetts, and Vancouver and Walla Walla, Washington. See appendix IV for a complete list of all 70 supportive-housing EULs and their status—active, under construction, in development, pre-development, on hold, and terminated—from 1998 through 2016. VA’s supportive-housing EULs serve a smaller but growing number of homeless veterans in relation to the other three key homeless programs in our review. Although the EUL program is smaller than the other key programs, VA officials stated that supportive-housing EULs play an important role in meeting the needs of homeless veterans with a mix of permanent and transitional housing on VA medical campuses. Furthermore, VA’s Fiscal Year 2016 “EUL Consideration Report,” noted that the amount of housing available to veterans has increased as VA has identified properties for development of additional supportive-housing EULs. As of fiscal year 2009, VA estimated that the supportive-housing EUL program provided housing for an average of 536 veterans a year. By fiscal year 2015 (the most recent year for which VA data are available), supportive-housing EULs provided 1,675 veterans with housing. In addition to offering housing, EULs provide access to medical and rehabilitative care, mental health counselling, substance abuse treatment, and an array of other services on VA medical campuses aimed at improving veterans’ health and well-being. According to USICH, supportive-housing is widely recognized as the solution for vulnerable people experiencing chronic homelessness who often have the greatest challenge in finding and remaining in permanent housing. Figure 3 provides examples of services that may be available at supportive- housing EULs to support veterans’ health and wellness. Below are examples of the services available at some of the permanent, transitional, and senior living supportive-housing EUL sites we visited. For profiles on each of the 13 sites we visited, including information about the supportive services offered and the housing assistance programs, see appendix V. Lyons, New Jersey (permanent housing): According to lessee officials, the majority of the units receive project-based HUD-VASH vouchers, which provide housing subsidies and case management services. Other supportive services include in-home counseling and on-site and 24/7 on-call crisis prevention and intervention, assistance with applying for benefits, financial budgeting, legal assistance, and vocational training. Los Angeles, California (permanent housing): Two supportive-housing EUL facilities are located on the VA Sepulveda Ambulatory Care Center campus and specifically serve disabled veterans. These supportive-housing EULs receive project-based HUD-VASH vouchers, which provide housing subsidies, on-site case management, and service coordination. Other supportive services include job training and placement, counseling, and legal services. Fort Snelling, Minneapolis, Minnesota (permanent housing): Three full-time, on-site service coordinators focus on assisting veterans with independent living, education, employment, and VA services. According to lessee officials, supportive-housing services provide trauma-informed care, crisis management, academic and social support, and job training. These supportive-housing EULs receive project based HUD-VASH vouchers, which provide housing subsidies, case management, and service coordination. St. Cloud, Minnesota (permanent housing): Located on the St. Cloud VAMC, the studio units are available to veterans who are in transition from a chemical-dependency treatment facility and in need of supportive services and housing. Facility amenities include media rooms, a communal kitchen, and a community room. Hines, Illinois (transitional housing): The supportive-housing EUL provides transitional housing and supportive services through the GPD program. These services focus on chemical dependency recovery for residents, and include structured days, balanced meals in a communal dining area, rehabilitative work training, individual counseling, recovery groups, holistic education, and assistance with permanent housing placement. Dayton, Ohio (senior housing): The senior-living supportive-housing serves low income veterans age 62 and over, including supportive services designed to help veteran residents achieve self-sufficiency. The supportive-housing EUL receives housing vouchers from HUD programs for the elderly and low income families. In addition to the supportive services provided for residents at supportive- housing EULs, VA and the lessee provide basic-administrative and operational services, such as transportation, mail delivery, and law enforcement. In some cases, the lessees face challenges getting these services up and running as the provision of these services involves multiple parties, for example: Transportation: VA officials identified the need to provide transportation services as a challenge in cases where public transportation is not easily accessible to the supportive-housing EUL location. We found that several supportive-housing EUL sites we visited provided veterans with some type of transportation. For example, one lessee provided veterans transportation to another VA campus for psychiatric, substance abuse, and other specialized care. Other lessee officials said that VA provided a campus shuttle to medical appointments on campus or provided funds for public transportation. A USICH report noted that transportation is critical in helping connect residents in supportive-housing to jobs, schools, health care, and childcare. We previously reported on VA programs to transport homeless veterans to VA or other private medical care in partnership with community-based providers. For example, the Veterans Health Administration developed the Veterans Transportation Service to help veterans obtain care by improving coordination with other transportation service providers in the community. Similarly, lessees told us they work with other community organizations to find transportation options for residents. Mail Delivery: In some cases, supportive-housing EULs faced the challenge of ensuring that the U.S. Postal Service delivers personal mail to residents, rather than to a central location on the VA campus. For example, at the supportive EUL in Sepulveda, California, it took 3 years to work out an arrangement with the Postal Service to deliver personal mail directly to the residents at the housing facility. EUL residents experienced delays in receiving mail when the Postal Service delivered it along with all of the mail for the entire VA medical campus. The mail for EUL residents was sorted from that delivered to the VA medical campus, delivered to the EUL, and then sorted again for each individual resident. This was problematic for the residents who needed personal mail on a timely basis for income and benefits, such as Social Security disability checks. Law Enforcement: VA officials noted that they have helped resolve issues of jurisdictional law enforcement authority between local law enforcement and VAMC campus police. This issue is a concern at some supportive- housing EULs because the EUL is a private residential facility located on a federal medical campus. Local law enforcement has jurisdiction over the private housing facility, and VA has jurisdiction for the part of the campus it operates. However, at times, it is unclear to local law enforcement agencies which organization is the first responder for the EUL facility. According to VA attorneys, a memorandum of understanding with local authorities to clarify first responder roles has helped some supportive-housing EULs to address the challenges of concurrent jurisdiction. In addition to the benefits to homeless veterans, our analysis of VA- reported data for EULs in operation from fiscal years 2006 through 2015 generated almost $275 million in benefits to veterans, VA, and the community. These benefits came in the form of lease revenue, cost avoidance, cost savings, and enhanced services, net of any new VA expenses (see table 2). VA’s Fiscal Year 2017 “EUL Consideration Report,” said that supportive-housing EULs resulted in cost savings by repurposing underutilized capital assets or transferring the cost to construct or renovate, operate, and maintain these properties to third- party partners (the lessees of the supportive-housing EULs). Further, allowing homeless veterans to stay in a VA medical center bed is more costly than providing them with supportive-housing. VA also reported qualitative benefits, including strengthening the network of local services available to veterans and developing community partnerships. According to VA officials, supportive-housing EULs benefit most of the lessees and developers by providing them with long-term access to federal property and land at little or no cost, access that can be particularly beneficial for those located in high-rent markets. According to the VA’s Fiscal Year 2017 “EUL Consideration Report,” 18 of 29 EULs did not pay any lease payment in fiscal year 2015. A few lessee officials we interviewed said access to federal property and land at little or no cost helped them to rehabilitate or construct facilities, in addition to providing needed services to homeless veterans. In addition, lessees we interviewed said the close proximity to VA medical, rehabilitative, and mental health services allowed them to invest in other needed services for homeless veterans, such as employment training and quality-of-life amenities. According to VA and USICH, supportive-housing EULs can also have benefits for the local community. Communities that added relatively more permanent supportive-housing units over a 6-year time frame showed significant decreases in chronic homelessness over time. Evaluations of permanent supportive-housing have demonstrated significant improvements in housing stability, reductions in days of homelessness, and reductions in the utilization and costs of public services such as emergency shelter, hospital emergency room and inpatient care, sobering centers, and jails. Supportive-housing EULs also can increase the tax base for the local community, because, according to VA officials, the facility is subject to state and local taxes, which can provide new long- term revenue sources for the local economy, jobs, and tax revenues for local and state entities. Furthermore, we identified several studies that attempted to quantify benefits to local communities. For example, a 2014 study on supportive-housing projects found that these projects create fiscal benefits for the state and local governments as a result of sales taxes collected on construction materials, income taxes paid by construction and other workers, and corporation or income taxes on profits earned by builders, developers, and other firms. Another study found that in some cases, cities and states also receive revenues from fees on affordable housing developments from permitting, zoning, and utilities. With the development of 35 active supportive-housing EULs, 6 supportive-housing EULs under construction, and 16 in development (see table 3), VA officials told us that they believe they have identified all currently viable opportunities on VA campuses. They said, however, that they continue to look for new sites on which to develop supportive- housing as changes occur in the use of VA’s properties. Challenges that VA faces in developing additional supportive-housing EULs include a lack of clear and complete documentation of project selection and implementation to inform future decisions, identifying available and suitable property for housing for homeless veterans, stakeholder opposition, and limited financing options for EULs. In addition, VA has not revised its EUL policy to address issues specific to developing supportive- housing EULs for veterans. These include the type of housing needed to serve homeless veterans in the local area, or the space configuration or square footage needed for supportive-housing as compared with available VA facilities. Without such consideration, VA may be missing an opportunity to help address these challenges. In 2009, VA launched the Building Utilization Review and Repurposing (BURR) initiative, which included a 2-year strategic study, to identify as many VA unutilized and underutilized properties as possible with the potential for development as new housing for homeless or at-risk veterans and their families. VA’s EUL authority was set to expire at the end of December 2011, and they intended to identify as many properties as possible before that deadline to support the goal of housing homeless veterans. According to officials, VA initially identified over 350 potential sites for development. By December 2011, had signed lease agreements for 38 sites. VA executed these short term-leases without completing the entire process for development of a supportive-housing EUL (see fig. 1 for a description of the process) in order to meet the deadline. These lease agreements allow the lessee 5 years for the supportive-housing EUL facility to become operational. VA officials did not comprehensively document their decision-making process for selecting the final 38 sites for development as supportive-housing EULs under the BURR initiative with a final written report or analysis. However, during the selection process, the Secretary of the VA signed formal decision briefings and documents for the individual properties. The Department entered into these 38 EUL agreements with lessees to develop 4,100 BURR housing units. As of September 2016, 871 of the 4,100 planned BURR units (21 percent) were active. In order for VA to achieve its goal by the end of December 2016, it would need to open an additional 3,229 units. The 35 active supportive- housing EULs are comprised of 15 BURR and 20 “legacy” projects (see table 3 for details on the status of these EULs). VA’s EUL policy states that to enter the development phase, EUL projects must be identified as valid priorities and included on the Department’s EUL project list. The policy describes several steps in the development phase, such as: (1) a preliminary inspection of the property; (2) identification of physical limitations such as local, state, or federal limitations on the site (e.g., zoning, environmental, or historic preservation); and (3) a preliminary asset valuation. It also requires collecting documentation about the site, such as title files, flood plain maps, and local zoning and code requirements. The policy further states that milestones, approvals, and supporting documents that occur during each phase of the process must be reported and attached in VA databases and that the office responsible for the project will ensure that all “reportables” are appropriately and accurately recorded. Furthermore, VA policy states that the Office of Asset Enterprise Management is responsible for establishing policies, procedures, guidelines, and assuring proper documentation for the EUL program. In the case of these 38 sites, under the expedited leasing process, VA completed some, but not all, of the steps in the development phase before entering into short-term leases. VA officials said they outlined the required transaction details needed to be completed before finalizing the EUL agreement, such as a development plan, financing, and environmental, and historic compliance. For example, VA analyzed the physical potential for housing, need for housing, and potential financing availability for the projects. However, VA officials did not consistently assess the same conditions for each site. In some cases, they documented known historic preservation or environmental issues but not in others. VA officials intended the short-term five-year leases to allow for the additional steps in the development process, but they did not clarify in their BURR documents the steps they had completed before signing the leases and those they planned to complete later. This lack of clarity made it difficult to assess how VA officials complied with their own policy. VA could not provide us with a final summary report or analysis documenting the BURR initiative. For the final site selection, VA officials provided us with documents of EUL sites with differing information. Initially, VA provided us with a document entitled “Draft BURR Site Priority for Housing Reuse,” dated December 2010, which included basic information on 39 sites (rather than the final 38), such as square footage, physical potential for housing, need for housing, and financing availability. However, this document did not include 21 of the 38 lease agreements. Subsequently, they provided us with a BURR project list from the third quarter of 2011 that did not mention 19 of the 38 lease agreements. Further, since the time that VA identified the 38 sites, some of those sites are no longer on the list, and additional sites are now categorized as BURR projects, making it difficult to reconcile the original list with subsequent updates. Federal Standards for Internal Control states that documentation is required for the effective design, implementation, and operating effectiveness of a federal program, and that management considers the impact of deficiencies identified in achieving documentation requirements. In addition, management clearly documents internal control and all transactions and other significant events in a manner that allows the documentation to be readily available for examination. Further, management designs control activities so that all transactions are completely and accurately recorded. This type of readily available, clear, and complete documentation of the EUL projects could have allowed VA to more effectively implement the supportive-housing EUL program by excluding sites that it later found it could not develop. We discuss examples of such cases in the next section of this report. In 2014, VA conducted a second nationwide housing-needs analysis to determine whether any additional opportunities existed to develop supportive-housing EULs. However, according to officials this assessment did not identify any new properties. Additionally, they told us that, after further research, they found that some of the properties initially identified as part of the BURR process were not suitable for housing for homeless veterans or were not available for development. As such, the Department may not have property available for repurposing as supportive-housing in a particular location even where they have identified a need for housing based on the homeless veterans’ population in that area or where they have initially identified unused or underutilized property for that purpose, for example: Castle Point, New York, more than 30 months after VA announced it would develop supportive-housing at the site, VA discontinued its plans because additional analysis found that the site contained six unofficial and unauthorized landfills, making the property unsuitable. Chicago, Illinois: VA identified a 26,500 square foot building on the North Chicago VA campus and, in June 2011, announced it would develop a supportive-housing project at that site. Based on additional analysis, officials found that the VAMC was using part of the building for other purposes and, as such, the officials could not develop the property. Long Beach, California: VA identified 2 parcels of land totaling 10 acres at the VAMC Campus in Long Beach, California, part of Los Angeles county, which has the highest number of homeless veterans—approximately 2,700—in the United States. VA officials announced in June 2011 that they would develop a supportive- housing EUL on the Long Beach site, but later found that, due to the extent of other construction projects on the campus, there were no longer any underutilized facilities. Spokane, Washington: VA officials discovered that the land identified for development belonged to the State of Washington, and not VA, 30 months after they had announced plans for a supportive-housing EUL on the property, and they had to cancel the project. Additional properties initially identified as part of the BURR process remain on hold because they may not be suitable for development for supportive-housing. VA officials stated that they would let the interim leases expire at the end of the term in December 2016, for example: Bath, New York: The property VA selected for development was located in a flood plain with a 1 percent chance of flooding. As a result, the developer could not obtain financing for the project. VA subsequently offered a second property, not located in the flood plain, to the developer; however, the local community withdrew its support for the project because of concerns about the cost of the project and about formerly homeless veterans moving into the area. Subsequently, the project could not move forward because it did not obtain state funding. Salem, Virginia: After entering into a lease agreement, VA found there was an insufficient homeless veteran population in the area to support the project as envisioned. Our findings echo those of the VA’s Office of Inspector General (OIG) in February 2012—that major decisions were not always documented in EUL project files or populated in the VA’s database, as required by VA policy. For these reasons, the OIG reported that it was unable to determine whether the selection process was appropriate and fair. Moreover, without clear and complete records that can provide institutional knowledge to inform future decisions, VA cannot be sure that it is making the best decisions in identifying real property for use as supportive-housing for homeless veterans. According to VA officials and lessees we interviewed, stakeholder support is crucial to developing supportive-housing EULs, and opposition has prevented or delayed some EUL projects. Our prior work has consistently found stakeholder resistance to locating federal homelessness programs in some communities. Stakeholders for supportive-housing EULs represent many different groups, including veterans, local and national veteran support organizations, the local community, state and local government, and developers. VA officials told us that reaching agreement with all stakeholders can be challenging, and objections from any one of these groups could delay or prevent a project from going forward. The officials provided us with several examples of cases in which the local community did not want formerly homeless individuals living nearby (in Perry Point, Maryland, and Los Angeles, California). Or veterans wanted VA to improve the medical facilities on the campus rather than lease the property to a private developer for supportive-housing for veterans and their families (in Queens, New York, and West Los Angeles). In some cases, legislation was introduced to stop supportive-housing EUL projects. Additionally, in West Los Angeles, a 2007 law prohibited VA from selling or exchanging land on the medical campus. According to VA officials, this prohibition resulted largely from veterans’ opposition to VA’s use of property for any purpose but direct services to veterans. According to VA officials, VA could not proceed with its draft master plan for 1,200 units of supportive-housing without a change in this law. VA officials also provided us with examples of approaches they used to address stakeholder opposition. For example, in the case of the West Los Angeles campus, they held an estimated 100 town hall meetings with various community groups to hear their concerns about locating supportive-housing EULs on-site. VA officials also said they collected more than 1,000 comments on the draft master plan and, in response to these comments, modified the plan to add a town center, redesign the flow of traffic, and increase the planned housing units from 900 to 1,200. Subsequently, the West Los Angeles Act of 2016 was enacted, which authorizes VA to enter into enhanced-use leases at the West Los Angeles VAMC for the purposes of providing supportive-housing to benefit veterans and their families, and permits VA to proceed with its draft master plan. Lessees rely on multiple funding sources for both capital and operational financing, including, the Low Income Housing Tax Credit (LIHTC) program, government grants, low-interest federal loans, and rental subsidies for residents. According to a senior official of the National Equity Fund—an organization that specializes in financing affordable housing with LIHTCs—these resources play a key role in creating affordable rental housing for veterans. VA officials told us that HUD- VASH project-based vouchers are important to EUL projects for rental payments as they are attached to the project for a period of 15 years. The process of obtaining funding for supportive-housing projects can be highly competitive, and the EUL lessees have to meet program requirements for each funding source from government and private entities, such as the HUD-VASH or LIHTC. In other cases, however, lessees have successfully obtained a range of financing sources to develop a supporting-housing EUL. Figure 4 illustrates the complexity of financing necessary for a supportive-housing EUL in Minnesota. VA’s existing policies for the EUL program are outdated and reference the EUL authority from 1991, which is no longer in effect. As discussed earlier, prior to 2012, VA’s EUL authority allowed it to develop a wide range of projects where the EUL contributed to VA’s mission, enhanced- use of the property, and would not adversely affect VA’s mission. In August 2012, legislation was enacted that limited VA’s EUL authority to the development of supportive-housing for homeless veterans. VA’s policy does not discuss the current program mission—to provide supportive-housing for homeless veterans—or outline specific considerations—such as addressing stakeholder opposition and obtaining financing for supportive-housing EULs. Identifying and developing real property to meet the housing and supportive service needs of homeless veterans is different from identifying and developing real property for other types of EULs, such as administrative offices, parking, hospice centers, and child-care facilities. Federal Standards for Internal Control state that management should periodically review policies, procedures, and related control activities for continued relevance and effectiveness in achieving the entity’s objectives or addressing related risks. VA reported that it updated its policy Directive and Handbook 7454 in June 2012. However, that update did not address the current EUL authority, specifically the inclusion of the provision that EULs can only provide for housing for homeless veterans. Further, the update did not revise the development phase of its process to address relevant needs for supportive-housing for homeless veterans, such as the type of housing needed for the local area or the space configuration or square footage needed for supportive-housing as compared with available VA property. VA officials told us that they had not updated the policy Handbook to address the changes in the current law because they were anticipating an amendment to its EUL authority that would again allow the use of EULs for purposes other than supportive-housing for homeless veterans. As of October 2016, VA officials told us that they were in the process of revising the Handbook to address the current EUL authority and related information such as financing options, which may be useful for lessees, and that they expected to complete it by December 2016. VA officials said they expect to update other EUL policies during fiscal year 2017. The draft that VA shared with us requires an analysis of the local market, including current and anticipated supply and demand conditions affecting the project. However, it does not specifically provide direction on how to determine whether a proposed supportive-housing EUL meets the need for homeless veteran housing in the local area or discuss VA’s limited authority to provide housing for homeless veterans. VA officials told us that they do assess whether the homeless veteran population can benefit from supportive-housing in the area of a proposed EUL. For example, since 2013, VA has conducted a gap analysis as part of its effort to determine the need for homeless veteran programs such as HUD-VASH, SSVF, and GPD. However, this assessment is not included in the draft Handbook. Without policies and procedures that address needs specific to supportive-housing for homeless veterans, VA may not be well positioned to identify viable supportive-housing EUL projects and help ensure that those projects are successfully developed. As a result, VA may not be making the most effective use of public resources to serve homeless veterans. HUD-VASH, GPD, and SSVF each differs in its eligibility requirements and the population it serves (see app. III). Program eligibility, resource availability, and veteran choice determine veteran program participation. USICH, VA, and HUD have advocated placing veterans and their families in permanent housing through HUD-VASH and SSVF and using GPD’s service-intensive transitional housing only if veterans refused permanent housing. However, USICH officials stated that they recognize that veterans should be provided meaningful choices, and USICH guidelines on ending veteran homelessness recognize that some veterans may decline permanent housing and choose to enter GPD or other transitional housing. Each of the three programs provides a range of supportive services to veterans (see table 4). Case management services, which vary by the level of veteran engagement and need, are required in the HUD-VASH program and generally required in the SSVF program. VA officials stated that veteran participation in other supportive services provided by HUD-VASH, GPD, and SSVF is voluntary and dependent on program design and veteran needs. Eligible veterans may use any of the three programs, but there are limits on the extent to which they may do so concurrently. For example, generally an SSVF participant cannot receive rental assistance as part of SSVF’s temporary financial assistance payments while also receiving a housing subsidy through a HUD-VASH voucher. VA officials stated that VA tracks the number of veterans participating in HUD-VASH, GPD, and SSVF, but generally does not track the number of veterans using the individual services in association with each program. From fiscal year 2012 to fiscal year 2016, almost twice as many chronically homeless and vulnerable veterans used HUD-VASH vouchers to find housing, from about 37,000 in fiscal year 2012 to about 72,500 in fiscal year 2016, as reported by VA (see table 5). VA’s data showed that as of September 30, 2016, 72,481 formerly homeless veterans were living in HUD-VASH supported housing; this number represents about 92.3 percent of the vouchers that HUD authorized, exceeding VA’s target of a 92 percent utilization rate. In addition, public-housing authorities issued about 5,100 (6.5 percent) vouchers to veterans who were still trying to find housing and about 1,300 (1.7 percent) vouchers were reserved for veterans undergoing public-housing-authority application processing. VA also targets the percentage of veterans housed within 90 days of admission to the HUD-VASH program at 65 percent and reported the fiscal year-to-date measurement for September 30, 2016 as 58 percent. Service providers at several supportive-housing EULs we interviewed said that they accept tenant-based HUD-VASH vouchers or have some residents who hold these vouchers. The total number of veterans subsidized by tenant-based HUD-VASH vouchers at supportive-housing EULs is unknown because VA does not specifically track the usage of tenant-based vouchers at these locations. However, VA does track the number of project-based HUD-VASH vouchers allocated to EULs. From fiscal years 2010 through 2016, HUD allocated 942 project-based HUD- VASH vouchers through HUD’s set-aside award process to 22 supportive-housing EULs. According to VA and HUD officials, as well as officials from the National Alliance to End Homelessness, some veterans may not be able to use their HUD-VASH vouchers because they face difficulties finding affordable and suitable housing in certain housing markets. For example, the maximum allowable amount of HUD-VASH housing assistance payments may be inadequate in some areas, and low rental vacancy rates in some markets have resulted in a lack of housing availability for veterans. National Alliance to End Homelessness officials stated while the housing assistance payments from HUD-VASH were supposed to keep up with increasing rental rates, this has not been the case. To address this issue, HUD officials stated that HUD has granted permission for some public-housing authorities to increase the housing assistance payments for housing in some high cost cities. Officials in the city of Los Angeles stated that the city received an increase in housing assistance payments in February 2016 and that as of August 2016, about half of the veterans found housing using the higher housing assistance payment amount. However, the low vacancy rate in Los Angeles still presents a challenge for the time it takes to find housing using HUD-VASH vouchers. Los Angeles county officials stated that as compared to the prior year, the average number of HUD-VASH voucher holders who found housing increased. However, in addition to housing assistance payments, Los Angeles county officials pointed to other efforts, such as providing incentives to landlords to hold vacant units for veterans and increasing the number of staff and housing locators for HUD-VASH, as contributing to the increase. According to VA officials we interviewed, some veterans may also have difficulty finding housing that complies with HUD’s housing quality standards. HUD and VA officials stated that they are working to raise landlords’ awareness of the HUD-VASH program. Agency data and studies we reviewed indicate that HUD-VASH vouchers, which veterans may use for as long as needed, are associated with stable housing and staying with the program for several years. One study, published in 2010, found that veterans who used the vouchers tended to participate in the program for over 2 years and another academic study, published in 2013, found that 93 percent of veterans who used the vouchers stayed in housing for at least 1 year. HUD estimated that HUD-VASH voucher turnover was about 8,400 for calendar year 2015, which may include veterans who no longer needed the vouchers, as well as those veterans who “negatively exited” the program. One of the studies cited earlier, for example, found that about half of the veterans who left the program left because they were over the income limit or no longer needed the program. VA data indicated that for fiscal year 2016, the percentage of veterans negatively exiting from the program was 16.4 percent, meeting VA’s target of 18 percent or less. Representatives from three locations USICH certified as having ended veteran homelessness (Virginia, Las Vegas, and Houston) stated that the HUD- VASH program was instrumental in ending chronic veteran homelessness in their communities. From fiscal years 2012 through 2016, the number of veterans served by the GPD program, as reported by VA, remained relatively steady (see table 6). In the same period, the number of beds available through the program increased in fiscal years 2013 and 2014, but fell in 2015 and 2016, with a decline of about 700 beds in fiscal year 2016 as compared to fiscal year 2015. VA reported that from fiscal years 2012 through 2016, the average length per stay for GPD participants ranged from 183 to 201 days. As of August 2016, service providers at five supportive-housing EUL sites provided GPD program services, including 214 transitional beds. As part of VA’s plan to end veteran homelessness, VA called for transitional housing programs to focus on discharging veterans directly to permanent housing. The GPD program set a target of 65 percent for veterans that entered transitional housing to leave the program for permanent housing in fiscal year 2014 and reported that it exceeded those targets in fiscal years 2014 through 2016 (see table 6). In fiscal year 2014, VA also set the target for negative exits from the program at 30 percent; VA reported that GPD negative exits were below the target rate for fiscal years 2014 through 2016. Those negative exits included instances where veterans violated program rules, failed to comply with program requirements, or left without consultation with staff. In March 2016, VA issued guidance encouraging GPD service providers to adjust their provision of transitional housing by allocating some of their GPD beds toward bridge housing. Bridge housing generally provides beds for short-term stays (up to 90 days) when a veteran (who may not be in the GPD program) has been offered and accepted permanent housing assistance, but that housing is not yet available. VA stated in its guidance that adding bridge housing would help the GPD program to better align with VA’s strategy of quickly placing homeless veterans into permanent housing without encountering barriers. Officials from USICH and representatives from the city and county of Los Angeles and the Commonwealth of Virginia, stated that some GPD programs have historically placed restrictions on entering the program, such as requiring veterans to obtain substance abuse treatment prior to obtaining housing. In conjunction with VA’s guidance, USICH has encouraged communities to limit the use of GPD service-intensive transitional housing and to use transitional housing as “bridge housing” whenever possible to limit restrictions to entry. Veterans and their family members participating in the SSVF program increased from about 33,000 in fiscal year 2012 to about 157,000 in fiscal year 2015, then declined by about 8,500 in fiscal year 2016, as reported by VA (see table 7). VA officials explained that the program’s expansion had coincided with increased fiscal year funding. VA officials additionally stated that, while the number of participants served in fiscal year 2015 declined, placements into permanent housing through the program increased mostly due to rapid re-housing efforts. For SSVF’s homelessness prevention efforts, VA reported that in fiscal year 2016, the program prevented about 92 percent of at-risk program participants from becoming homeless. The program rules also require service providers to use at least 60 percent of SSVF resources toward rapid re-housing intervention but set a goal of 70 percent. VA reported that in fiscal year 2016, about 70 percent of veteran households that SSVF served received rapid re-housing interventions, resulting in 78 percent of the participating households being discharged to permanent housing. Factors such as a veteran’s income and existence of disability affect the placement rate. VA’s data showed that those with higher monthly incomes were more likely to move into permanent housing upon leaving the program. Conversely, VA stated that disability could be a barrier to housing placement. In fiscal year 2014, VA found that more than half (55 percent) of the veterans participating in the program had a disabling condition. Rental assistance made up the majority of the temporary financial assistance provided through SSVF, followed by funding for housing security deposits (see table 8). At several supportive-housing EUL sites, service providers we spoke with stated that SSVF provided assistance, such as security deposits to veterans. However, the number of veterans that received SSVF assistance in conjunction with supportive-housing EULs is unknown because VA does not specifically track how many veterans access SSVF at supportive-housing EUL sites. SSVF focuses on short-term interventions. For example, VA officials stated that from fiscal year 2012 through 2015, participants received rental assistance ranged from 93 to 109 days. Two studies found the SSVF program helped veterans to maintain housing. A 2014 VA study found that the vast majority of veterans who participated in SSVF did not experience an episode of homelessness 1 year subsequent to the program. Another research study, published in 2015, found that a majority of veterans had either maintained their housing (in the case of prevention efforts) or obtained housing (in the case of rapid-re-housing efforts) 2 years after exiting the SSVF program. Representatives we interviewed from New Orleans and the Las Vegas metropolitan area said that the SSVF program was instrumental for rapidly re-housing veterans. Additionally, representatives from Houston stated that SSVF created new resources outside of existing programs that helped in ending veterans’ homelessness. Representatives from New Orleans stated that most of the currently homeless veterans in their area are recently homeless or transient, and generally have less severe health or disability issues in comparison to populations of homeless veterans that received housing in the past. They anticipate that SSVF, more than other programs, will help recently homeless veterans. VA has collaborated with other federal agencies, lessees, and homeless service providers to increase the number of supportive-housing EULs and help veterans obtain housing, health care, and other services through HUD-VASH, GPD, and SSVF programs. Within a 2-year time frame, the BURR initiative identified and VA executed interim leases for 38 sites for development as supportive-housing EULs. However, VA officials did not completely document their decision-making process for selecting properties, or other key information, as required by standards for internal control and their own policy. Without such documentation, VA cannot systematically make use of the knowledge gained from this initiative to help identify and develop future properties as supportive-housing EULs. In the future, documenting the steps taken to identify and develop these sites, as well as the additional information required by VA policy, could help VA ensure that the properties it identifies are viable for meeting veterans’ needs for supportive-housing. Further, VA has not updated its policy to reflect the 2012 change in its EUL authority limiting it to solely developing supportive-housing EULs for veterans. Federal Standards for Internal Control state that management should periodically review policies and related control activities for relevance and effectiveness in achieving the entity’s objectives. At the completion of our audit work, VA officials told us that they were in the process of updating their policy and expected to complete it by the second quarter of 2017. In addition to the lack of consistency with the current authority, VA has not specified in its policy how identifying properties for use as supportive-housing EULs for veterans differs from other types of EULs the agency has used in the past. Incorporating these changes into its policy may better position VA to identify feasible projects as well as potential delays in completing those projects, thereby allowing the VA to expedite development of additional supportive-housing EULs. With improved documentation and policies, VA may make a greater contribution toward ending veterans’ homelessness. To improve VA’s supportive-housing EUL program and meet the needs of homeless veterans, we recommend that the Secretary of Veterans Affairs should direct the Office of Asset Enterprise Management to take the following two actions: clearly and completely document the selection process for all supportive-housing EULs from pre-development through completion of VA’s development phase in keeping with internal control standards and VA policy, and; update its EUL policy to (1) address the current authority for developing supportive-housing; and (2) specify how to identify properties for supportive-housing EULs to meet the needs of homeless veterans. We provided a draft of this report to HUD, USICH, and VA for review and comment. We also provided a draft of the relevant EUL profile in Appendix V to lessees and service providers for each of the 13 supportive-housing EULs we visited. We received technical comments from HUD, USICH, and VA, as well as several of the lessees, and we incorporated those comments where applicable. In addition, both USICH and VA provided written responses to our report (reproduced in appendixes VI and VII respectively). USICH agreed with our report’s perspective that the EUL program is among the key strategies that meaningfully contribute to the supply of supportive-housing opportunities needed to end veterans’ homelessness and to meet the needs of veterans in the future. USICH’s comments also noted the importance of the other programs discussed in our report— HUD-VASH, SSVF, and GPD—in contributing to and sustaining the progress in ending veterans’ homelessness. VA concurred with both of our recommendations, and discussed planned actions to address them; however, VA disagreed with some of our findings. With respect to our finding that VA did not fully document the decision-making process in selecting supportive-housing EULs in keeping with internal control standards and VA policy, VA stated that it believes it did document the selection process for the supportive-housing EUL agreements. However, VA acknowledged that stakeholders could have benefited from a single formal report as an effective communication tool and to help ensure the transfer of institutional knowledge. VA stated that, going forward, it will continue to enhance its documentation process to keep in line with internal control standards. VA also stated that we conclude that the lack of a single formal report to document how it selected the BURR sites means that it missed key factors to choose optimal sites. In fact, we do not point to the lack of a single formal report, nor do we specify the type of documentation VA should prepare for the selection of supportive-housing EULs going forward. Rather, we discuss the difficulty we had in reconciling the multiple lists with different EUL sites VA provided to us at different points in time. We made over 10 formal requests for information and clarification on the sites selected, and VA did not provide us with comprehensive documentation on the reasons why they selected certain properties over others for development. We discuss the importance of clear documentation in the context of maintaining sufficient internal controls for program management and informing future decisions. In addition, we do provide several illustrative examples of sites that VA initially selected that missed key factors that prevented the development of the site. For example, VA later learned that one site was not located on VA property, another site was already used for other purposes, and another no longer had underutilized facilities. We point out that additional documentation could have allowed VA to more effectively implement the program by excluding sites such as these. With regard to our second recommendation, VA stated that it is in the process of updating its EUL policy and guidance to specifically document requirements, which are detailed in the agency’s comment letter (see app. VII), and it expects to complete the update by the end of the second quarter of 2017. Among the requirements, it refers to a review of market conditions, such as homeless populations to be served and the services they may require. However, VA does not specifically state that it will address how to identify properties that can meet the needs of homeless veterans. We continue to believe that VA should include this objective in its policy because, as discussed in our report, not all properties are suitable for housing the population the EUL program is required to serve. In its comments, VA noted some additional points they felt we should include in our report. However, we did cover these points to the extent applicable. In particular, VA raised an overall concern that the theme of our report does not take into account the entrepreneurial spirit and private sector dependency that are fundamental to the EUL program. To the contrary, we make these points clear throughout our report, by discussing the multiple parties (e.g., public housing authorities, private development corporations, non-profit lessees, and service providers) that play key roles in the success of the EUL program. We discuss the range of services provided and the benefits to VA, lessees, developers, and the local community through participation in the program. We note that VA reported that its ability to retain EUL lease proceeds provides it with an incentive to be creative and aggressively pursue opportunities to collaborate with both private and non-profit entities. Further, we describe some of the key challenges that come with providing services through multiple parties—such as transportation, mail delivery, and law enforcement. And, we acknowledge the complexity of financing supportive-housing EULs through multiple funding sources. In sum, our report acknowledges VA’s successful development of 35 active supportive-housing EULs, 6 under construction and 16 in development, notwithstanding the challenges faced with identifying suitable properties, stakeholder coordination, and obtaining sufficient financing. We believe that the improvements in documentation and updated policy that we recommended and VA has agreed to make will help to ensure that the supportive-housing EUL program continues to make an important contribution toward ending veterans’ homelessness. We are sending copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, the Secretary of Housing and Urban Development, the Executive Director of the United States Interagency Council on Homelessness, points of contact from the 13 EULs we visited, 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, please contact David Wise at (202) 512-2834 or [email protected] or Alicia Puente Cackley 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 VIII. This report examines: (1) how the U.S. Department of Veteran’s Affairs (VA) uses enhanced-use leases (EUL) to provide supportive-housing and services; (2) VA’s plans to develop additional supportive- housing through EULs and how past plans have been implemented, and (3) how the Department of Housing and Urban Development and Department of Veterans Affairs Supportive-Housing (HUD-VASH) program; the Grant and Per Diem (GPD) program; and the Supportive Services for Veteran Families (SSVF) program have helped support the goal of ending veterans’ homelessness. This report focuses on VA’s supportive-housing EULs. To examine how VA uses its EUL authority to provide supportive-housing to veterans, we collected and analyzed data from VA on the 35 active and other supportive-housing EULs from July 1998 to September 2016 and reviewed VA’s annual “EUL Consideration Report.” The data included project location, project status, housing type, the award date for the lease, number of housing units, and the year the facility began operating. We analyzed the number of EULs by housing type to determine what percentage of the housing units were permanent housing. We assessed the reliability of the data through interviews with knowledgeable VA officials and a review of the data for completeness and potential outliers. We determined that the data were sufficiently reliable for the purposes of providing summary information about supportive-housing EULs. Of the 35 active supportive-housing EULs, we conducted site visits to 13 supportive-housing EULs located on VA medical center (VAMC) campuses. Specifically, we visited the following supportive-housing EULs: one in Lyons, New Jersey; four in Dayton, Ohio; one in St. Cloud and two in Minneapolis, Minnesota; three in Hines, Illinois; and two in Sepulveda, California. We judgmentally selected these 13 supportive-housing EULs to include a range of geographic locations, a variety of stakeholders (e.g., public, private, and non-profit lessees and service providers); housing types (e.g., transitional and permanent housing); and with leases spanning a range of years. At these site visits, we interviewed VA officials from the Office of Asset Enterprise and Management (OAEM), Office of General Counsel, local VAMC officials, lessees (some of which were developers), and service providers to understand factors involved in developing the EULs, the supportive services provided, and the benefits of developing supportive-housing through the EUL program. The information from our site visits is illustrative of issues affecting particular sites and cannot be generalized to VA sites agency-wide. To understand how VA’s EUL authority has supported housing for homeless veterans, we interviewed officials from the U.S. Interagency Council on Homelessness (USICH)—an independent federal agency composed of 19 Cabinet secretaries and agency heads, and not-for-profit veterans organizations concerned with veterans’ homelessness: The National Alliance to End Homelessness, National Coalition for Homeless Veterans, U.S. Vets, Vietnam Veterans of America, and the National Equity Fund. To examine VA’s plans to develop additional supportive-housing and how VA implemented past plans, we analyzed VA data from July 1998 to September 2016 for projects under construction, development, and on hold. We assessed the reliability of the data through interviews with knowledgeable VA officials and a review of the data for completeness and potential outliers. We determined that the data were sufficiently reliable for the purposes of providing summary information about supportive- housing EULs. We also interviewed VA headquarters, local VAMC officials, lessees, and service providers as part of our 13 site visits. Five of the six VAMC campuses that we visited had supportive-housing EULs under development or construction. These VAMC campuses are located in Hines, IL; Lyons, NJ; Dayton, OH; and Minneapolis, and St. Cloud, MN. Additionally, we spoke to OAEM officials and local VAMC officials in Los Angeles, where VA is planning additional supportive-housing EULs. We also analyzed information on VA’s Building Utilization Review and Repurposing (BURR) initiative to identify VA’s proposed plans for and completed supportive-housing EULs. Additionally, we reviewed VA’s policies on EULs, including VA Handbook 7415 and VA Directive 7415, which contain EUL policies and procedures; and VA Handbook 7454 and VA Directive 7454, which contain policies and procedures for oversight and management of EULs. To understand potential challenges in developing EULs, we interviewed OAEM officials, local VAMC officials, lessees, and service providers at the 13 operating supportive-housing EULs about the challenges of developing an EUL. We reviewed and analyzed leasing agreement documents, directives, agency policy, guidance, and VA reports. We also reviewed VA’s Strategic Plan, VA Office of Inspector General’s (OIG) work, and our prior work related to EULs and lease agreements. We also reviewed the Standards for Internal Control in the Federal Government. To describe how VA leverages key programs to support the goal of ending veterans’ homeless, we examined three key housing programs: HUD-VASH, GPD, and SSVF. For each program, we asked VA for information about its performance targets and outcomes for fiscal year 2012 onward and the role these programs play in providing rent subsidies and services for supportive-housing EULs. We assessed the reliability of the data through interviews with knowledgeable VA officials and a review of the data for completeness and potential outliers. We selected fiscal year 2012 because we had conducted a review of the HUD-VASH program that captured its performance for 2012—the year in which SSVF began operation. Selecting fiscal year 2012 also allowed us to capture the program outcomes in the years after VA and other agencies announced their goal to end veterans’ homelessness. We conducted a literature review to identify available and relevant research on the effects of the three programs on homeless veterans. We identified relevant studies, surveys, and analyses published by industry associations, academics or research entities, and federal agencies. A GAO social scientist assessed the design and methods of each study and determined they were sufficient to support the findings we cite in this report. Additionally, we interviewed VA’s Veterans Heath Administration Homeless Program Office and HUD officials about relevant studies. We reviewed HUD and VA guidance and policies on HUD-VASH, including notices HUD issued on set-aside funding availability for project-based HUD-VASH vouchers; VA’s Veterans Health Administration’s (VHA) Handbook 1162.05 on the procedures for the HUD-VASH program, and VA’s Resource Guide on HUD-VASH. Additionally, we reviewed guidance and policies VA has published on GPD and SSVF, including the VHA Handbook 1162.01 on the procedures for the GPD program and VA’s SSVF Program Guide. To understand how these programs have supported housing for homeless veterans and supportive-housing EULs we visited, we interviewed officials from the following organizations: VA’s VHA; the Department of Labor; USICH; National Alliance to End Homelessness; National Coalition for Homeless Veterans; EUL lessees and service providers; and officials from the city and county of Los Angeles, which has the largest population of homeless veterans in the United States. Furthermore, to understand the roles the programs played in ending veteran homelessness in specific areas, we interviewed officials from Houston, Texas; New Orleans, Louisiana; the Las Vegas metropolitan area; and the Commonwealth of Virginia—all areas USICH certified as having ended veteran homelessness. We selected Houston, New Orleans, and the Las Vegas metropolitan area because, among the areas that ended veteran homelessness, they had the highest number of homeless veterans in 2011—the first year of the national effort to end veteran homelessness. We selected Virginia because it had a higher number of homeless veterans in 2011, as compared to Connecticut, the other state that had ended veteran homelessness at the time of our review. In Houston, we spoke with representatives from the local VA medical center, the Houston mayor’s office, and representatives involved in the local SSVF and HUD- VASH program. Similarly, in New Orleans, we spoke with representatives from the local VA medical center and three service providers involved with the local SSVF and HUD-VASH programs. In the Las Vegas metropolitan area, we spoke with the Combined Working Group to End Veteran Homelessness, which included representatives from VA, HUD, city of Las Vegas, and several service providers. In Virginia, we interviewed representatives of the Governor’s Coordinating Council on Homeless Veterans. We also reviewed USICH’s criteria and benchmarks for ending veteran homelessness. Additionally, we reviewed our prior work on veteran homelessness and the HUD-VASH program. We conducted this performance audit from October 2015 to December 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix III: Participant Program Eligibility for Three Key Veterans’ Housing Programs 38 U.S.C. §101(2); 38 C.F.R. § 3.1(d). A veteran is defined in statute as a person who served in the active military, naval or air service, and was discharged or released under conditions other than dishonorable. 38 U.S.C. § 101(2). There are currently five types of discharges: (1) honorable; (2) general; (3) other than honorable conditions or undesirable; (4) bad conduct; and (5) dishonorable. Public — Housing Authority of the City of Vancouver Private — Vietnam Veterans Workshop, Inc. 12/30/2004 Nonprofit — Miami Valley Public — St. Cloud Housing and Redevelopment Authority Public — Hennepin County Housing and Redevelopment Authority Private — New Directions Sepulveda I L.P. Private — New Directions Sepulveda II L.P. Private - Bedford Place, LLC (Peabody Properties) Private — Hines Veterans Residences L.P. (Communities for Veterans) Private - Freedoms Path at Kerrville (Communities for Veterans) Private — Valley Brook Village I, LLC (Peabody Properties) Private - Vancouver Veterans Residences, LP (Communities for Veterans) Private — Cloudbreak, Hawaii, LLC Private — Eisenhower Ridge Association (Pioneer Group, Inc.) Private — Cazenovia Recovery Systems, Inc. 12/27/2011 Nonprofit - Soldier On Private — PVII Viera Manor Private — Danville VA L.P. Nonprofit — Volunteers of America of Greater Ohio Private — Medallion Management, Inc. Public — Housing Authority of Salt Lake City Private - Howard House, LLC (Peabody Properties) 12/27/2011 Nonprofit - CBVA St Private - Chillicothe Veterans Residences, LP (Communities for Veterans) Private - Grand Island, LLC (Pioneer Group) Private - Augusta Veterans Residences (Communities for Veterans) Private - Fort Harrison Veterans, LLP (Communities for Veterans) Private — Hines Veterans Residences L.P. (Communities for Veterans) Private - Augusta Veterans Residence, LPs (Communities for Veterans) Private - America First Real Estate Group 12/30/2011 Nonprofit - Help USA Private - Northport Seniors, LLC (Communities for Veterans) Private — PVII Viera Manor Private — Medallion Management, Inc. In 2016, up to $26,950 (one person) or $30,800 (two persons) Up to 60 percent area median income or $22,100 (for units with a HUD subsidy) or $25,920 (for units without a HUD subsidy) In addition to the contacts named above, Amelia Shachoy (Assistant Director), Marshall Hamlett (Assistant Director), Nelsie Alcoser (Analyst in Charge), Russell Burnett, Delwen Jones, Joshua Ormond, Ernest Powell, Susmita Pendurthi, Kelsey Sagawa, Jessica Smith, Crystal Wesco, Daniel Will, and Weifei Zheng made key contributions to this report. | In August 2016, HUD and VA announced that the number of homeless veterans in the United States had been cut nearly in half since 2010 to less than 40,000. Part of this effort is the EUL program, which uses unneeded federal property (land or buildings) for housing for homeless veterans. GAO was asked to review VA's EUL program and other efforts to end veteran homelessness. This report examines: (1) how VA uses EULs to provide supportive-housing and services, (2) VA's plans to develop additional supportive-housing through EULs and how past plans have been implemented, and (3) how HUD-VASH, GPD, and SSVF have helped support the goal of ending veterans' homelessness. GAO analyzed agency documents, VA data on enhanced-use leases, and VA data on the HUD-VASH, GPD, and SSVF programs. GAO visited 13 active supportive-housing EUL sites, selected to provide a range of locations and housing types. GAO interviewed VA and HUD officials, lessee representatives, service providers, and veteran organizations. As of September 2016, for veterans who were homeless or at risk of homelessness, the Department of Veterans Affairs (VA) had developed 35 enhanced-use leases (EUL) for supportive-housing with low cost rental housing and coordinated access to medical, rehabilitative, mental healthcare, and other services. Each supportive-housing EUL is located on a VA medical center campus. Some lessee representatives told GAO that having access to federal property at little or no cost helped them to rehabilitate or build facilities to create supportive-housing. Furthermore, they noted that the close proximity to VA healthcare services allowed them to invest in other needed services for homeless veterans, such as counseling, job training, and quality-of-life amenities. VA has plans to develop additional supportive-housing EULs, 6 of which are under construction and 16 in development. However, VA needs to improve its documentation and update its policies to develop additional EULs. VA officials did not provide clear and complete documentation for the selection of supportive-housing EUL projects, as required by VA policy, and Standards for Internal Controls in the Federal Government. Completely documenting this decision-making process for selecting properties could provide institutional knowledge to inform future decisions. Also, Standards for Internal Controls in the Federal Government states that management should periodically review policies and procedures for continued relevance and effectiveness of a federal program, and that management considers the impact of deficiencies identified in achieving documentation requirements. VA's existing policy on EUL projects is outdated. For example, it refers to an EUL authority that previously allowed the development of a full range of EUL projects. However, this authority is no longer in effect. VA is updating its EUL policy; however, the updated draft policy still does not discuss VA's limited authority to provide housing for homeless veterans. Further, the updated draft policy does not specifically provide direction on how to determine whether a proposed supportive-housing EUL meets the needs of homeless veterans. Without documented policies and procedures that address these needs, VA may not be well positioned to identify viable supportive-housing EUL projects and help ensure that those projects are successfully developed. Three programs—Housing and Urban Development and VA Supportive-Housing (HUD-VASH), VA's Grant and Per Diem (GPD), and Supportive Services for Veteran Families (SSVF)—were used in conjunction with supportive-housing EULs to help support the goal of ending veteran homelessness. From fiscal years 2012 to 2016, the number of chronically homeless and vulnerable veterans housed through the HUD-VASH program increased from about 37,000 to 72,500. Community officials GAO interviewed stated that the HUD-VASH program has been instrumental in reducing chronic veteran homelessness. From fiscal years 2012 to 2016, veterans served by the transitional housing-focused GPD program remained relatively steady. Veterans and their family members participating in the SSVF program increased from about 33,000 in fiscal year 2012 to 149,000 in fiscal year 2016. According to the VA, rental assistance made up the majority of the temporary financial assistance provided by the SSVF program. GAO recommends that VA (1) document its decision-making process in selecting projects as required by VA's policy and (2) update its policy to address the current authority and specify how to identify properties for supportive-housing EULs to meet the needs of homeless veterans. VA concurred with both recommendations but disagreed with some of GAO's findings. GAO believes its findings are valid based on the evidence presented. |
The Federal Service Labor-Management Relations Statute (Statute) includes a congressional finding that labor organizations and collective bargaining in the civil service are in the public interest because they contribute to effectively conducting public business, among other things. The Statute allows for the use of official time, and while federal employees are not required to join a union, the union must represent all employees in a bargaining unit, regardless of whether they are dues- paying members of the union. Employees on official time are treated as if they are in a duty status when they are engaging in union representational activities, and they are paid accordingly. The Statute provides a legal basis for the current federal labor and management relations program and establishes two sources of official time. Official time for negotiation of a collective bargaining agreement, attendance at impasse proceedings, and authorized participation in proceedings before the Federal Labor Relations Authority, is provided as a statutory right. Official time for other purposes allowed under the Statute must be negotiated between the agency and the union in an agreed-upon amount deemed reasonable, necessary, and in the public interest. Accordingly, collective bargaining agreements often include provisions concerning the conditions for granting official time. Agencies and unions can negotiate at the department, component, operating administration, or facility level, for example, and there can be variation in how official time is managed within an agency. Activities that relate to internal union business, such as the solicitation of members or the election of union officials, must be performed when in a non-duty status; that is, not on official time. VA has negotiated master CBAs with five national unions. These agreements negotiated between VA and the unions contain provisions by which VA manages official time. As we previously reported, one approach used by VA to manage official time is to specify the percentage or number of hours authorized for a designated union position, such as the President, Vice-President, Secretary, or Treasurer. Time specified for designated positions in CBAs is typically characterized as a percentage of an employee’s total time, such as 50 or 100. Certain CBAs negotiated between VA and unions provide for at least one union official to charge up to 100 percent of their duty hours to official time. In addition to official time, unions may negotiate to receive other support from agencies, such as office space, supplies, and equipment. CBAs negotiated between VA and unions typically include information on accessibility, privacy, and size of unions’ designated space at VA facilities. Since fiscal year 2002, OPM has annually produced reports on the government-wide use of official time, with its most recent report covering fiscal year 2012. OPM officials stated that it is not required to report official time, and has no statutory or regulatory role for monitoring or enforcing agencies’ use of official time. However, there have been various legislative proposals over the years to require OPM to report official time. In its reporting of official time, OPM relies on federal agencies to verify the accuracy of the data provided. According to OPM, there is no uniform requirement concerning the degree and specificity of records kept for tracking and recording official time. However, OPM encourages labor and management to record official time data in the following categories for union representational activities and includes this information in its annual reports: (1) term negotiations; (2) mid-term negotiations; (3) general labor-management relations; and (4) dispute resolution. See figure 1 for examples of union representational activities as they relate to these categories. In reporting on the use of official time within federal agencies, OPM has noted that agency management and labor share a responsibility to ensure official time is authorized and used appropriately, and that the amount of official time used by agencies can depend on a number of factors, such as the timing of term negotiations, number of grievances, number of bargaining unit employees, and involvement of unions in labor management decisions. There is no standardized way for VA facilities to record the amount of official time employees use for representational activities because there are currently two time and attendance systems being used across the agency that capture this information differently. VA began implementing its new time and attendance system, the Veterans Affairs Time and Attendance System (VATAS), at some facilities in 2013 to replace its older system, the Enhanced Time and Attendance (ETA) System. VA expects to complete its rollout of VATAS in July 2018. According to a VA official, approximately 50 percent of VA facilities and about one-third of VA employees (120,000) had transitioned to using VATAS as of September 2016. For the five selected facilities we visited, three had transitioned to VATAS and two were still using ETA at the time of our visits. VATAS provides specific codes for timekeepers to record the various uses of official time for union representational activities, but according to VA officials, ETA lacks such codes. Under ETA, VA officials explained that timekeepers can record the amount of official time used by employees for representational activities in the remarks section of employees’ time and attendance records, which according to VA officials, does not always make clear the purpose for which official time is being used. While VATAS and ETA provide a means to record official time, we found that three of the selected facilities did not record official time in either of these systems. Two selected facilities under VATAS recorded information on the use of official time outside of the time and attendance system, and one facility under ETA did not record the information anywhere. Although the remaining two facilities recorded information in their time and attendance system, they recorded different information in different ways. The inconsistent recording of information raises questions about VA’s ability to monitor the use of official time and ensure that public resources are being used effectively. However, VATAS could help standardize the way individual facilities record information on official time and improve VA’s ability to monitor its use. VATAS could help standardize the way individual facilities record information on official time and provide better information on the different purposes for which official time is used; however, we found that VA has not provided consistent training to employees on how to record official time in the new system. The lack of consistent training on how to record official time in VATAS is due in part to the fact that VATAS is being implemented in phases and training is being updated throughout the course of implementation. For example, a VA official told us that information on how to record official time was incorporated into the VATAS training curriculum in June 2016. However, VATAS implementation began in 2013, and employees trained on VATAS prior to June 2016 may not have been instructed on how to record official time in the system. For instance, timekeepers and other officials from the three selected facilities that had implemented VATAS prior to June 2016 said that recording official time was not covered during their VATAS training and these facilities were not using the codes in VATAS to record official time because they were not aware of them. As a result, these facilities continued to use different approaches to record official time and documented different information. According to federal internal control standards, management should internally communicate quality information that enables personnel to perform key roles, and it should provide appropriate training to personnel so they may carry out their responsibilities. Without effectively providing guidance on how to record official time in VATAS, personnel responsible for recording and overseeing its use may not know how to perform certain duties, and VA is missing an opportunity to more accurately track the amount of official time used by employees across the agency to better monitor its use and manage its resources effectively. VA took several steps in 2016 to provide better guidance to facilities on how to record official time in VATAS, including: updating VATAS training curriculum for timekeepers and supervisors to include face-to-face training on official time at facilities where VATAS is being implemented; making information on how to record official time available on the VA discussing how to record official time during a monthly “VATAS Connections” call with payroll offices. Despite VA’s recent efforts, however, as of October 2016 two of the three selected facilities using VATAS at the time of our visits were still not using the different official time codes in VATAS for recording official time. An official from VA’s Financial Services Center (FSC) said that FSC is producing a timekeeper refresher training video to help ensure timekeepers are aware of the most recent changes in VATAS, including instructions on recording official time, and hopes to complete the video by the end of November 2016. To provide agency-wide official time data to OPM, which reports on the use of official time for representational activities government-wide, VA’s Office of Labor-Management Relations (LMR) annually collects and compiles data from individual facilities and shares the aggregated data with OPM. VA’s Office of LMR uses its LMR Official Time Tracking System to obtain information from individual facilities on the amount of official time used by employees. The LMR system is separate and distinct from VA’s time and attendance systems and provides the Office of LMR with a centralized way of collecting official time data from individual facilities. The Office of LMR sends an email each year to facilities with a link to access the LMR system, and a management representative at each facility manually enters information on the use of official time into the LMR system. The actual amount of official time used by employees across VA cannot be easily determined because VA offers facilities various options for calculating and reporting official time data in the LMR system. Federal internal control standards prescribe that management design control activities so that events are completely and accurately recorded and that it communicate reliable information to external entities, such as OPM, to help the agency achieve its objectives. VA allows facilities to use written records, estimates, samples, or surveys of official time hours used, or any combination of these methods to determine the amount of official time used by employees at their facility. Figure 2 shows the various information fields included in the LMR system for fiscal year 2015, including the different calculation methods VA allows facilities to use to determine the amount of official time used by employees. Fiscal year 2015 data collected through the LMR system show that employees spent approximately 1,057,000 hours on official time for union representational activities, and according to VA officials, unions represented almost 290,000 bargaining unit employees across the agency during this time. In addition, the data show that 346 employees spent 100 percent of their time on official time. However, as previously discussed, this data is inconsistent and not reliable. Of the 332 official time submissions from facilities in fiscal year 2015, 104 entries indicate that the facility used only records such as time and attendance records, 5 entries indicate the facility used only a survey of supervisors of union representatives, 123 entries indicate the facility used an estimate only, and 99 indicate that the facility used a combination of these methods to determine the amount of official time used. For one entry, it was not clear which method was used. These different methods of calculating official time result in inconsistent information on the number of official time hours used by employees for union representational activities. Figure 3 illustrates the range of information selected facilities submitted to the Office of LMR on the use of official time. In calculating the amount of official time used, VA strongly encourages facilities to provide comments describing how they arrived at their numbers when submitting their data on official time; however, our review of selected facilities’ fiscal year 2015 official time submissions found that none of the facilities provided such comments. Without reliable information from facilities on official time, VA management does not have what it needs to monitor the use of official time and manage its resources effectively. According to VA officials from the Office of LMR, once VATAS is fully implemented, there will be no need for individual facilities to use different methods to calculate the amount of official time used because facilities will be able to rely on information in VATAS when submitting data in the LMR system. A VA official also told us that after VATAS is fully implemented, they plan to issue a policy on the change to calculating official time. Until VATAS is fully implemented, however, the various calculation methods used by facilities will continue to produce inconsistent data on the amount of official time used agency-wide. Furthermore, once fully implemented agency-wide, VATAS could provide VA with an alternative to collecting data from individual facilities through its LMR system on the amount of official time used by employees. An official from VA’s FSC stated that FSC currently has the capability to generate reports in VATAS on the amount of official time used at individual facilities. The official added that once all facilities are using VATAS, FSC could generate one report with official time data, thereby eliminating the need for individual facilities to submit official time data through the LMR system. However, an official from VA’s Office of LMR was not aware of FSC’s ability to produce such reports and said that the Office of LMR currently plans to continue using the LMR system to obtain information from facilities on the amount of official time used. According to federal internal control standards, management should use reliable data for effective monitoring. If VA does not obtain more consistent data on the amount of official time used by employees, it will not be able to accurately track the amount of official time used by employees in order to ensure public resources are being used appropriately. At the five selected facilities GAO visited, VA provided unions with designated space for union representational activities. We found that the amount of designated space for these activities at selected facilities varied, but in all cases, unions’ designated space comprised less than 1 percent of the overall space available. VA does not collect or track data from individual facilities on the amount of designated space used by unions, but officials at selected facilities were able to provide us with information on the amount of designated space for representational activities. At the smallest facility, about 0.65 percent of the overall space was designated for representational activities (240 out of 37,068 square feet). At the largest facility, about 0.11 percent of the overall space was designated for representational activities (2,777 out of 2,546,036 square feet). Designated space for representational activities at selected facilities consisted primarily of office space. At all five selected facilities, union officials either had their own office space designated for representational activities, or they shared designated office space. For example, at one facility with two local unions representing a total of about 900 bargaining unit employees, both union presidents had their own office space designated for representational activities. At another facility with three local unions representing a total of about 3,900 bargaining unit employees, all three union presidents shared their designated space with other union officials. Figure 4 shows designated office space at a selected VA facility for a union official who did not share his space, and figure 5 shows designated office space at another selected facility that was shared by up to three union officials. In addition to office space, designated space for union activities included conference rooms and storage rooms at some of the selected facilities. Further, VA provided unions at all five selected facilities with basic office furniture and equipment, such as desks, chairs, filing cabinets, computers, printers, and fax machines. In some cases, union officials said they purchased additional office equipment using union funds. Union officials from three of five groups we interviewed said that limited space for representational activities was a challenge. Specifically, union officials from those three groups said there was not always sufficient privacy to ensure confidentiality for employees, especially in cases where designated space for representational activities was shared by multiple union officials. Union officials from one of five groups we interviewed said their requests to management for additional space were denied; however, union officials from two of five groups provided examples of instances where they declined offers from management to relocate to larger spaces in other buildings. For example, a union official at one facility said the union declined an offer from management to relocate from their space in the main hospital building to an ancillary building on the campus because it might not be as safe for employees to access when working night shifts or during periods of inclement weather. A VA official from the Office of LMR said that, in general, certain VA facilities may have space constraints depending on where they are located, the types of services provided, and the number of veterans served. VA does not track information on the costs associated with unions’ use of designated space across the agency, and we were not able to obtain consistent information on costs from selected facilities. However, operating costs at VA facilities typically include operations and maintenance expenses, such as utilities, cleaning costs, and grounds maintenance expenses. Therefore, certain costs associated with unions’ designated space at VA facilities are operating and maintenance expenses that would be incurred by VA, regardless of whether VA owned or rented the facilities. VA owned four of five selected facilities, and while some officials at these facilities provided us with information on cost, they used different methods and sources of information to calculate the costs associated with designated union space. At the one selected facility rented by VA, officials used rental payment information and information on the overall square footage of the building to calculate the cost per square foot for fiscal year 2016 to determine the cost associated with designated space for union representational activities at the facility. VA managers and union officials from groups we interviewed at selected facilities cited similar benefits of employees’ use of official time for representational activities. Managers and union officials from most groups we interviewed said that employees’ use of official time improved decision making and helped them resolve problems at their respective VA facilities, and some believed it improved relationships between management and labor (see fig. 6). VA managers from four out of five groups and union officials from all five groups we interviewed believed unions’ use of official time for pre- decisional involvement during meetings at which proposed policies or facility practices are discussed improved decision making processes. This pre-decisional involvement enabled union officials to provide employees’ perspectives on certain proposed policy changes and patient and worker safety initiatives. For example, a group of managers and a group of union officials at one selected facility said they recently collaborated to develop a policy on self-scheduling for nursing staff, which they hope will improve employee retention and morale by providing employees with greater flexibility. According to union officials at another selected facility, management and the union collaborated to develop an anti-bullying policy at the facility. Union Official’s Opinion on Benefits of the Use of Official Time A union official at one facility believed there was a mutual respect between labor and management at the facility, and that management respected the role of the unions and their concerns. For example, she said several supervisors contacted her with questions regarding how to handle certain employees and situations, and together they developed different approaches to resolve the issues before they escalated. In addition, VA managers and union officials from most groups we interviewed said that employees’ use of official time improved conflict resolution by allowing union officials time to communicate with management and employees about any problems that arise. Managers from four out of five groups and union officials from four out of five groups said official time may help resolve problems before they escalate. For example, the use of official time may help prevent problems from evolving into formal actions, such as grievances against management or disciplinary actions against employees. Further, managers and union officials from some groups cited improved relationships as a benefit of employees’ use of official time. Specifically, managers from three out of five groups and union officials from three out of five groups thought official time led to improved relationships between management and labor by providing union officials with time to build and maintain a good rapport with managers. For example, a union official from one group said the use of official time helped the union build a good relationship with management, which they believed led to more satisfied employees and management at the facility. According to union officials at the national and local levels, employees’ use of official time also facilitates the whistleblower process at VA by providing an avenue for employees to report issues or concerns. For example, national union officials said the unions were involved in uncovering various issues, such as overprescribing opiates and long wait times for veterans. Officials from one national union said nearly 50 whistleblowers had come through the union’s office to report issues with VA’s patient waitlist and long wait times. Further, a local union official at a selected facility explained that the unions have a sense of professional obligation within VA to report any whistleblower activity. Managers and union officials across selected facilities identified different challenges associated with employees’ use of official time. Managers from all five groups we interviewed cited staffing and scheduling challenges associated with employees’ use of official time. In some instances, employees split their worktime between union representational activities and non-union duties. For example, an employee at one selected facility served as union president 80 percent of the time and as a pharmacist for the remaining 20 percent. Managers said it is sometimes difficult to accommodate such employees’ use of official time because it may detract from these employees’ non-union responsibilities. Manager’s Opinion on Challenges Associated with the Use of Official Time A manager at one facility said it was difficult to find staff to fill in for employees who spent most of their time using official time. Further, she said the main focus is to provide access for veterans at the facility and employees’ use of official time can take away from patient care. Specifically, a manager from one group we interviewed said it can be especially challenging to find other staff to fill in for employees who are responsible for serving patients yet spend most of their worktime on official time. Union Official’s Opinion on Challenges Associated with the Use of Official Time A union official at one facility who had a set schedule for using official time explained he had limited flexibility to attend various committee meetings that occurred on days when he was not scheduled to use official time. As a result, he said he was unable to provide employees’ perspectives on different issues that were discussed. Union officials from three of five groups we interviewed said they experienced challenges with limited flexibility in terms of when official time may be used. Employees with designated union positions at selected facilities who split their worktime between union representational activities and non-union responsibilities often had set times during which they would use official time, and said that deviating from that schedule could be challenging. In addition, union officials from three of five groups we interviewed said that more official time is needed, and union officials from four groups said they used varying amounts of personal time to conduct union representational activities. The use of official time is viewed by VA managers and union officials we interviewed as beneficial, but it should be monitored effectively to ensure that public resources are spent appropriately. Reliable data on official time are important for effectively overseeing its use, understanding the extent to which it is used across VA, and assisting OPM with the government-wide tracking of the amount of official time used. Our findings raise questions about whether VA is doing all it can to ensure it obtains accurate information on the use of official time in order to effectively oversee its use and share with external entities. The agency-wide implementation of VATAS is an important step toward that goal. Prior to the agency-wide implementation of VATAS, however, VA is not doing all it can to encourage facilities to standardize the way in which they determine the amount of official time used. Taking the intermediary step to standardize methods for determining the amount of official time used at the facility level will not solve all of the data reliability issues surrounding VA’s tracking of official time, but it is a step toward collecting more reliable data. In addition, VA has not provided consistent training to facilities on how to record official time in VATAS, and some facilities are still not aware of VA’s updated guidance on how to record official time in the system, despite recent efforts. Furthermore, given the potential capabilities of VATAS, there may be better ways for VA to collect information on official time in the future and it may not be necessary for VA to continue using the LMR system to track official time. Until all personnel responsible for recording official time in VATAS are aware of and familiar with VA’s guidance, and VA is able to determine a way to obtain more consistent data from facilities, VA will not have an accurate picture of how much time employees use for union representational activities and cannot know how best to manage tracking its use. To improve VA’s ability to accurately track employees’ use of official time, we recommend that the Secretary of Veterans Affairs direct the Assistant Secretary for Human Resources and Administration to: 1. increase efforts to ensure timekeepers at all facilities receive training and consistent guidance on recording official time in VATAS; 2. standardize the methods used by facilities for determining the amount of official time used prior to the agency-wide implementation of VATAS by encouraging facilities to rely on time and attendance records when calculating the amount of official time used at the facility level; and 3. in preparation for the full implementation of VATAS, take steps to transition from using the LMR system to VATAS to collect and compile information on the amount of official time used agency-wide. We provided a draft of this report to the Department of Veterans Affairs (VA) and the Office of Personnel Management (OPM) for review and comment. We received formal written comments from VA, which are reproduced in appendix I. In addition, OPM provided technical comments, which we incorporated as appropriate. In its written comments, VA agreed with all three of our recommendations. With regard to our first recommendation, VA stated that the Office of Labor Management Relations (LMR) has revised its policy to include specific directions to human resource offices to begin recording official time in the VA Time and Attendance System (VATAS) once VATAS has been implemented at their respective facilities. With regard to our second recommendation, VA stated that the Office of Human Resources and Administration plans to develop a memo directing facilities to rely on time and attendance records when calculating the amount of official time used at the facility level. With regard to our third recommendation, VA stated that the Office of LMR will transition from using the LMR Official Time Tracking System to collect and compile data on official time and will coordinate with the Financial Services Center to use VATAS to create a report on the agency-wide use of official time. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies of this report to the appropriate congressional committee, the Secretary of Veterans Affairs, VA’s Assistant Secretary for Human Resources and Administration, the Director of OPM, 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) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Mary Crenshaw (Assistant Director), Meredith Moore (Analyst-in-Charge), Amber D. Gray, and Teresa Heger made significant contributions to this report. Also contributing to this report were Rachel Beers, Mark Bird, David Chrisinger, Lee Clark, George Depaoli, Ronald La Due Lake, Edward Laughlin, Steven Lozano, Marcia Mann, Signora May, Jean McSween, Mimi Nguyen, James Rebbe, Susan Sato, Almeta Spencer, Carolyn Voltz, and Craig Winslow. | In fiscal year 2012, there were over 250,000 bargaining unit employees at VA, and these employees spent about 1.1 million hours performing union representational activities on official time, according to an OPM report. The ways in which VA manages its human resources, including the use of official time, have received increased scrutiny in recent years. GAO was asked to review the amount of official time used by VA employees as well as the amount of space designated for representational activities. This report examines (1) the extent to which VA tracks official time, (2) what is known about the amount of designated space used for union representational activities at selected VA facilities, and (3) the views of VA managers and union officials on the benefits and challenges of employees using official time. GAO reviewed VA's fiscal year 2014 and 2015 data on official time—the most recent data available; analyzed information on designated union space and held group interviews with VA managers and union officials at a nongeneralizable sample of five VA facilities selected based on the number of bargaining unit employees and other factors; and interviewed officials at VA, OPM, and from national unions. The Department of Veterans Affairs (VA) cannot accurately track the amount of work time employees spend on union representational activities, referred to as official time, agency-wide because it does not have a standardized way for its facilities to record and calculate official time. Specifically: Recording official time —VA uses two separate time and attendance systems that capture official time differently. VA's new system (VA Time and Attendance System, or VATAS), which VA began rolling out at some facilities in 2013, has specific codes to record official time, but the older system does not. The inconsistent recording of official time raises questions about VA's ability to monitor its use, but VATAS could help to standardize this process. In rolling out the new system, which VA expects to complete agency-wide in 2018, VA has provided inconsistent training and guidance on how to use the codes in VATAS. While VA has taken steps to provide better training and guidance on recording official time, GAO recently found that timekeepers at two of three selected facilities where VATAS has been rolled out were still not using the codes. Without consistent guidance and training, personnel may not know how to properly record official time in the new system. Calculating official time —VA provides its facilities with a range of options for calculating the amount of official time used. VA annually collects and compiles these data agency-wide using the Labor-Management Relations (LMR) Official Time Tracking System—separate and distinct from VA's time and attendance systems. In calculating official time, facilities may use records, estimates, or other methods, which results in inconsistent data. VA officials told GAO that all facilities will eventually be able to rely on VATAS time and attendance records to calculate official time when submitting data in the LMR system. The full implementation of VATAS will provide VA with an alternative to using the LMR system to collect and compile more reliable official time data. Without reliable data, VA cannot monitor the use of official time agency-wide or share reliable data with the Office of Personnel Management (OPM), which reports on the government-wide use of official time. At all five selected VA facilities, designated space for representational activities comprised less than 1 percent of the overall square footage at each location, according to GAO's analysis. VA does not collect or track data from individual facilities on the amount of space designated for representational activities. Union officials at three of the five facilities GAO visited said that limited space for representational activities made it difficult to provide privacy for employees. A VA official said that certain VA facilities may have space constraints depending on where they are located and the number of veterans served, for example. At most selected VA facilities, VA managers and union officials GAO interviewed cited similar benefits of employees using official time, such as improving decision-making and resolving problems. However, they had differing views on challenges associated with employees' use of official time, such as when and how much official time may be used. GAO is making three recommendations to VA including that it provide consistent guidance and training on how to record official time in VATAS and that it take steps to collect more reliable data from facilities. VA agreed with GAO's recommendations and stated that it would take action to address them. |
Increasingly, agencies are using telework to diminish the disruption that severe weather events and other events may have on agencies’ abilities to accomplish their missions. For example, OPM encouraged agencies to use telework in the Washington, D.C. metropolitan area in response to the potential for disruptions caused by the papal visit in September 2015, the unplanned 1-day shutdown of the metropolitan area’s subway system in the spring of 2016, and ongoing subway track safety work begun in 2016. In 2010, Congress passed the act to specify the requirements for executive agency telework programs and define OPM’s role in providing leadership over telework to agencies. In drafting the act, Congress acknowledged telework as an important human capital tool for agencies, as well as the need for legislation to overcome resistance to telework. We have previously reported on federal telework programs and recommended improving the reliability of agency-reported data, the extent to which agencies have implemented telework as a tool for continuity and emergency planning, and the information available on costs and benefits of telework programs. As required in the act, executive agencies are to designate a TMO. According to OPM guidance, the TMO develops telework policy, serves as a resource for teleworkers and their managers, and advises the CHCO on the agency’s telework matters. OPM guidance stresses that the TMO position encompasses more than administrative responsibilities. The TMO is the single agency official accountable for that agency’s telework program and its compliance with the act. Agencies may also designate a telework coordinator to implement the day-to-day operations of the telework program. The act requires OPM to work with agencies to implement the act’s requirements. This includes assisting agencies in establishing appropriate qualitative and quantitative measures and teleworking goals. Additionally, the act charges OPM with providing telework guidance on pay and leave, agency closure, performance management, official worksite information, recruitment and retention, accommodations for employees with disabilities, and maintaining a central telework website, www.telework.gov. The act also requires OPM to issue an annual report to Congress on the status of telework in the federal government. OPM has surveyed executive agencies with an annual data call to fulfill its role in reporting on progress towards telework related goals to Congress. While there are many ways to assess telework program success, the act requires OPM to report on agencies’ goals related to increasing participation rates in their telework programs, whether or not the agencies met their goals, and if not, what actions agencies are taking to identify and eliminate barriers to maximizing telework opportunities. The information collected by OPM can shed light on the barriers agencies may face in implementation, such as managerial resistance or technology limitations. While we have previously reported on data limitations related to OPM’s annual telework reports, the reports do provide useful context about the status of telework in the federal government and are comprehensive sources of information on telework in the executive branch. OPM reports that the number of federal employees teleworking has increased more than 40 percent since fiscal year 2012. Table 1 shows the number of teleworkers in the federal government, as reported in OPM’s annual Status of Telework in the Federal Government reports to Congress. OPM has identified two general types of telework: routine telework and situational telework. Routine telework is telework that occurs as part of an ongoing, regular schedule. Routine telework may be part time or full time. The key feature of routine telework—also referred to as continuing, regular, fixed, or recurring—is that it occurs on a predictable schedule. In contrast, situational telework is approved on a case-by-case basis, and occurs outside of a routine telework schedule. Situational telework often occurs in response to a specific event such as inclement weather. Situational telework is also referred to as ad hoc, episodic, intermittent, and unscheduled telework. Situational telework may be approved for 1 day or a number of days. For example, short-term telework is situational telework that occurs continuously for a finite number of days. Employees participating in short-term arrangements (e.g., because recuperating from surgery, maternity reasons, etc.) typically do not have in-office days; they work a full or part-time schedule from their homes. Before an employee can participate in any telework arrangement he or she must be approved to telework. The act requires OPM to report agencies’ progress towards meeting telework goals, such as telework participation rates; however, telework had existed at federal agencies before the act’s passage. As previously mentioned, for this review we included Education, GSA, Labor, and SEC as our case study agencies based on telework participation rates and agency size. Table 2 shows the average number of individuals teleworking for the pay periods that include September 30, 2015 through May 31, 2016. According to Education officials, Education’s telework program began in 1994 and became permanent in 2000. After the act was enacted, Education drafted a telework policy and notified all employees of their eligibility to participate in telework, officials stated. Education finalized its official telework policy in 2015. Education’s telework policy is set at the department level. The department’s components have some discretion in applying the rules set in the policy. Education has a negotiated collective bargaining agreement covering telework with one union that represents Education employees. According to GSA officials, GSA began allowing informal telework in the early 1990s and developed its first telework policy in the mid-1990s. In 2008, GSA developed and updated its official telework policy. The policy applied general criteria to eligibility and participation that, according to GSA, were later mandated by the act. In October 2011, GSA further updated its telework policies to fully comply with the act, officials said. GSA allows for telework up to and including full-time telework. GSA has a negotiated collective bargaining agreement that covers telework with each of the two unions that represent GSA employees nationwide. According to Labor officials, Labor’s telework program dates back to the 1990s. Labor officials stated that when the act passed, Labor officials reviewed its telework program to ensure it complied with the act’s provisions. Labor has not changed its telework policy significantly since 2010. While its telework policy is set at the department level, subagencies within Labor have discretion in interpreting and applying the policy, so long as it aligns with the department’s policy. Labor has negotiated collective bargaining agreements covering telework with three unions that represent its employees. According to SEC officials, SEC launched its first official telework program in 2002, but had allowed telework more informally since the mid- 1990s. In 2007, SEC negotiated a new collective bargaining agreement with the one union that represents SEC employees. SEC officials said this agreement included an expanded telework pilot program that allowed for telework up to 5 days per week for certain employees. In 2013, SEC made the expanded telework pilot program permanent and expanded telework to others within the agency. SEC sets telework policy at the commission level. Standards for Internal Control in the Federal Government provides guidance for establishing and maintaining an effective internal control system in federal agencies. Internal control comprises the plans, methods, policies, and procedures used to fulfill the mission, strategic plan, goals, and objectives of an agency. Internal control is a process affected by the agency’s oversight body, management, and other personnel who provide reasonable assurance that the objectives of the agency will be achieved. These objectives and related risks can be broadly classified into one or more of the following three categories: Operations – Effectiveness and efficiency of operations Reporting – Reliability of reporting for internal and external use Compliance – Compliance with applicable laws and regulations To be effective, an agency’s internal control system must incorporate a series of actions and activities that occur throughout its operations and on an ongoing basis. Once in place, internal control provides a reasonable, but not absolute, assurance of meeting those objectives. As related to telework, management is responsible for adapting the internal control standards to develop activities and processes that allow the agency to achieve its telework policy goals. The activities adapted by the agency should help staff carry out specific program activities according to its telework policies and procedures. For this report, we limited our examination of internal controls to specific activities, processes, and policies that help the four case study agencies comply with the act. We also examined specific internal controls designed to help the four case study agencies achieve their telework goals as expressed in case study agencies’ individual telework policies. The act sets out basic requirements for agencies for (1) telework eligibility, participation, and notification; (2) telework agreements; and (3) training. Furthermore, OPM also provides guidance on notifying newly hired employees of their eligibility to telework. We reviewed the controls and processes that our four case study agencies had in place to help ensure they comply with the act and adhere to OPM guidance and other agency telework policies. While controls and policies varied for each agency, the agencies all met the act’s requirements and followed the same general process for approving telework agreements. The telework policies of all four case study agencies comply with the eligibility and participation requirements noted in the act. The act required agencies to determine all employees’ eligibility for telework and notify employees of their eligibility no later than 180 days after enactment. In keeping with the recognized importance of telework, the act describes the limited situations in which employees are ineligible to telework instead of prescribing eligibility. The act also describes situations in which participation in telework may be limited or not authorized. Beyond these exceptions, the act authorizes agencies to determine specific employees’ eligibility to participate. Education, Labor, and SEC designed additional policies to clarify when employees were either ineligible or could not participate in telework. GSA’s policies did not have additional eligibility or participation requirements. As noted in its telework policy, GSA supports the broadest possible use of telework. For example, GSA required all employees to have a telework agreement. Even if GSA employees choose not to telework, they may be required to have an agreement authorizing telework in the event of an unexpected need to telework. Figure 1 shows the 4 case study agencies’ policy compliance with the act’s eligibility and participation requirements, as well as additional related policies. The act required agencies to notify all employees of their eligibility to telework within 180 days of enactment. OPM reported in 2012 that most agencies required to make this notification did so within the given time frame. While the act does not specify when newly hired employees must be notified of their eligibility to participate, OPM guidance provides that agency policies should provide for notification of newly hired employees within a reasonable time frame. Officials at Education, GSA, and Labor said they include information on telework eligibility in employment announcements. According to agency officials at the four case study agencies, newly hired employees are informed of their eligibility in new employee orientation or during the onboarding process. SEC officials said all new employees are required to take telework training at which time employees are again informed of their eligibility. We heard in all of our focus groups with teleworkers that employees were notified through a variety of methods including agency-wide notices, union notifications, discussions with a supervisor, newsletters, intranet sites, and direct e- mail notification. The act requires agencies’ employees to enter into a written telework agreement with an agency manager before they can telework. The telework agreement is to outline the specific work arrangement agreed upon between employee and supervisor. With slight variations, the 4 case study agencies generally follow the same telework approval process, as shown in figure 2. Executive management at all four case study agencies require supervisors and, in one case, managers, to approve or deny telework applications. At GSA, Labor, and SEC, first-line supervisors are responsible for approving or denying agreements. At Education, first-level supervisors recommend approval or denial to second-level managers, who make the final decisions. Employees at Education, GSA, and SEC submit agreements to their direct supervisors or managers through electronic approval systems. Conversely, Labor’s telework application system is largely paper based. Labor employees submit paper agreements or electronic versions of paper applications to their direct supervisor for approval. Finalized telework agreements are then maintained either by supervisors or centrally within the agencies, by reporting to a telework program official or in an electronic telework agreement system. The four case study agencies provide supervisors and managers guidance on making telework agreement decisions through telework policies. Telework policy at all four case study agencies allows supervisors to use their professional judgment or discretion within the parameters of the official policy. According to these policies, decisions to approve or deny telework agreements should be based on sound business and performance management principles. For example, to help managers determine the eligibility of both positions and employees, Labor has developed a decision tree that includes a series of yes or no questions that help managers and supervisors determine whether or not to approve an agreement. Supervisors are also encouraged to discuss telework with their employees before formal requests are made. Telework policies at each case study agency include procedures for employees to appeal the denial of a telework agreement. In all four of our focus groups with supervisors we heard that telework denials due to performance or conduct issues are rare. In addition, collective bargaining agreements at each agency afford bargaining-unit employees the ability to file a grievance if denied telework. Agency or union officials at each case study agency also told us that grievances are rare. The act requires that agencies provide interactive telework training to employees eligible to telework and to managers of teleworkers. The act also requires that employees successfully complete the training before entering into a telework agreement. Consistent with this requirement, all 4 case study agencies require employees to complete and document telework training before signing a telework agreement. To verify completion, Education, Labor, and SEC require employees to include a certificate of telework training when they submit a telework agreement for approval. At GSA, employees are not granted access to the online telework agreement system until they have successfully completed telework training. Figure 3 shows the training requirements for both employees and managers at the 4 case study agencies. The act also requires agencies to provide training to managers of teleworkers. OPM provides tools and policy guidance intended to improve agency telework programs. In its guidance to managers and supervisors, OPM defines 13 basic steps managers should follow to help them effectively implement a telework program. This guidance sequences training completion (step 3) before entering into telework agreements (step 6). See table 3 for the key steps for managing teleworkers as sequenced by OPM. Consistent with federal internal control standards, persons in the key role of approving or denying telework agreements need to possess and maintain a level of competence that allows them to accomplish their assigned task in accordance with established policies. To achieve this competency, management provides training to help staff develop the knowledge, skills, and abilities needed to accomplish assigned tasks. If an agency ineffectively times training for managers or supervisors or lacks controls for ensuring the training is complete before entering into telework agreements, then managers or supervisors might make telework decisions before having completed the training. All four case study agencies require managers and supervisors to complete telework training, but not all require it before signing telework agreements. Education’s and SEC’s telework policies stipulate that managers and supervisors are to complete telework training before entering into telework agreements. However, officials at Education and SEC told us that managers and supervisors are required to take training within a specific timeframe, but not necessarily before entering into telework agreements. Telework policies at GSA and Labor do not mention the timing of training for managers or supervisors. However, because GSA’s automated telework application system requires personnel to successfully complete telework training before granting access to either the employee or the supervisor, GSA supervisors and managers must complete telework training before approving telework agreements. Labor officials told us that new managers have 6 months to complete telework training. Other than at GSA, case study agency training systems contain the mechanisms to track manager and supervisors’ completion of training and are not directly linked to the telework program system. At these three agencies, the internal controls in place for training completion do not interface with the telework systems and therefore may affect the ability of telework program officials to readily track completion. SEC officials told us that after receiving a biannual report listing managers, supervisors, and employees who have not completed the training, the TMO will send a reminder to complete training. Education and Labor telework officials said they can request data from the learning divisions on telework training, but they do not have direct access to the information. Managers and supervisors at Education, Labor, and SEC who do not undergo telework training prior to entering into telework agreements may not fully understand the agency’s telework policy before approving or denying a telework request. Without adequate knowledge of agency policy, these managers and supervisors may not be performing their assigned tasks in a manner that helps their respective agencies achieve telework program goals and objectives. Given the expectation that managers will apply professional judgment when approving or managing telework agreements, it is important that they have the appropriate training before entering into agreements. According to OPM’s best practice guidance for managers and supervisors, telework agreements are living documents that should be regularly reviewed and re-signed by both the manager and teleworker. However, our four case study agencies were inconsistent in whether they review or document the review of ongoing telework agreements. As a result, the telework agreements on file may not accurately reflect current telework participation and may undermine the quality of the telework data the agency has. Federal internal control standards state that agencies should use quality information to achieve agency objectives. To help ensure that the information contained in telework agreements is accurate, management should design control activities to respond to the risk of having inaccurate data, including outdated information. In addition, according to federal internal control standards, documentation is a necessary part of an effective internal control system. Therefore, as applied to telework agreements, these standards suggest that agencies should document these reviews. Unless telework agreements are regularly reviewed and these reviews documented, the agencies face the increased risk of having inaccurate information. The four case study agencies varied in how frequently they reviewed and documented their review of telework agreements. Education’s telework policy requires telework agreements to be renewed annually. Telework agreements expire 1 year after their approval date. According to Education officials, Education’s new telework agreement management system will require all telework agreements to be renewed annually during the same time period and for this review to be documented in the system. GSA’s telework policy does not require telework agreements to be periodically reviewed once they are approved. Instead, GSA officials told us they remind supervisors to review agreements as part of the performance appraisal process. However, unless a change is made to the agreement in GSA’s electronic system, the telework agreement review is not documented. GSA officials said the agency is considering a new policy to require a periodic, documented review of telework agreements. Labor’s policy requires supervisors to annually review agreements to help ensure that agency and employee needs are being met, but documentation of the review is not required. SEC’s telework policy notes that employees may be required to recertify agreements to help ensure the accuracy of the information in the agreement, but a periodic and documented review is not required. SEC officials said they anticipate updating SEC’s telework agreement system sometime in 2017, including requiring that all telework agreements be renewed annually and the actions documented. By not requiring telework agreements to be regularly reviewed, GSA, Labor, and SEC cannot be assured that the agreements reflect and support their current business needs. Of these agencies, Labor is most vulnerable to the risk of having inaccurate data on current telework agreements because it uses a largely paper-based manual system to manage its telework agreements. Given the likelihood of changes in work responsibilities and employee schedules over time, telework agreements not subject to a periodic and documented review may contain outdated information. In turn, that may result in management at these agencies using inaccurate data when making decisions that require telework data, such as for space planning, technology investments, or calculating the costs and benefits of telework. Also, employees at these agencies may be teleworking more often than approved or on days not specified in their agreements. Without a documented periodic review, these agencies lack an important internal control to better help ensure the accuracy of reporting, and to reasonably assure that policy guidelines are being maintained. Case study agency officials and some focus groups with supervisors and teleworkers report that while managerial resistance to telework has gone down, and telework technology has improved in the 6 years since the act’s passage, they remain the key challenges to increasing telework participation. In its 2014 report to Congress, OPM reported that the top 2 reported barriers to employees’ ability to telework were management resistance (22 percent) and information technology (IT)/infrastructure (20 percent). In its 2016 report, OPM continued to cite managerial resistance and technology limitations as barriers to telework. According to the act, OPM shall assist agencies in establishing appropriate qualitative and quantitative measures and teleworking goals as well as consult with GSA on policy guidance for telework technology and equipment. OPM asks each agency in its annual data call to report its goal for increasing telework participation to the extent practicable or necessary. OPM also asks agencies to explain whether or not they met the participation goal and, if not, what actions are being taken to identify and eliminate barriers to maximizing telework opportunities. We previously identified 25 key practices that federal agencies should implement in developing successful telework programs. This includes 2 practices that demonstrate managerial support for telework and 5 practices related to technology. OPM has previously identified managerial resistance and technology limitations as common challenges to agency telework programs, which is consistent with what we found at our four case study agencies, as discussed in detail below. All four of our case study agencies described agency-wide activities demonstrating the senior leadership’s efforts to design and implement a successful telework program. However, in our focus groups with teleworkers and supervisors we heard a range of examples of how supervisors or managers discourage or support agency telework programs. Table 4 provides examples of how supervisors reportedly demonstrated this support and discouragement at our case study agencies. Officials at three of our four case study agencies and two focus groups with teleworkers and supervisors reported that some managers do not support telework because they believe it contributes to poorer performance, as compared to the performance of in-office employees. Agency and union officials said the frequency of telework varied across the agencies and supervisors. All four agencies noted in their telework policies that some supervisor discretion should be used when approving and monitoring telework agreements, but some agency and union officials said the resulting variation in telework usage contributed to a perception that the agency was inconsistently implementing the telework program. We heard from some union officials and focus groups with teleworkers that employees sometimes assumed that supervisors were approving telework based on favoritism or other reasons not supported by agency policy. Agency and union officials did not characterize the extent to which supervisors or managers were discouraging telework, partly because none of our case study agencies had conducted any recent agency-wide surveys on telework. We also heard at one focus group with teleworkers that employees did not always feel comfortable voicing concerns publicly for fear of negative consequences for their careers. However, if employees are not provided an opportunity to voice their concerns without concern for negative consequences to their jobs, agencies may be missing an opportunity to better identify and address barriers to telework, including managerial resistance. Addressing managerial resistance could help increase telework participation rates by reducing inconsistencies in how agency telework policy is applied. According to federal standards for internal control, management, along with oversight from the oversight body, should determine through an evaluation process the extent to which deviations are occurring that would prevent the organization from achieving its objectives. Although OPM is not in an oversight capacity, given the requirements the act has placed on OPM to assist agencies, OPM can help ensure that the agencies have the appropriate tools and processes to assess barriers to telework and develop solutions to address them. OPM officials said organizations that are the most successful at telework are those that incorporate telework throughout agency operations and policies as opposed to simply having a written policy on telework. Case study agency officials said technology issues remain a challenge to their telework programs’ success. We heard at ten of our eleven focus groups with supervisors and teleworkers that teleworkers have experienced challenges accessing needed equipment and applications. Sometimes this limits the type of work that could be done while teleworking. Seven of these focus groups discussed how network connectivity or access was a challenge, including having to repeatedly log on to the agency network after being disconnected and spending time getting assistance from their respective agencies’ IT help desks. One focus group with supervisors reported that when IT challenges arose, supervisors may have to cover teleworking employees’ daily tasks while the employee resolved the IT issues. We also heard at some of the focus groups that teleworkers and supervisors discussed what resources and tools the teleworker would need to perform work activities while teleworking, and how to address any telework technology-related problems. For example, we heard at one focus group that if a teleworker’s phone or other telework-related technology was not working properly, the teleworker may be expected to return to the office to work until the issue could be corrected. Case study agency officials described a number of actions to address telework technology challenges. For example, these agencies provide dedicated help desk support to teleworkers; provide equipment, including webcams, to teleworkers; and have upgraded IT systems to support telework. GSA officials said they focus IT investments on mobile strategies that allow employees to work from anywhere. Labor officials said they have upgraded IT to expand the number of programs supported remotely. SEC officials said they provide employees who telework 3 days a week or more with laptops, monitors, and printers to use in their telework location. SEC officials also said that in 2015, they introduced new tools, including phones with integrated cameras and upgraded videoconference equipment, which have helped enable more collaboration, among both teleworkers and employees across their 11 field offices. We heard at all seven focus groups with teleworkers that teleworkers do not always have access to, or were not aware of, the IT tools available to teleworkers. For example, one focus group reported that some newly issued laptops at GSA did not have webcams. GSA officials confirmed that a recent order of laptops did not include webcams. Also, while external webcams were available to these employees, officials were unsure if the affected employees had been notified about how to request one. GSA officials said they had recently surveyed teleworkers about technology issues to assess the user experience and determine if there was capacity for additional telework. Education officials said they have solicited feedback from employees during training, which identified IT challenges for the telework program, but had not conducted other surveys on telework IT. Labor and SEC officials said they have not surveyed their employees about their IT needs or experiences. However, these case study agency officials said they conduct IT tests to monitor their networks’ abilities to handle telework needs and identify areas needing improvement. Case study agency officials told us that OPM telework guidance generally met their needs, although some agencies would like more clarity on OPM’s guidance on unscheduled telework. In accordance with the act, OPM provides telework guidance to agencies on its website, www.telework.gov. The website covers a number of areas including agency closure. OPM officials said they also have had multiple meetings with TMOs and coordinators to clarify its meaning of unscheduled leave. They added that agencies should treat unscheduled telework the same as unscheduled leave. Officials also stated that since OPM introduced the concept of being telework ready, employees are expected to telework when there is an adverse weather event. This has led to less confusion about what agencies should do. Education and Labor officials said that OPM’s announcements of unscheduled telework and unscheduled leave have created difficulties for them. These agency officials told us that employees assume OPM’s announcement allows them to telework even though agency policy requires employees to either request permission to telework or notify their supervisors of their intentions to telework. To decrease the confusion, Labor communicates with employees to remind them of the agency policy requiring them to notify their supervisors ahead of known continuity of operations (COOP) events, such as weather-related closures. Labor officials also encourage managers to speak with employees ahead of a known event to work out details of telework or leave in advance. In addition to sending notifications to all employees ahead of known COOP events, Education advises supervisors to have procedures and guidance in place beforehand when inclement weather or other possible closures are expected. Education officials said they would like OPM to more strongly emphasize the need for employees to follow their agency’s policy in its announcements. OPM officials said that when OPM receives multiple questions on a particular area, OPM usually issues clarifying guidance to all agencies. If a question comes up often enough, OPM officials said the topic is included on OPM’s Frequently Asked Questions page at telework.gov. For example, in August 2016, OPM revamped the site to include answers to specific questions concerning unscheduled telework and unscheduled leave. Consistent with the act, all four case study agencies have developed internal controls designed to help ensure employee and organizational performance is maintained with telework. The act calls for agencies to establish performance related internal controls by making performance a criterion for continued program participation. Specifically, the act states that telework policies should ensure that telework does not diminish employee performance or agency operations. It also requires agencies to ensure that teleworkers and nonteleworkers are treated the same for the purposes of performance appraisals, among other management activities. In addition to the requirements of the act, three of the four case study agencies had additional performance management controls related to employee telework eligibility. For example, some agencies limited telework for new employees and those employees on a performance-improvement plan. Figure 4 shows performance-related controls included in each case study agency’s telework policy. Supervisors at all four case study agencies may reduce or revoke telework participation if an employee’s performance declines. We heard in all of our focus groups with supervisors that denying or limiting telework for performance reasons was rare. Many supervisors said they have never done so. We heard at some focus groups with supervisors that supervisors assess whether a teleworking employee’s performance has declined through performance reviews and monitoring work flow. We have previously reported that day-to-day performance management activities like those discussed below can help marginal staff improve performance. The act requires that teleworkers and nonteleworkers be treated the same for the purposes of work requirements, performance appraisals, and promotions, among other managerial decisions. We heard from agency officials and in ten of our eleven focus groups with teleworkers and supervisors that telework status did not affect performance expectations. Some agency officials, supervisors, and teleworkers also said that employee performance problems were generally not specific to telework status. For example, we heard at two of four focus groups with supervisors that teleworkers with performance problems typically have them when in the office as well. Further, teleworkers cited personal benefits that they believed improved their performance. For example, we heard at all of our focus groups with teleworkers that employees often felt more productive, were able to concentrate on their work better, and experienced fewer interruptions when they teleworked. Supervisors in our focus groups described numerous strategies and resources they use to supervise and stay connected with their employees, including teleworking employees. For example, some supervisors required all employees to work in the office on a certain day so everyone could participate at weekly staff meetings in person. Supervisors in one focus group said they monitor employees’ work tasks online, regardless of telework status. Figure 5 shows the strategies and resources supervisors discussed using to manage teleworking employees. Because employees are not always collocated with their supervisors, these strategies can also be used for managing across locations, whether the employee is teleworking or not. Participants in our supervisor and teleworker focus groups spoke about the importance of discussing the expectations and preferences for communicating before beginning a telework arrangement. Supervisors and teleworkers in these focus groups also reported that they rely on phone calls, conference calls, e-mails, instant messaging, and, for some, videoconferencing to stay in contact when teleworking. In all of our focus groups with teleworkers we heard that telework status either had no effect on how often employees communicated with their supervisor or, in some cases, led to increased communication. For example, one focus group discussed that some teleworkers communicate with their supervisors almost exclusively through e-mail or phone calls, regardless of telework status. We also heard in some of our focus groups that sharing calendars allows other team members to see what individuals were working on and when they were available to collaborate. Having robust telework data is important for managing and improving telework programs. Telework data can inform management decisions about investing resources, planning for COOP events, assessing compliance with the act, and managing physical space needs. For example, Education officials said they use telework data to support space-reduction efforts by informing work space allocation decisions. SEC uses telework data to ensure those teleworking full-time are assigned to their proper duty station. Having reliable and timely data available to management for decision making and reporting is both important to managing agency telework programs and consistent with federal internal control standards. While our case study agencies varied in the methods used to collect, validate, and report telework data, all agreed that there are challenges to ensuring that telework data are accurate. Three of our case study agencies use an electronic telework agreement management system, but Labor’s manual system creates challenges in tracking the number of telework agreements. GSA and SEC use electronic systems for storing and tracking telework agreements. Education transitioned to an electronic system in 2016. The electronic telework agreement systems allow Education, GSA, and SEC to integrate certain internal controls into the telework agreement and data collection process. For example, the electronic systems can prevent employees from applying for telework if they have not completed training. They can also show supervisors their employees’ approved telework schedule when approving employee timesheets. In 2016, Education transitioned from tracking telework agreements on paper to using an electronic system where employees request telework agreements electronically. As part of this conversion, Education employees created new telework agreements in the electronic system. Education officials said this process will serve two key functions: first, it will convert telework agreements from paper files to electronic agreements; second, it will require all agreements to be renewed annually to ensure they continue to fit the needs of the employee or the agency unit. The electronic system will generate annual reminders to employees to renew their telework agreements. Unlike the three other case study agencies, Labor uses a manual, largely paper-based system. Labor officials said budget limitations had prevented them from procuring an electronic telework management system. Labor employees submit a written request for telework to their supervisor, either on paper or an electronic document. If approved and signed by the supervisor, the telework agreement is then forwarded to a telework point- of-contact (POC) in the employee’s division or region. The POC then logs the agreement into a spreadsheet and scans the agreement if it is submitted on paper. POCs supply telework data for their respective divisions or regions to the TMO quarterly via a spreadsheet; the TMO aggregates the data for management reporting and for inclusion in OPM’s annual reports. Labor officials said their data on telework agreements may be inaccurate due, in part, to this manual process and some individuals not following policy. For example, an employee is allowed to telework as soon as a supervisor signs the agreement. However, if the agreement is not forwarded on to the POC, it is not included in the telework data the POC transmits to the telework coordinator and TMO. Thus it may not be included in the telework data used by senior department leadership for decision-making and reporting purposes. Further, Labor officials said that they began collecting information on scheduled telework hours quarterly beginning in October 2015, but they did not yet routinely use the data because they are known to not reflect actual telework hours. Additionally, Labor officials said that many employees have situational telework agreements and use them to telework fairly regularly. Such situational telework would not be part of the scheduled telework hours reported. These officials also said they are working towards improving telework data quality to use more data to manage and expand the telework program. Because employees may adjust their telework agreement throughout the year, Labor’s manual process may prevent the agency from being able to have accurate real-time data on the total number of employees authorized to telework or accurate expectations for levels of scheduled telework. Labor officials said senior leadership reviews telework data at least quarterly. It uses the data for such decision-making purposes as COOP planning and assessing compliance with the act. If these data are inaccurate, then any decisions or internal controls based on these data may be less effective. All of our case study agencies reported actual telework hours through employee self-reported data in electronic time and attendance tools. All of our case study agencies have employees input their bi-weekly work hours into their electronic timesheet and code for the number of work hours that were spent teleworking. Supervisors review and certify these timesheets, and the data are sent to OPM’s Enterprise Human Resources Integration (EHRI) system. Figure 6 shows the number of telework hours agencies reported for the pay periods ending October 3, 2015 through June 11, 2016. Our case study agencies, as well as OPM, agreed that self-reported telework data may be inaccurate because employees may be unsure how to correctly report telework hours. Some case study agency officials said they continue to field questions from employees about how to properly code for telework hours. This shows that confusion remains about how to report telework hours correctly. Case study agency officials also said they sometimes identify instances of incorrect telework time coding in periodic reviews of telework data. The case study agencies may require timesheets be corrected when discrepancies are identified. To address issues with improper recording of telework hours, telework officials at our case study agencies took a variety of training and communication approaches. For example, they said they stress the need for telework data accuracy in communications to supervisors, send frequent reminders to both teleworkers and supervisors on how to properly code for telework hours, and offer training and provide job aids to both teleworkers and supervisors on how to properly code telework time. Supervisors in our focus groups identified some tools they use to help ensure their employees’ timesheets properly reflect their telework hours. For example, supervisors in one focus group said they refer to shared calendars to verify telework hours before certifying timesheets. At SEC, electronic timesheets are pre-filled with an employee’s telework schedule, so employees need only to change the telework time coding if there is a change to their telework schedule for the pay period, such as for situational telework. Supervisors at SEC can also run reports from their telework agreement system showing the telework schedule for all employees reporting to them. All four of our case study agencies periodically reviewed telework data to identify and address trends and outliers, as well as to assess compliance. Officials at the four case study agencies said they compare lists of individuals charging telework codes against a list of individuals with valid telework agreements on file. This helps ensure that everyone who teleworks is authorized to do so. Agency officials said that when they identify discrepancies, they notify the individual charging telework and potentially others, such as the supervisor and local telework coordinator, of the need for a valid agreement. For example, SEC officials said they identified 66 individuals teleworking without an agreement in their most recent review. They then followed up with the individuals to get a telework agreement in place. SEC officials said they also review situational telework hours to determine if employees are teleworking routinely and need a continuing telework agreement. According to agency officials at our four case study agencies, incorrectly coding work time and teleworking without a valid agreement were the most common types of telework data errors. The case study agencies varied in how they collect and report telework data. GSA and SEC’s electronic telework management systems and electronic timesheets provide aggregated data reports. Officials at both agencies said they can readily collect and report the telework data required in OPM’s annual telework data calls and for other internal needs. Officials at Education and Labor said they had some difficulty reporting certain telework data. As previously discussed, Labor’s telework management process relies on manual quarterly reporting from subagencies which does not allow for a real-time assessment of some telework data. Education officials also said they have had difficulty with reporting annualized numbers of telework days per employee, as originally requested by OPM. The process of generating such data includes comparing data across several systems which is difficult and time-consuming. For this reason, Education has instead reported to OPM biweekly telework data for a full year. We identified errors in OPM’s 2014 and 2016 Status of Telework in the Federal Government reports issued to Congress. The act requires the Director of OPM, in consultation with the Chief Human Capital Officers (CHCO) Council, to submit a report annually to Congress addressing telework at executive branch agencies. This report is to include data on: telework participation and eligibility; methods for gathering telework data; explanations for changes in participation rates of 10 percent or more; agency goals for increasing telework participation; a discussion of whether agencies met prior year goals and, if not, what actions are being taken to identify and eliminate barriers to maximize telework opportunities; an assessment of agencies’ progress towards meeting telework goals; best practices in agency telework programs. OPM issued a Status of Telework in the Federal Government report for fiscal years 2012, 2013, and 2014, reporting on data from the prior fiscal year. However, OPM did not issue the 2014 report until November 2015. OPM did not issue a fiscal year 2015 report. Instead, it issued a fiscal year 2016 report in September 2016, using data from fiscal years 2014 and 2015. For the purposes of this report, we refer to the two most recent reports as the 2014 report and the 2016 report. To gather data for these annual reports, OPM requests that telework officials at executive branch agencies and subagencies complete a data call that includes a series of questions on participation rates and telework goals, among other topics. OPM updated data standards in March 2012 to assist agencies in reporting telework data properly. It aggregates and analyzes the data in a spreadsheet and compiles them into the annual report. OPM officials said that to issue the report, they work within a tight timeframe and with limited staff resources. They stated, however, that data accuracy in these reports is a priority. Consistent with federal internal control standards, OPM provides agencies with a chance to review their data to help ensure they are accurate before completing the report. Specifically, these internal control standards state that agency management should communicate with and obtain quality information from external parties, and also use quality information (data that are relevant and from reliable sources) to meet agency objectives. However, despite this step, we identified some instances of inaccurate agency data being included in both the 2014 and the 2016 reports. Examples include the following: In the 2016 report, Education’s telework participation goals are listed as 5 percent (the lowest percentage goal for agencies reporting one). This sharply contrasts with prior fiscal year goals of 85 percent. Education officials said that they interpreted the question in the data call as asking for the increase in the telework participation rate goal, and provided 5 percent as the agency response. The overall participation goal for fiscal year 2016 should have been 90 percent. Education officials also said that the data call instructions for this item and others are not always clear. In the 2014 report, OPM erroneously reported Labor’s participation goal. Labor officials said that when OPM provided them with a chance to review the data to be included in the 2014 report, Labor identified an error in its reported telework participation goal. Labor officials notified OPM of the error and supplied the corrected goal information. However, the published report did not include this corrected goal information. In the 2014 report, OPM highlighted the fact that Labor reported having varying telework eligibility criteria among its subagencies. However, Labor’s actual telework eligibility criteria are uniform across the entire department, as had been reported in the prior annual report. Labor officials said that they had mistakenly supplied incorrect information to OPM on eligibility criteria for four subagencies. They added that they did not recognize the error until the final report was issued. Education officials said that although OPM sometimes follows up on data supplied in the data call, they believe it would be helpful if OPM reviewed agencies’ year-to-year data and followed up on any unexpected or large changes. For example, OPM did not contact Education to clarify why its overall telework participation goal dropped from 85 percent to 5 percent. Had OPM done so, Education officials could have clarified their response. We have previously found that OPM may be missing opportunities to improve upon data it reports by not following up with agencies on data differences. OPM officials, however, said that they do some data verification, but that they rely on the agencies to submit the correct data compliant with OPM’s data standards. OPM holds training sessions for each data call to answer questions telework officials may have about completing the data call. OPM officials also said that given the sheer volume of data that they receive, it is unrealistic for OPM to catch all reporting errors. However, given that OPM has aggregated data call responses into spreadsheets, it would be feasible to automate some comparisons of numeric data across these spreadsheets to identify changes in year-to-year data, and follow up with agencies on changes above a given threshold. We also identified instances where the agencies failed to properly report data on telework eligibility. For example, in the 2014 report, Labor reported the number of individuals eligible to participate in telework as higher than the number of total employees for several subagencies, with the difference sometimes as high as 32 percent. Labor officials explained that at the time of the 2013 data call—which provided the data used in the 2014 report—they counted the number of positions eligible to telework, regardless of whether the positions were filled or not. This resulted in some subagencies reporting a higher number of eligible teleworkers than total employees. Labor officials said they have since changed the way they count the number of individuals eligible to telework. They included this adjusted methodology when providing data for the 2016 report. In the 2014 report, Education also reported the number of individuals eligible to participate in telework as higher than the number of total employees for several of its offices. According to Education officials, they last determined telework eligibility by position in 2011 and have reported the same number of eligible positions for all data calls since, including in the 2016 report. Education officials said that they interpreted the instruction on the data call as allowing for such static data reporting. OPM officials said that for the 2016 report they systematically compared the reported number of employees, eligible employees, and teleworking employees to identify situations in which the number of eligible employees exceeded the number of employees or when the number of teleworkers exceeded the number of eligible employees. They then contacted every agency where they found inconsistent data, including Education. According to OPM officials, they discussed with Education officials OPM’s expectation that agencies update their eligibility records regularly. However, OPM officials said they deferred to Education’s decision regarding what eligibility information it wanted to provide and published Education’s static eligibility data despite the accuracy issues identified. Agencies reporting on position eligibility and not individual eligibility overstate telework eligibility. As a result, they also understate other data points calculated from eligibility data, such as total participation rates. Further, the methodology of counting eligible positions does not take into account the additional telework eligibility requirements of the act at the individual level, such as personal conduct and performance history. Accounting for these requirements may further reduce the total number of employees eligible for telework. The methodology Education officials described using for counting and reporting eligibility indicates that the data Education has been reporting to OPM do not comply with the act. In the 2016 report, OPM recognized that some agencies have not revisited eligibility determinations since early implementation of telework. However, it concluded that this may result in agencies understating, not overstating, eligibility because more individuals may become eligible as agency telework policies and capacities expand. OPM officials said this is a reasonable conclusion because as agency telework programs mature, more individuals should become eligible. Furthermore, Federal Employee Viewpoint Survey data show that both self-reported eligibility and telework participation have been increasing over time. The version of the 2016 report issued to Congress in September 2016 did not explain why some agencies report a higher number of eligible employees than total employees. However, OPM included some discussion of this data discrepancy in an updated version of the report posted on www.telework.gov in November 2016. Agencies are responsible for providing OPM with telework data that comply with OPM’s data standards, but OPM’s responsibility for reporting telework data annually is not limited to aggregating and reporting data directly from agencies without verifying its reliability. Consistent with federal internal control standards, OPM is responsible for taking reasonable measures to help ensure the accuracy of the information it reports and, where necessary, indicating in the report where data may be of questionable accuracy. Although OPM has taken some steps over the years to improve the accuracy of the telework data it reports, in reviewing OPM’s two most recent telework reports we found that the report included some inaccurate data for two of our four case study agencies. Without clear and accurate data in these annual reports, Congress does not have all of the information necessary to conduct its oversight work and federal agencies and other users of the report do not have an accurate picture of how telework is working across the federal government. In an August 11, 2016, memorandum, OPM announced to CHCOs and TMOs that it will begin using telework data in the EHRI system to automate the telework data collection process. OPM plans to use these data to meet the act’s annual reporting requirements to Congress, and to analyze cross-agency telework data to demonstrate links between telework and agency outcomes. While this will not eliminate the annual telework data call, according to the memorandum, it will reduce the manual reporting burden for agencies. OPM stated that it will continue to administer an annual data call to collect telework program information not available in EHRI, such as agency progress towards reaching telework goals and best practices for telework programs. Although we have previously reported that EHRI data are sometimes incomplete or inaccurate, using these data could be helpful in identifying and addressing data quality issues. Further, OPM officials told us there are known problems with some telework data because agencies vary in how they report them. To address these limitations and help ensure agencies are following data standards, OPM set a timeline for testing and assessing the accuracy of telework data in EHRI over the course of fiscal year 2017. This process includes as a first step having agency TMOs and human resources staff examine telework data pulled from EHRI for one pay period to assess the accuracy of the data and determine any potential issues affecting data accuracy. OPM then plans to hold a series of meetings with agency TMOs, human resources directors, and payroll providers to discuss the steps and assistance needed to ensure telework data in EHRI are reported accurately. OPM officials said they plan to pursue an iterative process with agencies to verify the accuracy of telework data in EHRI. OPM’s plan to use EHRI data for future telework data reporting is a positive step toward improving the accuracy of telework data and OPM’s ability to compare data year to year. For prior data calls, agencies supplied telework data from their own systems, which may have differed from data reported to EHRI. OPM officials told us they were unsure how much, if at all, agencies were adjusting their telework data across various data sources before responding to data calls. OPM did not compare these data to payroll data aggregated in EHRI because, according to OPM officials, doing so would have been inappropriate given the known limitations of the EHRI data at the time. According to OPM officials, reporting telework data directly from EHRI going forward will reinforce to agencies the importance of recording and certifying telework data regularly through payroll reporting. Further, reporting data consistently from one source for all agencies will allow the federal government to compare telework data more consistently across agencies and across years. Telework is an important tool agencies can use to realize benefits for both themselves and their employees. As technology and the nature of work in the federal government evolve, incorporating telework into agency operations and expanding telework participation could help agencies continue normal operations during adverse weather or other COOP events, as well as attract and retain employees. But to have a telework program that can achieve these benefits and comply with the act’s requirements, the four case study agencies we reviewed must ensure that their telework policies, procedures, and other controls are implemented appropriately, and that the technology needed for employees to telework functions as it should. Documenting that those responsible for implementing agency telework policy are trained before doing so and reviewing telework agreements regularly can help these agencies ensure that they are applying their telework policies consistently, and improve telework data accuracy. Identifying pain points for teleworkers can also help agencies prioritize ways to improve and investments in their programs. Because telework data are used across the government, such as by Congress for oversight, and by agencies for decision-making purposes, the four agencies and OPM need to ensure that the data they report accurately reflect the status of telework at federal agencies. Reporting and using data that either do not comply with the act or are known to be of questionable quality compromises these agencies’ abilities to effectively manage their telework programs, and limits the usefulness of OPM’s annual reports to Congress. OPM’s plans to use data in EHRI and a shorter data call instrument could improve telework data accuracy. However, OPM and agencies must also take steps to help ensure that these annual reports include only accurate data or clearly explain why this is not possible. To support the consistent application of agency telework policy throughout the agency, the Secretaries of the Departments of Education and Labor and the Chair of the Securities and Exchange Commission should implement controls to verify that supervisors have completed telework training prior to entering into telework agreements with their employees and that completion of this training is documented. To help ensure that telework agreements accurately reflect telework participation, and to further ensure the accuracy of telework data reported internally and externally, the Secretary of the Department of Labor, the Administrator of the General Services Administration, and the Chair of the Securities and Exchange Commission should require documentation of regular or periodic reviews of all telework agreements in agency telework policies. To improve the accuracy of telework data transmitted to OPM, the Secretary of the Department of Labor should direct the Chief Human Capital Officer to work with the Telework Managing Officer to develop and implement a plan to modernize Labor’s telework agreement tracking system to enable more timely access to accurate telework data. To help ensure the employee eligibility data transmitted to OPM comport with what OPM is required to report under the Telework Enhancement Act of 2010 and accurately reflect the current number of employees eligible to telework, the Secretary of the Department of Education should direct the Telework Managing Officer to take the steps necessary to regularly update employees’ eligibility status. To provide additional guidance to agencies and encourage the elimination of barriers to increased telework opportunities consistent with the act, and to ensure the accuracy of telework information OPM annually reports to Congress, the Director of OPM should: develop tools to help agencies assess and analyze persistent barriers to telework, including managerial resistance, such as a survey or other feedback mechanism; and strengthen controls for reviewing, validating, and reporting telework data in annual Status of Telework in the Federal Government reports. Specifically, OPM should follow up with agency officials on data outliers, including significant changes in year-to-year data. We provided a draft of this report to Education, GSA, Labor, SEC, and OPM for review and comment. We received written comments from Education, GSA, SEC, and OPM which are reprinted in appendixes II, III, IV and V, respectively. Education, Labor, and OPM also provided technical comments, which we incorporated into the report as appropriate. Labor also commented on the recommendations addressed to it, which we summarize and discuss below. Education, GSA, and SEC agreed with the recommendations in our report. GSA and SEC stated they are making changes to require a periodic and documented review of telework agreements. Education and SEC stated they will implement controls to help ensure supervisors complete telework training before entering into telework agreements with employees. Education also agreed to take steps necessary to regularly update employees’ eligibility status and report data that meet the criteria in the act. Labor neither agreed nor disagreed with our recommendations but provided comments on the report’s recommendations. Labor stated that budgetary constraints have prevented it from employing an automated telework agreement system, as we noted in the report. We recognize this in our recommendation by stating Labor should modernize its telework agreement tracking system to allow for more timely access to accurate data, which can include changes other than implementing an automated system. Labor also stated that it has controls to monitor manager telework training and telework agreement review. We agree that Labor takes steps to monitor manager training and has a process for regularly reviewing telework agreements. However, these processes could be strengthened by requiring additional documentation. OPM did not concur with the two recommendations directed to it. For the first recommendation on creating tools to help agencies assess and analyze persistent barriers to telework, OPM agreed with our assessment of the value of such tools and their ability to help agencies increase participation rates. However, OPM stated it has fulfilled its responsibilities under the act through training, policy guidance, and tools for program evaluation and management, and that, given limited resources, it is not in a position to expand upon materials and tools for an area not required by the act. We agree that OPM has provided resources to agencies to help identify barriers to telework and are encouraged that it is developing additional tools. However, we disagree with OPM’s assertion that developing tools to address persistent barriers is not related to internal controls. Federal internal control standards state that to help ensure an agency is meeting its objectives management should identify, analyze, and respond to risks related to achieving objectives, such as by addressing deviations from established policies. Barriers to telework reflect a risk to an agency’s ability to meet the goals they have established for increasing telework participation, as directed in the act. And as noted in our report, some managers’ decisions to limit or deny employees’ ability to telework may be for reasons other than those outlined in the agencies’ policies, suggesting deviations from established policy that should be addressed. Because agencies and OPM continue to identify persistent barriers to telework participation, as did responses in our focus groups and discussions with agency officials, we continue to believe that OPM should play a key role in aiding agencies in assessing and analyzing, not just identifying, barriers to telework participation. For the second recommendation, OPM said it recognizes the importance of data accuracy and states it takes reasonable steps to follow up with agencies to resolve possible reporting errors, but that agencies are ultimately responsible for providing complete and accurate data. OPM further states that the act does not obligate OPM to spend significant resources to independently validate agency telework data. We agree that OPM should not independently validate agency data, but OPM should take the steps necessary to identify and explain data outliers and limitations. Because OPM is the agency responsible for reporting telework data, OPM should ensure its annual reports to Congress include a clear discussion of data reliability limitations, as we have previously recommended. Following up on data outliers and large year-to-year changes can help OPM identify data errors that could be corrected by agencies and provide OPM with the opportunity to discuss data limitations with agencies. Including such information clearly in the annual telework reports to Congress can make them more useful to Congress and to others. 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 OPM, Education, GSA, Labor, and SEC as well as to interested 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) 512-6806 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. This report identifies and examines (1) how selected agencies establish and monitor telework eligibility and participation, and comply with the requirements of and expectations included in telework agreements; (2) the internal controls and practices at selected agencies that affect supervisors’ abilities to manage for results in the telework environment, and hold employees who routinely telework accountable for achieving results; and (3) the challenges selected agencies and the Office of Personnel Management (OPM) face in collecting and reporting telework data. To address these objectives, we reviewed and used as criteria the Telework Enhancement Act of 2010 (the act), Standards for Internal Control in the Federal Government, OPM’s guidance and training on telework and performance management, and our prior work on agency telework programs. We also interviewed key OPM officials from Employee Services and Senior Executive Service and Performance Management as well as the Executive Director of the Chief Human Capital Officers (CHCO) Council. To address all of our objectives, we selected the Department of Education (Education), General Services Administration (GSA), the Department of Labor (Labor), and the Securities and Exchange Commission (SEC) as case study agencies for our review. Because a case study approach does not allow for generalizable results, we limited our case study agencies to four to compare telework programs across agencies of varying sizes. We selected these agencies using size and telework participation rates as criteria. We reviewed OPM’s 2014 Status of Telework in the Federal Government Report to Congress (Fiscal Year 2013) and created a list of all of the agencies that reported telework data that year. To ensure that our case study agencies would have a sufficient number of active teleworkers, we limited this list to agencies with more than 2,500 employees. Using data from OPM’s report, the most recent available at the time of our analysis, we compiled a list containing data on each agency’s number of employees, number of employees eligible to telework, number of employees with telework agreements, percentage of employees with telework agreements, and percentage of employees who teleworked in fiscal year 2013. We also reviewed data from the 2015 Federal Employee Viewpoint Survey (FEVS), the most recent data available at the time of our analysis, and incorporated data on telework frequency rates into our list of agencies. After building this universe of agencies and their associated telework data, we applied 3 filters to the list: agencies where the percent of employees eligible to telework is greater than or equal to 50 percent; the percent of eligible employees with telework agreements is greater than or equal to 50 percent; and the percent of employees teleworking at least once per week is greater than or equal to 25 percent. These filters produced a list of seven agencies. To compare and contrast telework programs of different sizes, we divided the remaining agencies into 2 groups: 1 of agencies with more than 10,000 employees and the other with fewer than 10,000 employees. We eliminated one large agency because it was negotiating its telework program with relevant labor unions, and had been the subject of recent reports on telework internal controls. For the smaller agencies, we rank ordered the agencies by the number of teleworkers as of February 2014, the most recent data available across the agencies. These filters produced GSA and Labor as the large agencies, and Education and SEC as the smaller agencies for inclusion as our case study agencies. To address all of our objectives, we conducted a series of focus groups at our four case study agencies with groups of supervisors of teleworkers and groups of teleworkers. When discussing these focus groups throughout the report, we use the word some to mean more than two but fewer than six focus groups. To determine supervisor focus group participants, the agencies sent us lists of all supervisors and the agency, office, or division where they worked. We randomized the list using a random number generator and sorted the list in rank order. To avoid inviting individuals who work closely with each other to the focus groups, we chose from the list the first individual from each agency, office, or division, and created a list of alternates in the event the first individual could not participate. We then confirmed with the agencies that these supervisors on our invite and alternates lists met the following criteria: (1) they were not senior executives and (2) they supervised at least one employee with a regular telework agreement. We sent invitations to participate in the focus groups to the first 10 individuals who met our criteria. We then invited alternates for individuals who could not attend. Each focus group had between 6 and 8 participants. To determine focus group participants for teleworkers, agencies sent us lists of employees, which included, at a minimum, the employee’s name, location, and whether they had a telework agreement. To ensure we could gather information from nonsupervisory employees, we removed from the lists, as necessary, any individuals who were supervisors or otherwise not covered by a collective bargaining unit. We also excluded individuals from the Offices of Inspector General. We additionally excluded individuals with only a situational telework agreement. We randomized the list using a random number generator and sorted the lists in rank order. Similar to supervisors, to avoid inviting individuals who work closely together, we chose from the list the first individual from each agency, office, or division. Also, to determine if employees similarly experienced telework in the field as in headquarters, we created two lists of potential focus group participants—one for employees who work in Washington, D.C., and one for employees who work in a regional or field office. For field employees, we chose the first individual from each location from the ranked list to participate. Because telework experiences can be influenced by an employee’s supervisor, we then requested from the agencies the name of the supervisor for those on our preliminary invitation list, and eliminated individuals from the invitation list if someone higher on the list worked for the same supervisor. For Education, Labor, and SEC, we held two focus groups for teleworkers, each with between four and six participants. For GSA, due to scheduling difficulties, we held one combined focus group of seven teleworkers from headquarters and the field. To determine how case study agencies establish and monitor telework eligibility and compliance with requirements and expectations of telework agreements, we reviewed the act, OPM guidance, telework policies, telework training materials, blank telework agreements, and collective bargaining agreements. We interviewed agency officials responsible for telework policy and program implementation, including the Telework Managing Officer or the telework coordinator, to discuss telework policy, program implementation, internal controls, and OPM guidance on telework. We then compared agency policies to act requirements, OPM guidance, and Standards for Internal Control in the Federal Government to assess compliance. We discussed telework eligibility and notification at our focus groups with teleworkers and discussed reasons for denying telework agreement applications with supervisors. We also interviewed OPM officials about OPM’s role in providing telework guidance to federal agencies. To determine how supervisors at case study agencies manage for results in a telework environment and hold employees who routinely telework accountable for achieving results, we reviewed requirements of the act and agency policies, reviewed OPM and agency specific training materials on telework and performance management, and discussed agency performance management policy with case study agency officials. We also asked supervisors participating in our focus groups what strategies and resources they use to manage their teleworking employees, and what steps they take to help ensure telework does not diminish their employees’ performance. We asked participants at our teleworkers focus groups about how telework has affected their ability to meet performance goals, how their supervisor holds them accountable for achieving results while teleworking, and how the agency supports telework. We also spoke with representatives from the unions that represent employees at the four case study agencies to discuss any concerns the unions have heard about telework. To assess the challenges the four case study agencies and OPM face in collecting and reporting telework data, we reviewed our prior work on OPM telework data reporting. We also reviewed OPM’s Status of Telework in the Federal Government Report to Congress (Fiscal Year 2013) and OPM’s Status of Telework in the Federal Government Report to Congress (Fiscal Years 2014 and 2015). We requested case study agencies’ original telework data call submissions to OPM for fiscal years 2013, 2014, and 2015, and compared these data to what OPM included in the final reports to Congress to identify any discrepancies. To report data on numbers of teleworkers and the average number of hours employees telework per pay period, we analyzed telework data from each of the case study agencies. We reviewed the data for outliers, reviewed agency documentation on how the agencies enter and maintain telework data, and interviewed agency officials. We determined these data to be reliable for the purposes of reporting reported telework hours and the number of individuals teleworking for a 9-month period between September 2015 and June 2016. We interviewed OPM and case study agency officials about the steps they take to collect, validate, and report telework data, and any challenges they may face in doing so. We also asked teleworkers in our focus groups how they record their telework hours. In addition, we asked supervisors what challenges they may face to ensuring these telework hours are recorded and reported accurately. We conducted this performance audit from November 2015 to February 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Chelsa Gurkin (Assistant Director), Miranda Cohen, Ann Czapiewski, Karin Fangman, Cheryl L. Jones, Danielle Novak, Steven R. Putansu, and Stewart W. Small made key contributions to this report. | The Telework Enhancement Act of 2010 required agencies to develop telework policies and OPM to provide guidance and report on telework use, among other things. GAO was asked to review agency telework programs. This report examines (1) how selected agencies comply with the act's requirements, (2) the internal controls affecting federal supervisors' ability to hold teleworkers accountable for achieving results, and (3) the challenges selected agencies and OPM face in collecting and reporting telework data. GAO selected four case study agencies for review—Education, General Services Administration, Labor, and Securities and Exchange Commission—based on agency size and telework participation rates. GAO reviewed OPM guidance and reports, and policies and data at case study agencies. GAO also interviewed OPM and case study agency officials and held focus groups with case study agency supervisors and teleworkers. The telework policies at four selected case study agencies GAO reviewed met select requirements of the Telework Enhancement Act of 2010 (the act) for telework eligibility and agreements. These agencies followed similar processes for approving telework agreements. Office of Personnel Management (OPM) guidance recommends managers complete telework training prior to approving telework agreements, but three of the four agencies did not have a mechanism to help ensure managers have completed this training before approving employee telework agreements. Because managers in these agencies may not have completed the training before entering into agreements, they may not be familiar with telework policies. Further, three of the four agencies did not require a periodic documented review of telework agreements. By not requiring regular review of telework agreements, these agencies cannot be assured that the agreements reflect and support their current business needs. Consistent with the act, all four agencies described efforts to encourage telework participation and provide for the technology to enable it. However, GAO's focus groups with teleworkers provided some examples of how supervisors may discourage telework participation and reported that some level of managerial resistance to telework remains. Managerial resistance to telework can undermine reviewed agencies' ability to meet telework participation goals. In its leadership role for telework matters, OPM can assist agencies with tools to assess and resolve these types of concerns. Consistent with the act, all four case study agencies have controls to help ensure that telework does not diminish employee and organizational performance. These four agencies' policies followed the act's requirement that teleworkers be treated the same as nonteleworkers for the purposes of work requirements, performance appraisals, and other managerial decisions. Agency officials and focus groups reported that telework status did not impact performance expectations. Focus groups with supervisors described numerous strategies and resources they use to supervise and stay connected with teleworking employees. The four agencies used varied methods to collect and report telework data to be included in OPM's annual telework reports, but all cited challenges to ensuring that employee-reported telework data were accurate because employees may not know or follow policies for recording telework. While three of these agencies use electronic systems to track telework agreements, the Department of Labor (Labor) uses a manual system which limits its ability to access accurate, real-time telework agreement data that management uses to assess compliance and for resource allocation decisions. Further, GAO found that the Department of Education (Education) had not been reporting telework eligibility data compliant with the act. OPM also faced challenges in reporting accurate agency telework data and GAO identified errors in OPM's annual reports to Congress. For example, OPM's report cited Education's fiscal year 2016 telework participation goal as 5 percent, reflecting Education's goal for increasing its participation rate, instead of its overall participation goal of 90 percent. OPM may be missing opportunities to improve its data because it does not always follow up with agencies on significant data differences or outliers. The errors and invalid data in OPM's annual reports to Congress reduce the usefulness of these reports. GAO makes recommendations to each of the case study agencies, including ensuring supervisors complete telework training in a timely manner and improving telework data. GAO also recommends that OPM develop tools to help agencies assess telework barriers, and to improve telework data reported to Congress. Three agencies agreed with the recommendations. One did not comment. OPM disagreed with GAO's recommendations citing limited resources to expend on efforts not specifically required under the act. GAO maintains that OPM should implement these actions as discussed in the report. |
Since the 1960s, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar-orbiting Operational Environmental Satellite (POES) series, which is managed by NOAA, and the Defense Meteorological Satellite Program (DMSP), which is managed by the Air Force. These satellites obtain environmental data that are processed to provide graphical weather images and specialized weather products. These satellite data are also the predominant input to numerical weather prediction models, which are a primary tool for forecasting weather days in advance—including forecasting the path and intensity of hurricanes. The weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate its effects. Polar satellites also provide data used to monitor environmental phenomena, such as ozone depletion and drought conditions, as well as data sets that are used by researchers for a variety of studies such as climate monitoring. Unlike geostationary satellites, which maintain a fixed position relative to the earth, polar-orbiting satellites constantly circle the earth in an almost north-south orbit, providing global coverage of conditions that affect the weather and climate. Each satellite makes about 14 orbits a day. As the earth rotates beneath it, each satellite views the entire earth’s surface twice a day. Currently, there is one operational POES satellite and two operational DMSP satellites that are positioned so that they cross the equator in the early morning, midmorning, and early afternoon. In addition, the government is also relying on a European satellite, called the Meteorological Operational (MetOp) satellite. Together, they ensure that, for any region of the earth, the data provided to users are generally no more than 6 hours old. Besides the four operational satellites, six older satellites are in orbit that still collect some data and are available to provide limited backup to the operational satellites should they degrade or fail. The last POES satellite was launched in February 2009 and declared operational in early June 2009. The Air Force plans to launch its two remaining DMSP satellites as needed. Figure 1 illustrates the current ustrates the current operational polar satellite configuration. operational polar satellite configuration. Polar satellites gather a broad range of data that are transformed into a variety of products. Satellite sensors observe different bands of radiation wavelengths, called channels, which are used for remotely determining information about the earth’s atmosphere, land surface, oceans, and the space environment. When first received, satellite data are considered raw data. To make them usable, processing centers format the data so that they are time-sequenced and include earth location and calibration information. After formatting, these data are called raw data records. The centers further process these raw data records into channel-specific data sets, called sensor data records and temperature data records. These data records are then used to derive weather and climate products called environmental data records. These environmental data records include a wide range of atmospheric products detailing cloud coverage, temperature, humidity, and ozone distribution; land surface products showing snow cover, vegetation, and land use; ocean products depicting sea surface temperatures, sea ice, and wave height; and characterizations of the space environment. Combinations of these data records (raw, sensor, temperature, and environmental data records) are also used to derive more sophisticated products, including outputs from numerical weather models and assessments of climate trends. Figure 2 is a simplified depiction of the various stages of satellite data processing, and figure 3 depicts examples of two different weather products. With the expectation that combining the POES and DMSP programs would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program capable of satisfying both civilian and military requirements. The converged program, NPOESS, was considered critical to the nation’s ability to maintain the continuity of data required for weather forecasting and global climate monitoring. To manage this program, DOD, NOAA, and NASA formed a tri-agency Integrated Program Office. Within the program office, each agency has the lead on certain activities: NOAA has overall program management responsibility for the converged system and for satellite operations; the Air Force has the lead on the acquisition; and NASA has primary responsibility for facilitating the development and incorporation of new technologies into the converged system. NOAA and DOD share the cost of funding NPOESS, while NASA funds specific technology projects and studies. In addition, an Executive Committee—made up of the administrators of NOAA and NASA and the Under Secretary of Defense for Acquisition, Technology, and Logistics—is responsible for providing policy guidance, ensuring agency support and funding, and exercising oversight authority. Figure 4 depicts the organizations that make up the NPOESS program office and lists their responsibilities. NPOESS is a major system acquisition that was originally estimated to cost about $6.5 billion over the 24-year life of the program from its inception in 1995 through 2018. The program includes satellite development, satellite launch and operation, and ground-based satellite data processing. When the NPOESS engineering, manufacturing, and development contract was awarded in August 2002, the cost estimate was adjusted to $7 billion. Acquisition plans called for the procurement and launch of six satellites over the life of the program, as well as the integration of 13 instruments— consisting of 10 environmental sensors and 3 subsystems. Together, the sensors were to receive and transmit data on atmospheric, cloud cover, environmental, climatic, oceanographic, and solar-geophysical observations. The subsystems were to support non-environmental search and rescue efforts, system survivability, and environmental data collection activities. In addition, a demonstration satellite, called the NPOESS Preparatory Project (NPP), was planned to be launched several years before the first NPOESS satellite in order to reduce the risk associated with launching new sensor technologies and ensure continuity of climate data with NASA’s Earth Observing System satellites. NPP is a joint mission between the NPOESS program office and NASA. NPP was to host four NPOESS sensors and provide the program office and the processing centers an early opportunity to work with the sensors, ground control, and data processing systems. When the NPOESS development contract was awarded in 2002, the schedule for launching the satellites was driven by a requirement that the NPOESS satellites be available to back up the final POES and DMSP satellites should anything go wrong during the planned launches of these satellites. Early program milestones included (1) launching NPP by May 2006, (2) having the first NPOESS satellite available to back up the final POES satellite launch then planned for March 2008, and (3) having the second NPOESS satellite available to back up the final DMSP satellite launch then planned for October 2009. If the NPOESS satellites were not needed to back up the final predecessor satellites, their anticipated launch dates would have been April 2009 and June 2011, respectively. Over several years, we reported that NPOESS had experienced continued cost increases, schedule delays, and serious technical problems. By November 2005, we estimated that the cost of the program had grown from $7 billion to over $10 billion. In addition, the program was experiencing major technical problems with a critical imaging sensor that were expected to delay the launch date of the first satellite by almost 2 years. These issues ultimately required difficult decisions to be made about the program’s direction and capabilities. The Nunn-McCurdy law requires DOD to take specific actions when a major defense acquisition program’s cost growth exceeds certain thresholds. Where applicable, the law requires the Secretary of Defense to certify the program to Congress when it is expected to overrun its current baseline by 25 percent or more. In November 2005, NPOESS breached the 25 percent threshold, and DOD was required to certify the program for it to continue. The requirements for certifying a program, as relevant here, involved a determination that (1) the program is essential to national security, (2) there are no alternatives to the program that will provide equal or greater military capability at less cost, (3) the new estimates of the program’s cost are reasonable, and (4) the management structure for the program is adequate to manage and control costs. DOD established tri- agency teams—made up of DOD, NOAA, and NASA experts—to work on each of the four elements of the certification process. In June 2006, DOD (with the agreement of both of its partner agencies) certified a restructured NPOESS program, estimated to cost $12.5 billion through 2024—an increase of $4 billion more than the prior life-cycle cost estimate. This restructuring decision delayed the launch of NPP and the first two satellites (called C1 and C2) by roughly 3 to 5 years—a deviation from the requirement to have NPOESS satellites available to back up the final POES and DMSP satellites should anything go wrong during those launches. The restructured program also reduced the number of satellites to be produced by relying on European satellites for the midmorning orbit and planning to use NPOESS satellites in the early-morning and afternoon orbits. In addition, in order to reduce program complexity, the Nunn- McCurdy certification decision decreased the number of NPOESS instruments from 13 to 9 and reduced the functionality of 4 sensors. Table 1 summarizes the major program changes made by the Nunn-McCurdy certification decision and table 2 describes the sensors that were planned for NPP and NPOESS after the Nunn-McCurdy certification. The changes in NPOESS sensors affected the number and quality of the resulting weather and environmental products. In selecting sensors for the restructured program during the Nunn-McCurdy process, decision makers placed the highest priority on continuing current operational weather capabilities and a lower priority on obtaining selected environmental and climate measuring capabilities. As a result, the revised NPOESS system had significantly less capability for providing global climate, ocean, and space environment measures than was originally planned. Specifically, the number of environmental data records was decreased from 55 to 39, of which 6 were of a reduced quality. The 39 data records that remain include cloud base height, land surface temperature, precipitation type and rate, and sea surface winds. The 16 data records that were removed include cloud particle size and distribution, sea surface height, net solar radiation at the top of the atmosphere, and products to depict the electric fields in the space environment. The six data records that are of a reduced quality include ozone profile, soil moisture, and multiple products depicting energy in the space environment. After the 2006 Nunn-McCurdy decision, the NPOESS Executive Committee decided to add selected sensors back to individual satellites in order to address concerns from the climate community about the loss of key climate data. In January 2008, the Committee approved plans to include the Clouds and the Earth’s Radiant Energy System sensor on the NPP satellite. In addition, in May 2008, the Committee approved plans to include a Total and Spectral Solar Irradiance Sensor on the C1 satellite. Table 3 shows which sensors were planned for NPP and the four satellites of the NPOESS program, called C1, C2, C3, and C4, as of May 2008. Program officials acknowledged that these configurations could change if other parties decide to develop the sensors that were canceled. After the program was restructured, the NPOESS program continued to experience cost growth, schedule delays, and management challenges. In April 2007, we reported that DOD’s plans to reassign the Program Executive Officer would unnecessarily increase risks to an already risky program. We also reported that, while the program office had made progress in restructuring NPOESS after the June 2006 Nunn-McCurdy certification decision, important tasks leading up to finalizing contract changes remained to be completed. Specifically, executive approval of key acquisition documents was about 6 months late at that time—due in part to the complexity of navigating three agencies’ approval processes. To address these issues, we recommended that DOD delay the reassignment of the Program Executive Officer until all sensors were delivered to NPP, and that the appropriate agency executives finalize key acquisition documents by the end of April 2007. In May 2008, we reported that DOD had reassigned the Program Executive Officer and that key acquisition documents were more than a year late. We reiterated our prior recommendation that the agencies immediately complete the acquisition documents. In addition, we reported that poor workmanship and testing delays caused an 8-month slip to the expected delivery date of the Visible/Infrared Imager/Radiometer Suite (VIIRS) sensor. This late delivery caused a corresponding delay in the expected launch date of the NPP demonstration satellite, moving it to June 2010. In June 2008, we also reported that the program’s life-cycle costs, estimated at $12.5 billion, were expected to rise by approximately $1 billion because of problems experienced in the development of the VIIRS and Cross-track Infrared Sounder (CrIS) sensors, the need to revise outdated operations and support cost estimates, and the need to modify information security requirements on ground systems. Program officials subsequently modified their life-cycle cost estimate in December 2008 to $13.95 billion, which included about $1.15 billion for revised pre- and post- launch operations and support costs and about $300 million to address development issues. The revised cost estimate did not include funds to modify information security requirements. In June 2009, we added to our previous concerns about the tri-agency oversight of the NPOESS program. Specifically, we reported that the Executive Committee was ineffective because the DOD acquisition executive did not attend committee meetings; the committee did not track its action items to closure; and many of the committee’s decisions did not achieve desired outcomes. We also reported that the life-cycle cost estimate of $13.95 billion was expected to rise by another $1 billion, and the schedules for NPP and the first two NPOESS satellites were expected to be delayed by 7, 14, and 5 months, respectively. (See table 4 for the history of cost and schedule estimates for the program.) We recommended that the DOD Executive Committee member attend and participate in Executive Committee meetings, and that the Executive Committee better track and manage risk and action items. Additionally, we recommended that the program develop plans to mitigate the risk of gaps in satellite continuity and establish a realistic time frame for revising the program’s cost and schedule baselines. To address risks and challenges, the NPOESS Executive Committee sponsored a series of reviews of the program. Two of the reviews, conducted in 2007 and 2008, examined the feasibility of alternative management strategies. Both of these reviews recommended against changing the prime contractor and made recommendations to improve other aspects of program management—including the government’s executive and program management and the contractor’s management. In the fall of 2008, an independent review team assessed the program and delivered its final report in June 2009. Among other things, the independent review team found that the program had a low probability of success, the continuity of data was at risk, and the priorities of DOD and NOAA were not aligned. The team recommended using NPP data operationally to mitigate potential gaps in coverage, co-locating the program at an acquisition center, and involving the White House to resolve priority differences. In March 2009, in response to a draft of the review team’s report, the NPOESS Executive Committee decided to use NPP data operationally. In August 2009, the Executive Office of the President formed a task force, led by the Office of Science and Technology Policy (OSTP), to investigate the management and acquisition options that would improve the NPOESS program. Specifically, the task force sought to identify a governance structure that would address the problems in schedule and budget, and the risk of a loss of satellite data due to delays in launching the satellites. In performing its review, the task force worked with NOAA, DOD, and NASA representatives and attended Executive Committee meetings. In February 2010, the Director of OSTP announced that NOAA and DOD will no longer jointly procure the NPOESS satellite system; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA is to be responsible for the afternoon orbit and the observations planned for the first and third NPOESS satellites. DOD is to be responsible for the morning orbit and the observations planned for the second and fourth NPOESS satellites. The partnership with the European satellite agencies for the midmorning orbit is to continue as planned. In addition, the task force explained that partnerships between DOD, NOAA, and NASA should continue and encouraged the agencies to continue joint efforts in the areas that have been successful in the past, such as the command and control of the satellites. Moving forward, while NOAA and DOD develop plans for separate acquisitions, the development of key components of the NPOESS program is continuing. Specifically, the program is continuing to develop the instruments and ground systems supporting NPP and selected components of the first two NPOESS satellites, which will likely be needed by the NOAA and DOD follow-on programs. NOAA and DOD have begun planning to transition the NPOESS program to separate acquisitions, but the agencies are at different stages in planning and neither has finalized its plans. NOAA has developed preliminary plans for a new program to fulfill the requirements of the afternoon NPOESS orbit. DOD has just begun planning how it will meet the requirements of the morning orbit, and expects to have initial decisions on how it will proceed in acquiring the spacecraft and sensors by June 2010 and October 2010, respectively. Because neither agency has completed its plans, the impact of the decision to disband the program on expected costs, schedules, and promised capabilities has not yet been fully determined. However, it is likely that the decision will further delay the first satellite’s launch schedule, add to the overall cost, and remove selected capabilities. Moving forward, the agencies face key risks in transitioning from NPOESS to two separate programs. These risks include the loss of key staff and capabilities, added delays in negotiating contract changes and establishing new program offices, the loss of support for the other agency’s requirements, and insufficient oversight of new program management. Until these risks are effectively mitigated, it is likely that the satellite programs’ costs will continue to grow and launch dates will continue to be delayed. Further delays are likely to jeopardize the availability and continuity of weather and climate data. NOAA and DOD have begun planning to transition the NPOESS program to separate acquisitions, but the two agencies are at different stages in planning. NOAA has developed preliminary plans for its new satellite acquisition program—called the Joint Polar Satellite System (JPSS). Specifically, NOAA developed plans for two satellites to fly in the afternoon orbit. NOAA plans to have the first JPSS satellite, formerly NPOESS C1, available for launch in 2015, and the second JPSS satellite, formerly NPOESS C3, available for launch in 2018. NOAA will also provide the ground systems for both the JPSS and DOD programs. Current plans estimate that the life-cycle cost of the JPSS program will be approximately $11.9 billion, which includes $2.9 billion in NOAA funds spent on NPOESS through fiscal year 2010. NOAA is also considering technical changes to the program that involve the size of the spacecraft and the sensors to be included on each of the satellites. Specifically, NOAA is considering using a smaller spacecraft than the one planned for NPOESS. NOAA is also considering removing sensors that were planned for the NPOESS C1 and C3 satellites and obtaining those data from other sources, including international satellites. Table 5 includes preliminary plans for which sensors will be accommodated on the JPSS satellites. The management of the JPSS satellites will also change from that of the NPOESS satellites. NOAA plans to transfer the management of acquisition from the NPOESS program office to NASA’s Goddard Space Flight Center, so that it can be co-located at a space system acquisition center as advocated by the NPOESS independent review team. According to NOAA officials, the agency will provide direction, requirements, and budget to NASA. NOAA will also provide staff, including a program director and program scientist. A NASA employee will function as program manager. In addition, NOAA has developed a team to lead the transition from NPOESS to JPSS and has included representatives from NOAA, NASA, and DOD. Because this team has just been formed, they have not yet fully developed plans to guide the transition. NOAA officials plan to begin transitioning in July, and complete the transition plan—including cost and schedule estimates—by the end of September. DOD is at an earlier stage in its planning process, in part because it has more time before the first satellite in the morning orbit is needed. DOD officials are currently reviewing requirements for the morning orbit and plan to define how to proceed by the end of June 2010. After this review is completed, DOD plans to analyze alternatives for meeting the requirements and to develop a plan for the chosen alternative. DOD anticipates making a decision on whether to use the NPOESS spacecraft by June 2010 and to make a decision on which sensors it will include— including the Space Environment Monitor and the Microwave Imager/Sounder—by October 2010. DOD acquisition officials expect to begin the program in fiscal year 2013. Table 6 compares key attributes of the NPOESS program when it was restructured in 2006 to the NPOESS program at the time of the task force decision in 2010 and to preliminary plans for the separate NOAA and DOD acquisitions. Because neither agency has finalized plans for its acquisition, the full impact of the task force decision on the expected cost, schedule, and capabilities is unknown. However, it appears likely that the combined cost of the separate acquisitions could be higher than the last NPOESS estimate, the schedule for the first satellite’s launch will be later than the last NPOESS estimate, and selected capabilities will be removed from the program. Cost: NOAA anticipates that the JPSS program will cost approximately $11.9 billion to complete through 2024. Although this estimated cost is less than the baselined cost of the NPOESS program, DOD will still need to fund and develop satellites to meet the requirements for the early morning orbit. DOD’s initial estimates are for its new program to cost almost $5 billion through fiscal year 2015. Thus, it is likely that the cost of the two acquisitions will exceed the baselined life-cycle cost of the NPOESS program. Schedule: Neither NOAA nor DOD have finalized plans that show the full impact of the restructuring on the schedule for satellite development. We have previously reported that restructuring a program like NPOESS could take significant time to accomplish, due in part to the time taken revising, renegotiating, or developing important acquisition documents, including contracts and interagency agreements. With important decisions and negotiations still pending, it is likely that the expected launch date of the first JPSS satellite will be delayed. Capabilities: Neither agency has made final decisions on the full set of sensors—or which satellites will accommodate them—for their respective satellite programs. Until those decisions are made, it will not be possible to determine the capabilities that these satellites will and will not provide. Timely decisions on cost, schedule, and capabilities would allow both acquisitions to move forward and satellite data users to start planning for any data shortfalls they may experience. Until DOD and NOAA finalize their plans, it is not clear whether the new acquisitions will meet the requirements of both civilian and military users. Moving forward, the agencies face key risks in transitioning from NPOESS to their new programs. These risks include the loss of key staff and capabilities, delays resulting from negotiating contract changes and establishing new program offices, the loss of support for both agencies’ requirements, and insufficient oversight of new program management. Loss of key staff and capabilities—The NPOESS program office is composed of NOAA, NASA, Air Force, and contractor staff with knowledge and experience in spacecraft procurement and integration, ground systems, sensors, data products, systems engineering, budgeting, and cost analysis. These individuals have knowledge and experience in the status, risks, and lessons learned from the NPOESS program. This knowledge will be critical to moving the program forward both during and after the transition period. However, program office staff have already begun leaving—or looking for other employment—due to the uncertainties about the future of the program office. Unless NOAA is proactive in retaining these staff, the new program may waste valuable time if staff must relearn program details and may repeat mistakes made and lose lessons learned by prior program staff. Delays in negotiating contract changes and establishing new programs—We have previously reported that restructuring a program like NPOESS could take significant time to accomplish, due in part to the time taken revising, renegotiating, or developing important acquisition documents, including contracts and interagency agreements. According to NOAA officials, the plan for JPSS may require negotiations with contractors and between contractors and their subcontractors. In addition, both NOAA and DOD will need to establish and fully staff program offices to facilitate and manage the transition and new programs. However, these contract and program changes have not yet occurred and it is not clear when they will occur. These changes could take significant time to complete. Meanwhile, the NPOESS program office continues to support—and fund—development activities that may not be used in the new programs, because neither NOAA nor DOD have made key decisions on the technologies, such as the spacecraft and sensors, that will be included on the new programs. Until decisions are made on how the program is to proceed with contract changes and terminations, the contractors and program office cannot implement the chosen solution and some decisions, such as the ability to hold schedule slips to a minimum, could become much more difficult. Failure to support the other agency’s requirements—As a joint program, NPOESS was expected to fulfill many military, civilian, and research requirements for environmental data. The task force decision to restructure NPOESS noted that decisions on future satellite programs should ensure the continuity of critical satellite data. However, because the requirements of NOAA and DOD are different, the agencies may develop programs that meet their own needs but not the other’s. DOD, NOAA, and NASA will still need to work together to ensure that requirements are known, agreed upon, and managed, and that changes in their respective program’s capabilities do not degrade the continuity requirements. For example, NOAA officials reported that they do not plan to include the Microwave Imager/Sounder in their follow-on program and will instead procure data from a different sensor on an international satellite. However, it is not clear that NOAA’s plans will meet the needs of all of DOD’s users, including the Navy and Army. Similarly, it is not clear that DOD will continue to support the climate community’s requirements for highly calibrated and accurate measurements. If the agencies cannot find a way to build a partnership that facilitates both efficient and effective decision-making on data continuity needs, the data continuity needs of both agencies may not be adequately incorporated into the new programs. Insufficient oversight of new program management—Under its new JPSS program, NOAA plans to transfer parts of the NPOESS program to NASA, but it has not yet defined how it will oversee NASA’s efforts. Transferring the program to NASA will not necessarily resolve existing cost, schedule, and subcontractor management issues. We recently reported that the acquisition challenges faced in major NASA acquisitions are similar to the ones faced by DOD acquisitions, including NPOESS. Specifically, we reported that NASA has consistently underestimated time and cost and has not adequately managed risk factors such as contractor performance. Because of these issues, we listed NASA’s acquisition management as a high-risk area in 1990, and it remains a high-risk area today. In addition, our work on the GOES I-M satellite series found that NOAA did not have the ability to make quick decisions on problems because portions of the procurement were managed by NASA. Specifically, this management approach limited NOAA’s insight and management involvement in the procurement of major elements of the system. NOAA officials reported that they are developing a management control plan with NASA and intend to perform an independent review of this plan when it is completed. They could not provide a time frame for its completion. Without strong NOAA oversight of NASA’s management of program components, JPSS may continue to face the same cost, schedule, and contract management challenges as the NPOESS program. While NOAA, NASA, and DOD acknowledge that there are risks associated with the transition to new programs, they have not yet established plans to mitigate these risks. Until these risks are effectively mitigated, it is likely that the satellite programs’ costs will continue to grow and launch dates will continue to be delayed. Further launch delays are likely to jeopardize the availability and continuity of weather and climate data. For example, the POES satellite currently in the afternoon orbit is expected to reach the end of its lifespan at the end of 2012. If NPP is delayed, there could be a gap in polar satellite observations in the afternoon orbit. Similarly, a delay in the launch of the first JPSS satellite may lead to a gap in satellite data after NPP reaches the end of its lifespan. Data continuity gaps pose different implications for DOD and NOAA. For both agencies, a loss of satellite data represents a reduction in weather forecasting capabilities. Within the military, satellite data and products allow military planners and tactical users to focus on anticipating and exploiting atmospheric and space environmental conditions. For example, accurate wind and temperature forecasts are critical to any decision to launch an aircraft that will need mid-flight refueling. For NOAA, satellite data and products are provided to weather forecasters for use in issuing weather forecasts and warnings to the public and to support our nation’s aviation, agriculture, and maritime communities. NOAA also faces risks in losing longer-term climate observations. Maintaining the continuity of climate and space data over decades is important to identify long-term environmental cycles (such as the 11-year solar cycle and multiyear ocean cycles, including the El Niño effect) and their impacts, and to detect trends in global warming. Figure 5 shows the current and planned satellites and highlights gaps where the constellation is at risk. While NOAA and DOD are establishing plans for separate acquisitions, the development of key NPOESS components is continuing. In recent months, the critical VIIRS sensor has been completed and integrated onto the NPP spacecraft. In addition, the program continues to work on components of the first and second NPOESS satellites, including sensors and ground systems. These components may be transferred to NOAA and DOD to become part of their respective follow-on programs. However, the expected launch date of the NPP satellite has been delayed by 9 months due to technical issues in the development of a key sensor, and the development of the VIIRS sensor for the first NPOESS satellite is experiencing cost overruns. In addition, the program is slowing down and may stop work on key components in order to address potential contract liabilities and funding constraints. This would further delay the launches of the NPP satellite and the first NOAA and DOD satellites under their new programs. In recent months, selected components of the NPOESS program have made progress. Specifically, the program completed the development of the critical VIIRS sensor and delivered it to NASA for integration onto the NPP satellite. Four of the five sensors intended for NPP are now on the spacecraft. In addition, the program has continued to develop key sensors intended for the first NPOESS satellite (VIIRS, CrIS, OMPS, and the Advanced Technology Microwave Sounder sensors), and a key sensor for the second NPOESS satellite (the Microwave Imager/Sounder). These components may be transferred to NOAA and DOD to become part of their respective follow-on programs. However, the program experienced technical issues on the Cross-track Infrared Sounder (CrIS) sensor intended for the NPP satellite. Specifically, in January 2009 after the CrIS sensor completed its thermal vacuum tests, an anomaly was discovered on a circuit card that then led to the discovery of unrelated design flaws on two additional circuit cards. During final testing of new parts in August 2009, components intended for CrIS were damaged after the subcontractor failed to adhere to proper test processes. After investigating the problem and possible solutions for several months, the program decided to replace damaged parts and send the instrument through a limited thermal vacuum test. In total, this testing error resulted in an 11-month delay in the delivery of CrIS and a 9-month delay to the NPP satellite launch date (bringing it to September 2011, at the earliest). In addition, the program continues to face technical challenges and cost overruns in developing the VIIRS sensor for the first NPOESS satellite. Details on the status of key components for NPP and the first two NPOESS satellites are provided in table 7. In the months leading up to an official transition from the NPOESS program to the successor NOAA and DOD programs, NPOESS officials face key challenges that further threaten environmental satellite continuity. Specifically, the NPOESS program is slowing down and may stop work on key components in order to address potential contract liabilities and funding constraints. According to agency officials, the prime contract includes a clause requiring termination liability be funded in the current year’s budget. This means that if NPOESS development were to continue according to schedule, the program would need to stop all development work in August 2010 in order to fund the approximately $84 million in potential termination liability for this year. To mitigate this risk, in April 2010, the prime contractor was directed to slow down work on all development activities so that work could continue through the end of the fiscal year. In addition, the National Defense Authorization Act for Fiscal Year 2010 placed limitations on the amount of DOD funding available to the program until certain requirements were met. Although the program met those requirements in March 2010, agency officials noted that DOD funding could be rescinded if not obligated quickly. According to program officials, if these funds are rescinded, DOD may have to terminate the NPOESS contract by the end of the fiscal year. Slowing or stopping work under either scenario could further delay the launches of the NPP satellite and the first NOAA and DOD satellites under their new programs. However, officials have not established detailed priorities among different components to guide any work stoppages. Unless selected components are able to continue scheduled development, the launches of NPP and the first few satellites could be further delayed. As originally designed, NPP was planned to reduce the risk associated with launching new sensor technologies in the NPOESS program and to ensure continuity of climate data with NASA’s Earth Observing System satellites. Therefore, NPP was not expected to be an operational satellite used for weather forecasting. However, in March 2009, delays in the expected launch of the first NPOESS satellite led the Executive Committee to decide to use NPP data operationally. Because the NPP demonstration satellite was not designed as an operational asset, it has several limitations. These limitations include fewer ground-based data processing systems, fewer security controls, and a shorter satellite lifespan than current or planned operational satellites. These design limitations mean that in some cases, NPP’s data will not be as timely and useful as current polar satellites or as secure as planned satellites. In addition, there is a risk of a gap in the nation’s climate and weather data should the NPP satellite or its sensors fail before the next satellite is launched. Agency officials acknowledge these limitations and are assessing options to make NPP data more timely and secure. While NOAA, NASA, and DOD plan to have a ground-based data processing system in each of four central data processing centers when NPOESS (or its successors’) satellites are in operation, the data processing system will be in only two of the centers for the NPP demonstration satellite. This arrangement means that the two centers that do not have the data processing systems will experience a lag in obtaining NPP data. Specifically, under current operations, the four satellite data processing centers receive polar satellite data within about 100 to 150 minutes. NPP’s data will be available to the two centers with the data processing system within approximately 140 minutes; it will be available to the two other centers within about 170 minutes. This presents a delay of 20 to 70 minutes from current operations for the two centers without the data processing system. Because of this delay, NPP data will not be as useful to DOD as the data from legacy DMSP and POES satellites. DOD officials reported that they plan to incorporate NPP data when and where they can to supplement data from the legacy satellites. However, DOD’s centers will not be able to incorporate NPP data into all of their operational products, due to the time delay. For example, officials from one data processing center reported that the delay in obtaining NPP data could adversely affect their atmospheric and oceanographic numerical weather prediction capabilities. This situation would be exacerbated if POES or DMSP satellites fail in orbit before the first NPOESS/JPSS satellite is launched because the DOD centers may not be able to use NPP data to make up for the data loss. According to DOD officials, the three DOD centers are currently investigating options to shorten the time it will take for the data to go from the one center with the data processing system to the other two that lack the system, but do not have a timeline for making decisions on how to proceed. NASA officials reported that there are other options for shortening the time lag. For example, JPSS officials are considering accelerating the development of the data processing systems in their new program. This could allow all four centers to have a processing system shortly after NPP is launched and would eliminate the additional time lag for two of the centers. When originally designed, the NPP ground systems included information security controls that were based on the DOD security requirements that existed at that time. However, these standards—approved in 1998—do not include all of the security controls applicable to newer systems. According to NOAA officials, the limitations in NPP’s security controls relate primarily to the risk of data loss, denial-of-service, and continuity of operations, rather than a risk to the command and control of the satellite. In 2008, program officials evaluated the security requirements of the NPOESS program. Specifically, they evaluated whether to increase the security controls before the NPP launch, before the first NPOESS satellite launch, or before the second NPOESS satellite launch. They decided against updating the NPP security requirements, because it would cost the program up to $280 million to make such a change, and could risk NPP’s scheduled launch date. According to NOAA officials, they recently evaluated the impact of the weaknesses in NPP’s security controls and made decisions on a majority of security controls in April 2010. The NPP satellite was only designed to support a 5-year mission life, unlike the 7-year mission life of the NPOESS satellites. Because NPP’s design life is only 5 years, it has the potential to fail before the next satellite is launched. If NPP launches as planned in October 2011, the satellite, based on current design, may remain functional until 2016. Thus, data from the next polar-orbiting satellite may be needed as early as 2016. Although the first JPSS satellite launch is planned for 2015, it may need a year or more to perform an on-orbit accuracy check. Thus, it is very likely that there will be gaps in climate and weather data if NPP cannot survive beyond its design life. Further delays in the development and launch of the next satellite will increase the risk of a gap. NOAA officials acknowledge this limitation and are evaluating ways to mitigate the risk of a gap. NASA officials reported that the NPP spacecraft is based on a legac design; thus, they estimate that the spacecraft will likely last for 7 years or more. However, they questioned the reliability of key sensors— particularly VIIRS, CrIS, and OMPS—on NPP, due to poor workmanship and mission assurance weaknesses during development. At the end of this fiscal year, the federal government will have spent 16 years and over $5 billion to combine two legacy satellite programs into one, yet will not have launched a single satellite. Faced with expected cost growth exceeding $8 billion, schedule delays of over 5 years, and continuing tri-agency management challenges, a task force led by the President’s Office of Science and Technology Policy decided to disband NPOESS so that NOAA and DOD could pursue separate satellite acquisitions. While the two agencies are scrambling to develop plans for their respective programs, it is not yet clear what the programs will deliver, when, and at what cost. Timely decisions on cost, schedule, and capabilities are needed to allow both acquisitions to move forward. As the agencies develop plans for their respective satellite programs, they face risks associated with the loss of critical staff with knowledge and experience, delays in negotiating contract changes and setting up new program offices, the two agencies not fulfilling each other’s core requirements, and insufficient program oversight. Neither agency has developed plans to mitigate these risks. Until the transition is completed, the NPOESS program is continuing to develop components of the NPP satellite and components of the first two satellites. However, program officials reported that they have slowed all development work, and may need to stop work on these deliverables because of potential contract liabilities and funding constraints. Slowing or stopping work could further delay the satellites’ launches, and the program has not developed a prioritized list of what to stop first to mitigate impacts on satellite launches. Until it does so, there may be an increased risk of gaps in satellite data. Because NPP was built to be a demonstration satellite, its data may not be as timely and useful as current polar satellites and not as secure as planned satellites. In addition, the limited lifespan of NPP further increases the risk of gaps in climate and weather data. Agency officials acknowledge these limitations and are assessing options to make NPP data more timely, but do not have time frames for deciding among alternative options. In order to ensure that the transition from NPOESS to its successor programs is efficiently and effectively managed, we recommend that the Secretaries of Defense and Commerce take the following four actions: direct their respective NPOESS follow-on programs to expedite decisions on the expected cost, schedule, and capabilities of their planned programs; direct their respective NPOESS follow-on programs to develop plans to address key transition risks, including the loss of skilled staff, delays in contract negotiations and setting up new program offices, loss of support for the other agency’s requirements, and oversight of new program management; direct the NPOESS program office to develop priorities for work slowdown and stoppage to allow the activities that are most important to maintaining launch schedules to continue; and direct NOAA and DOD officials to develop time frames for making key decisions on—or accepting the risks related to—the timeliness of NPP’s data. We received written comments on a draft of this report from the Secretary of Commerce, who transmitted NOAA’s comments (see app. II), the Director of Space and Intelligence within DOD (see app. III), and the Associate Administrator for the Science Mission Directorate of NASA (see app. IV). In addition, a senior policy analyst from the Office of Science and Technology Policy/Executive Office of the President provided technical comments on a draft of this report via email, which we incorporated as appropriate. In their comments, both NOAA and DOD agreed with our recommendations and identified plans to implement them. For example, NOAA plans to work with NASA to develop requirements and acquisition plans, identify the organization and staffing, and establish a cost and schedule baseline for JPSS. In addition, DOD officials reported that the agency plans to make decisions on capability, cost, and schedule following a series of meetings taking place in June 2010. In addition, regarding the potential need to slow down or stop work on the NPOESS program to deal with potential contract liabilities and funding constraints, NOAA, NASA, and DOD reported that the NPOESS program office has identified priorities for work stoppage so that key activities could continue. At the end of March 2010, the program executive officer provided high-level guidance on the priorities of the program, such as ensuring that NPP development continues and ensuring that key sensor development is transferred to the JPSS program. Subsequently, program officials stated that the contractor agreed to slow all of its development work through the end of the fiscal year to avoid a work stoppage. However, slowing all work activities does not reflect a prioritization of the most important activities. Unless the key activities that are on the critical path are able to continue scheduled development, the launches of NPP and the first few satellites could be further delayed. NASA also commented on our finding that NOAA would need to provide enhanced oversight of NASA’s management of the JPSS program. We called for enhanced oversight based, in part, on NASA’s history of poor performance in managing major acquisitions. NASA officials asserted that the proper basis for comparison should not be their leading edge research missions, but, instead, should be the operational environmental satellite missions it has developed for NOAA in the past. NASA noted that its role in JPSS will be structured similar to the Polar-orbiting Operational Environmental Satellite (POES) and Geostationary Operational Environmental Satellite (GOES) programs, where NOAA and NASA have a long and effective partnership. However, we believe that enhanced oversight is warranted. The JPSS program differs from the recent POES and GOES programs in that it includes leading edge sensor technologies. The complexity of these sensor technologies has been a key reason for the cost growth and schedule delays experienced to date on the NPOESS program. In addition, the program continues to discover technical problems on the sensors currently being developed for the follow-on programs. Thus, it will be important for both NOAA and NASA to ensure that the subcontractors are adequately managed so that technical, cost, and schedule issues are minimized or mitigated. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We are sending copies of this report to interested congressional committees, the Secretary of Commerce, the Secretary of Defense, the Administrator of NASA, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 9286 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objectives were to (1) assess efforts to plan for separate satellite acquisitions; (2) evaluate the status and risks of key program components still under development; and (3) evaluate implications of using the demonstration satellite’s data operationally. To assess efforts to plan for separate satellite acquisitions, we reviewed the presidential directive that established the National Polar-orbiting Operational Environmental Satellite System (NPOESS) as well as materials related to the program restructuring in 2006. We also reviewed the White House task force’s terms of reference and final decision to disband the NPOESS program. We reviewed preliminary plans for the National Oceanic and Atmospheric Administration’s (NOAA) new program to replace two of the NPOESS satellites. We compared the strategy and plans to best practices for program planning and requirements management and met with members of the task force responsible for the final restructuring decision. We also interviewed agency officials from the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), and NOAA, as well as members of the NPOESS task force and the NPOESS program office. To evaluate the status and risks of key program components, we reviewed briefings, weekly updates, and monthly program management reports. We reviewed cost reports and program risk management documents and interviewed program officials to determine program and program segment risks that could negatively affect the program’s ability to maintain the current schedule and cost estimates. We also interviewed agency officials from DOD, NASA, and NOAA and the NPOESS program office to determine the status and risks of the key program segments. We also observed senior-level management review meetings to obtain information on the status of the NPOESS program. To evaluate plans for and implications of using the demonstration satellite’s data operationally, we reviewed program documentation for using the demonstration satellite’s data and compared them to plans for using the NPOESS satellite data. Additionally, we interviewed program office, NOAA, NASA, and DOD officials about plans for using the data. We primarily performed our work at the NPOESS Integrated Program Office and at DOD, NASA, and NOAA offices in the Washington, D.C., metropolitan area. In addition, we conducted work at the Fleet Numerical Meteorology and Oceanography Center in Monterey, California; the Naval Oceanographic Office in Bay St. Louis, Mississippi; and the Air Force Weather Agency in Omaha, Nebraska. We conducted this performance audit from August 2009 to May 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Colleen Phillips, Assistant Director; Kate Agatone; Neil Doherty; Franklin Jackson; Lee McCracken; and Matthew Strain made key contributions to this report. | In the 8 years since a contract was awarded, the National Polar-orbiting Operational Environmental Satellite System (NPOESS)--a tri-agency program managed by the National Oceanic and Atmospheric Administration (NOAA), the Department of Defense (DOD), and the National Aeronautics and Space Administration (NASA)--has experienced escalating costs, schedule delays, and ineffective interagency management. The launch date for a demonstration satellite has been delayed by over 5 years and the cost estimate for the program has more than doubled--to about $15 billion. In February 2010, a Presidential task force decided to disband NPOESS and, instead, have the agencies undertake separate acquisitions. GAO was asked to (1) assess efforts to establish separate satellite programs; (2) evaluate the status and risks of the NPOESS components still under development; and (3) evaluate the implications of using the demonstration satellite's data operationally. To do so, GAO analyzed program management and cost data, attended program reviews, and interviewed agency officials. NOAA and DOD have begun planning to transition the NPOESS program to separate acquisitions, but neither has finalized its plans. NOAA has developed preliminary plans for its new program--called the Joint Polar Satellite Program--to meet the requirements of the afternoon NPOESS orbit. DOD expects to make decisions on the spacecraft and sensors by June and October 2010, respectively. Because neither agency has completed its plans, the impact of the decision to disband the program on expected costs, schedules, and promised capabilities has not been fully determined. Moving forward, the agencies face key risks in transitioning from NPOESS to their separate programs. These risks include the loss of key staff and capabilities, delays in negotiating contract changes and establishing new program offices, the loss of support for the other agency's requirements, and insufficient oversight of new program management. Until these risks are effectively mitigated, it is likely that the satellite programs' costs will continue to grow and launch dates will continue to be delayed, which could lead to gaps in the continuity of critical satellite data. While NOAA and DOD are establishing plans for their separate acquisitions, the development of key components of the NPOESS program is continuing. In recent months, a critical imaging sensor has been completed and integrated onto the spacecraft of a demonstration satellite, called the NPOESS Preparatory Project (NPP). In addition, the program continues to work on components of the first and second NPOESS satellites, which are to be transferred to NOAA and DOD to become part of their respective follow-on programs. However, the expected launch date of the NPP satellite has been delayed by 9 months due to technical issues in the development of a key sensor. Further, the program is slowing down and may need to stop work on key components because of potential contract liabilities and funding constraints, but has not developed a prioritized list on what to stop first. This may further delay NPP and the components of the first NOAA and DOD satellites under their new programs. Because the NPP demonstration satellite was designed as a risk-reduction mission, not as an operational asset, it has several limitations. These limitations include fewer ground-based data processing systems, fewer security controls, and a shorter satellite lifespan than exist for current or planned operational satellites. These design limitations mean that, in some cases, NPP's data will not be as timely, useful, and secure as other polar satellites and that there is a risk of a gap in the nation's climate and weather services should NPP fail before the next satellite is launched. Agency officials acknowledge these limitations and are assessing options to make NPP data more timely and secure. GAO is making recommendations to NOAA and DOD to address key risks in transitioning to their respective new programs. Both agencies agreed with GAO's recommendations and identified plans for addressing them. GAO is making recommendations to NOAA and DOD to address key risks in transitioning to their respective new programs. Both agencies agreed with GAO's recommendations and identified plans for addressing them. |
Afghanistan is a mountainous, arid, land-locked country with limited natural resources, bordered by Pakistan to the east and south; Tajikistan, Turkmenistan, Uzbekistan, and China to the north; and Iran to the west (see fig. 1). At 647,500 square kilometers, Afghanistan is slightly smaller than the state of Texas; its population, estimated at 27.8 million, is ethnically diverse, largely rural, and mostly uneducated. The country is divided into 32 provinces, over 300 districts, and approximately 30,000 villages. Afghanistan is an extremely poor country. As shown in table 1, development indicators published by the World Bank and the U.N. rank Afghanistan at the bottom of virtually every category, including malnutrition; infant, child, and maternal mortality; life expectancy; and literacy. Over the last 2 decades, political conflicts ravaged Afghanistan. The country was subject to ethnic rivalry led by provincial warlords, communist invasion, and fundamental Islamic control, all of which limited development (see fig. 2). Factional control of the country following the withdrawal of Soviet troops in 1989, coupled with the population’s fatigue of fighting, allowed a fundamental Islamic group, the Taliban, to seize control of the country. Although the Taliban regime provided some political stability during the late 1990s, its destructive policies, highlighted in its repressive treatment of women, and its continuing war with the opposition Northern Alliance further impeded international aid and development. In December 2001, less than 2 months after U.S. and coalition forces forcibly removed the Taliban regime, an international summit in Bonn, Germany, established a framework for a new Afghan government, which focused on an ambitious 30-month timeline for writing a new constitution by the end of October 2003 and holding democratic elections by June 2004. The framework, known as the Bonn Agreement, was endorsed by the U.N. Security Council on December 6, 2001, through UN Resolution 1383. (See app. II for additional information on the Bonn Agreement.) In December 2002, the United States passed the Afghanistan Freedom Support Act of 2002 and increased its assistance to Afghanistan. (See app. III for details on the types and purposes of the assistance authorized by the act.) The goal of the U.S. government in Afghanistan is to firmly establish a democratic nation inhospitable to international terrorism, drug trafficking and cultivation; at peace with its neighbors; and able to provide its own internal and external security. U.S. efforts in support of this goal are intended to help create national security institutions, provide humanitarian and reconstruction assistance, and reinforce the primacy of the central government over Afghanistan’s provinces. Title I, Section 104(a) of the act states that in general, the President is strongly urged to designate, within the Department of State, a coordinator who shall among other things be responsible for designing an overall strategy to advance U.S. interests in Afghanistan; ensuring program and policy coordination among U.S. agencies carrying out the policies set forth in this title; pursuing Afghanistan assistance coordination with other countries and ensuring proper management, implementation, and oversight by agencies responsible for Afghan assistance programs. USAID provides U.S. assistance to underdeveloped countries through U.N. agencies, nongovernmental organizations, and private contractors. The main organizational units responsible for managing USAID’s reconstruction programs and operations in Afghanistan in fiscal years 2002–2003 were the agency’s mission in Kabul, Afghanistan; the Bureau for Asia and the Near East; and the Bureau for Democracy, Conflict, and Humanitarian Assistance through the Office of U.S. Foreign Disaster Assistance, Office of Food for Peace, Office of Transition Initiatives (OTI), and Office for Democracy and Governance. Other U.S. government agencies provided additional assistance, including the Department of Defense through its provincial reconstruction teams (PRT) located at sites throughout Afghanistan. In fiscal years 2002–2003, the PRTs ranged in size from 50 to 100 civilian and military personnel, including civil affairs units, force protection soldiers, and representatives of the Departments of Agriculture and State and USAID. The teams are intended to deliver assistance that advances military goals and provide security in an effort to increase the reach of the Afghan central government in the provinces and allow assistance agencies to implement projects. By late 2003, Defense established PRTs in Bamian, Kunduz, Gardez, and Mazar-I-Sharif. In fiscal years 2002–2003, the United States spent the majority of its nonsecurity-related funding to Afghanistan on humanitarian and quick- impact projects, and it contributed approximately one-third of the international funding disbursed in Afghanistan. Of the 10 U.S. agencies providing assistance to Afghanistan, USAID provided the largest amount, for both humanitarian and reconstruction assistance, and the Department of State provided the second largest amount, primarily for humanitarian assistance. USAID and the Department of Defense obligated a total of $283 million for nationwide programs and $564 million for localized program assistance in 31 provinces. The United States accounted for 38 percent of the $3.7 billion in nonsecurity-related international funding disbursed in Afghanistan in fiscal years 2002–2003. The U.S. government obligated $1.4 billion for assistance to Afghanistan in fiscal years 2002–2003, including $782 million for humanitarian and quick- impact projects and $647 million for strategic, longer-term reconstruction projects. U.S. agencies spent $900 million, of which $686 million, or over 75 percent, was spent on humanitarian and quick-impact projects and about $214 million, or over 20 percent, was spent on longer-term reconstruction needs. (See fig. 3.) Of the 10 U.S. government departments and agencies involved in assistance to Afghanistan in fiscal years 2002–2003,USAID provided the largest amount of assistance, for both humanitarian and reconstruction needs. USAID obligated $942 million, of which it spent about $508 million by September 2003. It provided both short-term assistance—emergency, humanitarian, and quick-impact projects—and longer-term reconstruction and development-oriented assistance, such as revitalizing infrastructure, improving health and education, strengthening the economy, and supporting democracy and governance. The Department of State provided the next largest amount, obligating $287 million in fiscal years 2002-2003 and spending $254 million of that amount. State’s programs were targeted mainly to refugee and humanitarian assistance, including demining, and also included funding for counterdrug programs and building a police force. The Department of Defense obligated $71 million and spent $64 million, primarily for provincial-level, short-term projects implemented through its PRTs and for humanitarian daily rations that it air-dropped early in fiscal year 2002. In addition, seven other U.S. government agencies obligated $128 million and spent $74 million for a variety of both humanitarian and reconstruction activities. (See fig. 4.) In an effort to expand the reach of the Afghan government—a major U.S. and Afghan government priority—most USAID and Defense assistance funding was spent on projects implemented at the provincial level. Specifically, USAID and Defense obligated $283 million for nationwide programs and $564 million for provincial-level assistance across 31 provinces. Kabul received the most provincial-level assistance, $70.4 million for 148 projects, while Konar received the least, $121,350 for one project. Although assistance was provided in virtually all of Afghanistan’s provinces, five provinces received approximately half of provincial-level program assistance. Four of these provinces—Kabul, Kandahar, Balkh, and Hirat—have major population centers, and the fifth, Badakshan, is increasingly important to the opium trade. (See fig. 5.) In fiscal years 2002–2003, international donors pledged $9.7 billion for assistance to Afghanistan. (See app. V for details.) International disbursements for the 2-year period totaled approximately $3.7 billion, of which U.S. obligations accounted for approximately 38 percent, or $1.4 billion—the largest amount donated (see fig. 6). Like U.S. funding, most international funding was directed to meet humanitarian needs rather than major reconstruction efforts. According to the Center on International Cooperation, as of May 2003, $947 million of the international disbursements had been used to begin reconstruction projects. In fiscal years 2002-2003, humanitarian and quick-impact assistance benefited Afghanistan, but longer-term reconstruction efforts achieved limited results. U.S. humanitarian aid helped overcome emergency conditions and jump-start the recovery effort. In addition, quick-impact projects helped Afghanistan transition from the emergency to the reconstruction phase. However, because of delayed funding, most major contracts for reconstruction activities were not signed until summer 2003, limiting the results achieved by the end of that fiscal year. In fiscal years 2002–2003, to help redress the complex humanitarian crisis in Afghanistan, the U.S. government provided emergency assistance that helped avert a famine, significantly reduce the suffering of the most vulnerable Afghans, and assist the return of refugees. USAID’s Office of Food for Peace provided Afghanistan with 355,270 metric tons of wheat and other emergency food assistance (valued at $206.4 million) through P.L. 480, Title II, and the Department of Agriculture provided 79,600 metric tons of surplus wheat (valued at $38.7 million) through the 416(b) program. The United States provided most of its food assistance to Afghanistan through the U.N. World Food Program (WFP), as well as the U.N. Food and Agriculture Organization and nongovernmental organizations. (See fig. 7.) Over the 2-year period, the United States provided over 60 percent of all international food assistance received by Afghanistan. According to the WFP, the food assistance provided by the United States and the international community helped avert famine in Afghanistan. USAID also provided other emergency assistance in fiscal years 2002–2003. According to USAID reports, the Office of Foreign Disaster Assistance provided $137.8 million to meet the basic needs of internally displaced people and other vulnerable Afghans. The funding supported health and nutrition programs, agricultural and other income-generating rehabilitative work in rural areas, and logistics for coordinating humanitarian and food assistance countrywide. According to USAID, the office, through its cash- for-work programs, supported more than 4,000 small rehabilitation projects, including repairs to approximately 2,600 kilometers of roads, 1,500 wells and irrigation systems, and more than 100 schools and hospitals, benefiting selected communities throughout the country. The Department of State’s Bureau of Population, Refugees, and Migration provided $234 million to assist returning refugees. This assistance, disbursed primarily through the UN High Commissioner for Refugees, supported the voluntary return and reintegration of 2.2 million refugees and internally displaced people to their homes in Afghanistan. The U.S. assistance also provided shelter; water and sanitation; primary, reproductive, maternal, and child health care; food and nutrition; primary education; mine education and awareness; and economic assistance and training to refugees and internally displaced people. USAID’s OTI and the Department of Defense’s PRTs implemented small- scale, quick-impact projects. These projects aimed to extend the reach of the Afghan central government by providing benefits to rural communities and to facilitate the transition to longer-term reconstruction programs. Both OTI and the PRTs engaged in clinic and school reconstruction, bridge rehabilitation, irrigation construction, and other locally determined, small- scale projects. In fiscal years 2002–2003, OTI expended $18 million for 435 projects. (On average, each project cost $42,465.) By October 2003, 66 percent of the projects had been completed. In a November 2003 assessment, OTI concluded that its efforts had increased the Afghan state’s ability to function, enhanced the independent media’s ability to promote public information, and facilitated infrastructure improvements in hundreds of communities. However, OTI also concluded that these gains had not yet achieved its objective of building citizen confidence in the ability of the central Afghan government. Few Afghans interviewed by OTI during the assessment were aware that the U.S. government or the Afghan central government had supported a specific project. (See fig. 8 for an example of an OTI project.) The Department of Defense’s quick-impact projects were similar in size and scope to those implemented by USAID’s OTI. In fiscal years 2002–2003, Defense granted $20 million for 451 projects in Afghanistan through its PRTs. (On average, the projects cost $45,000 each.) Sixty-four percent of them were completed by December 2003. The PRTs implemented projects designed to help (1) advance U.S. military goals, (2) build goodwill among the local population, (3) increase the visibility of U.S. support, and (4) extend the reach of the Afghan central government. Although no formal evaluation of the overall PRT effort had been completed as of October 2003, officials at the Departments of State and Defense said that the activities of civil affairs teams appeared to have a positive effect on security and were a useful tool for expanding local support for both the U.S. presence and the Afghan government. However, the Agency Coordinating Body for Afghan Relief reported that as currently structured, the PRTs lack the resources or mandate to either solve the security situation in Afghanistan or significantly contribute to reconstruction. (Fig. 9 shows one example of a PRT project.) USAID’s longer-term reconstruction efforts in fiscal years 2002–2003 achieved limited results because of delays in funding. To help the Afghan government extend its influence throughout the country, USAID organized its longer-term assistance into six sectors: infrastructure rehabilitation, economic governance, democracy strengthening, education, health, and agriculture. The agency also integrated elements to promote gender equity into each sector. Most of the contracts for longer-term reconstruction assistance in each of the six sectors were not signed until summer 2003, due to delayed funding, limiting what USAID could achieve in that fiscal year. The following presents U.S. efforts in each sector. The goals listed in figures 10–16 portray USAID’s goals and objectives as stated in early planning and reporting documents. Since many of the projects created under the six sectors continued work begun through the quick-impact projects, USAID has not disaggregated their achievements. We include information on some quick-impact projects, as well as longer-term reconstruction projects. Also, since USAID does not track expenditures by the six sectors, we do not include information on total amounts spent by sector. Infrastructure rehabilitation. By the end of fiscal 2003, USAID had built or rehabilitated several physical infrastructure projects, most notably the Kabul–Kandahar road. Many of the early physical infrastructure projects handled through the quick-impact programs used local or low-technology procedures in order to speed implementation. For example, the OTI projects applied stone, gravel, and dirt to improve transport over secondary and tertiary roads. By contrast, a contract for the longer-term Rehabilitation of Economic Facilities and Services infrastructure program (REFS), signed in September 2002, provided engineering and construction services for the production of paved roads and seismically sound buildings. The Kabul-Kandahar road, a U.S. presidential priority, represents a significant political symbol within Afghanistan and is the main transport route for north-south trade from Central Asia to the Indian Ocean. In about 17 months, under the REFS contract, USAID contractors demined, graded, and installed the first layer of pavement on a segment of highway stretching 389 kilometers (approximately the distance from Washington, D.C., to New York, N.Y.). As a result, travel between the two cities was reduced from several days to about 6 hours. The road requires two more layers of asphalt and the construction of bridges and culverts; the estimated project completion date is October 2004. The prime contractor for the REFS program was also responsible for constructing schools and clinics listed as objectives under the education and health sectors. However, as of the end of fiscal 2003, although OTI and the PRTs built and rehabilitated schools and clinics, none of the more sophisticated buildings included in the infrastructure contract had been built. In addition to the USAID infrastructure projects, State identified communications as an infrastructure element essential to meeting the long- term security needs of Afghanistan. USAID provided for voice and e-mail communication between the central government in Kabul and all 32 provinces by installing a high-frequency radio communications network. The U.S. Trade and Development Agency provided short-term advisors to create a strategic plan for telecommunications development. By October 2003, two telephone companies had established service in Afghanistan, but according to USAID and others, connectivity was still unreliable. Economic governance. When the U.S. government began its reconstruction efforts in Afghanistan, the Ministry of Finance and the Central Bank— necessary to set fiscal policy and handle the country’s reconstruction cash flow, respectively—were operating at an elementary level. USAID helped to reestablish the Ministry of Finance, create a central bank of Afghanistan and a new currency, and reform the customs process. To do this, USAID awarded a contract for its Sustainable Economic Policy and Institutional Reform Support program in November 2002. Under the program, USAID helped rehabilitate the ministry building and provided advisors to retrain the bank’s staff. In addition, USAID helped the central bank establish and distribute a new national currency (the “afghani”). This involved collecting and destroying an estimated 13 trillion of the greatly devalued, previously existing afghanis and the disparate currencies printed by warlords. USAID supported the commercial bank sector by assisting in legal and regulatory reform and training financial sector officials. As a result, international commercial banks began to receive licenses in the fall of 2003. Further, USAID helped to partially rehabilitate the Kabul customs house and airport customs facilities, streamline customs processes, and establish a tax identification number system for traders. Despite these and other efforts aimed at encouraging the provinces to remit revenue to the central government, according to the UN and others, warlords continued to keep large portions in their own regions, undermining the authority of the central government. Health care. In November 2002, USAID, with assistance from the UN Population Fund, Japan’s aid agency, and the European Commission, completed a comprehensive assessment of health facilities, services, personnel, and supplies available throughout the country. This effort helped Afghanistan's Ministry of Health to establish a national health strategy and national health priorities. All grants for health sector activities must address the priorities established in the ministry’s strategy. The study found that Afghanistan has approximately one health facility per 27,000 inhabitants. It also established that nearly 40 percent of existing basic care facilities employ no female health workers. (According to cultural norms, it is taboo for women to receive care from male health care workers.) Other health achievements included providing grants to NGOs to operate over 160 health facilities—covering an area where 3.9 million Afghans live—constructing or rehabilitating 140 health facilities, training over 1,700 health workers, participating in the campaign to immunize 90 percent of the population against measles, and improving approximately 3,600 rural potable waterworks. To expand U.S. support for Afghanistan’s health sector goals, USAID established its Rural Expansion of Afghanistan’s Community-Based Health Care program through a contract signed in May 2003, as a continuation of previously begun work. Education. By the end of fiscal year 2003, USAID, through quick-impact projects, had repaired or constructed approximately 200 schools, provided more than 25 million textbooks, trained over 3,000 teachers, and supplemented approximately 50,000 teachers’ salaries with vegetable oil. (The oil represented 26 percent of the teachers’ monthly income.) To assist Afghanistan with longer-term education goals, USAID created the Afghanistan Primary Education Program through a contract signed in June 2003. Early efforts in this program included developing and beginning to disseminate an accelerated learning curriculum for girls, who were not educated under the Taliban. USAID plans to train 30,000 classroom teachers between fiscal years 2003 and 2006. The prime education contractor in charge of the training referred to the educators it will train as “mentors” because they will not have the same qualifications as formally trained teachers. Agriculture. Through quick-impact projects, USAID helped farmers reestablish agricultural production by distributing approximately 9,300 metric tons of seed and 12,400 metric tons of fertilizer, and by rehabilitating more than 7,000 rural irrigation structures. USAID also helped improve the rural economy by repairing over 70 bridges and tunnels and more than 7,000 kilometers of secondary and tertiary roads and by employing the equivalent of 1 million Afghans for 1 month. In July 2003, the agency awarded a contract for the Rebuilding Agricultural Markets Program, aimed at increasing the food security and incomes of the rural population. However, as of October 2003, work under this contract had not yet begun. Democracy strengthening. USAID established two democracy and governance programs, one to help implement the political goals set by the Bonn Agreement and the other to bolster the civil society, media, and political parties. Through the beginning efforts of these programs, in conjunction with the quick-impact activities, the United States provided key technical assistance, civic education, and logistics support for the emergency loya jirga (grand council) to establish the interim government, and for the second loya jirga to ratify a new constitution. USAID also provided over 130 advisers to the Afghan ministries and funded approximately 880 staff positions. In addition, USAID supported the creation of radio stations and trained over 320 journalists to aid the development of a free and independent media. As of October 2003, USAID and the international community had helped the Afghan government establish judicial reform, human rights, and constitutional commissions. Further, USAID commissioned designs for a provincial courthouse and a judicial complex in Kabul. USAID’s cooperative agreement with the Consortium for Elections and Political Process Strengthening, establishing the democracy strengthening program, was not signed until July 2003. Gender equity. USAID did not create separate women’s projects but rather included elements promoting gender equity in its programs. For example, some quick-impact infrastructure projects incorporated women’s labor into the construction process. In Kunduz, where USAID helped a community build a retaining wall, women participated and earned income by making wire screens to contain rocks placed in the wall by the men. In addition, USAID facilitated the involvement of women in the loya jirgas (women accounted for 20 percent of the delegates at the December 2003 constitutional loya jirga) and in the Afghan government by rehabilitating 15 day care centers in ministry buildings to encourage Afghan women to return to work. USAID also encouraged the return of girls to the classroom by creating an accelerated education program. USAID also made maternal care one of its primary health goals. However, Afghan society still limits women’s travel and work, which complicates attempts to educate, train, or provide medical care to them, and nearly 40 percent of existing health care facilities employ no female health workers. Further, several girls’ schools have been set on fire to protest educating women, and a female loya jirga representative’s life was threatened when she expressed her negative opinion about the government’s collaboration with warlords. In fiscal years 2002–2003, the U.S. government established several mechanisms to coordinate its assistance effort in Afghanistan, but it lacked a comprehensive reconstruction strategy. Although U.S. agency officials characterized coordination as effective overall, some problems occurred. In addition, key operational components of the strategies intended to guide the reconstruction effort were incomplete or were not drafted until the latter half of fiscal 2003. Further, coordination officials lacked complete and accurate financial data needed for effective program management. Meanwhile, international assistance coordination was weak in 2002, with limited improvements introduced through the consultative group mechanism in 2003. U.S. assistance to Afghanistan in fiscal years 2002–2003 was coordinated through a number of mechanisms; however, some problems occurred. U.S. efforts were coordinated in Washington through the Afghanistan Reconstruction Office, the Policy Coordinating Committee, the Deputies’ Committee, and the Principals’ Committee, and in Afghanistan through the U.S. Embassy country team. (See fig. 17.) According to Department of State officials, interagency coordination among the Afghanistan Reconstruction Office, agencies delivering assistance, and the embassy country team was routine and daily. In addition, these officials stated that the formal, hierarchical, interagency committee structure provided a uniform process for making policy-level decisions and keeping the President informed. U.S. officials from several agencies we spoke to stated that, overall, the U.S. government’s coordination of the Afghan assistance effort in fiscal years 2002–2003 was effective. According to officials from USAID and the Departments of Agriculture, State, and Commerce, coordination efforts were successful and the policy coordination committee succeeded in bringing all of the agencies together to discuss pertinent issues and make collective decisions. USAID’s former mission director in Afghanistan emphasized that the daily meetings of the country team and other assistance sector–based teams ensured good coordination within the embassy. Although U.S. officials stated that coordination among agencies was generally good, several cited examples of coordination problems. For example, USAID officials said that whereas USAID worked closely with Afghan government ministries on the selection and location of projects, the PRTs focused on projects chosen by local authorities. Consequently, the PRTs implemented projects that were not included in national plans developed by the central government. In addition, USAID officials and Department of Health and Human Services (HHS) officials confirmed that coordination problems involving the two organizations’ efforts in Afghanistan’s health sector had occurred. Specifically, HHS rehabilitated the Rabia Balkhi Hospital in Kabul, rather than focus efforts on rural health clinics where the Afghan Ministry of Health and USAID had determined the need for assistance was greater. In another example, Department of State staff stated that USAID did not share information on its demining activities and that staff turnover and inconsistent operating procedures within the Department of Defense made coordinating demining efforts difficult. The U.S. government’s strategies for directing its reconstruction efforts in Afghanistan evolved during fiscal years 2002–2003, and key operational components of the strategies were incomplete or not drafted until the latter half of fiscal year 2003. In addition, coordination officials lacked complete and accurate financial data needed for effective program management. Various strategies pertaining to U.S. assistance efforts were developed during the fiscal 2002–2003 period. Several levels of strategies, from the President’s office down to the USAID mission, are designed to guide U.S. assistance efforts in Afghanistan, focus resources, and hold agencies accountable for their efforts. In February 2003, the President published a broad strategy for meeting the immediate and long-term security needs of Afghanistan in response to the Afghanistan Freedom Support Act requirements. The President’s strategy is intentionally broad and, therefore, lacks operational details, such as time frames and measurable goals. In June 2003, 18 months after the signing of the Bonn Agreement, the Department of State published its first mission performance plan to guide U.S. efforts in Afghanistan for fiscal years 2003–2006. This plan is organized around five strategic goals for the reconstruction effort and one management goal pertaining to Department of State facilities in Afghanistan. The mission plan provides an estimate, by appropriation account, of the financial resources needed. Further, the plan (1) describes specific tactics and activities to be undertaken and assigns responsibility for each activity to USAID and other offices of the agencies housed within the U.S. Embassy in Afghanistan and (2) defines baseline data, performance indicators, and targets for achieving each performance goal. As the key U.S. agency for reconstruction of Afghanistan, USAID is responsible for developing a more detailed strategy and subordinate plans and programs to carry out its responsibilities. The USAID mission in Afghanistan developed an interim strategy and action plan in August 2002. However, these documents did not clearly articulate measurable goals or provide details on time frames, resources, responsibilities, objective measures, or means to evaluate progress for each of the sectors targeted by the strategy. USAID directives require that interim strategies include a description of how or when the strategy would be replaced by a standard strategic plan. The interim strategy for Afghanistan does not contain the required description. USAID’s guidelines and directives state that country-level strategies and plans should address, among other things, strategic objectives, key country-level problems, programmatic approaches, baseline data and targets, performance indicators and the means to measure progress, fundamental assumptions, and resources required to implement the plan. Although USAID developed a number of measurable goals for various sectors during fiscal years 2002– 2003, these goals and the resources and methods designed to achieve them were included in numerous project documents and contracts rather than stated in a comprehensive strategy as called for by USAID guidelines. Further, according to USAID officials, although USAID Washington reviewed the strategy and action plan, the documents were not vetted through USAID’s standard strategy review process; instead an abbreviated process was used to assess clarity, feasibility, compliance with agency policies, delineation of expected results, and congruency with available resources. The former mission director in Afghanistan stated that the time and resources needed to develop and approve a strategy through the normal USAID operating procedures were not available when the strategy documents were developed and that a waiver for meeting standard strategy-related requirements was granted in February 2002. In January 2003, USAID officials responsible for the agency’s efforts in Afghanistan requested a second waiver and promised to draft a strategy according to USAID guidelines within 6 months of the waiver’s approval. According to USAID documents, no strategy was drafted because the situation in Afghanistan was too dynamic, preventing USAID from taking a proactive approach to its efforts including the development of a strategy. A third waiver was approved in February 2004 that exempts USAID from developing the strategy until February 2005. As a result, more than 3 years will have passed between the time USAID began providing postconflict assistance to Afghanistan and the completion of a USAID assistance strategy for Afghanistan. The lack of a complete country strategy impedes USAID’s ability to ensure progress toward development goals, make informed resource allocation decisions, and meet agency and congressional accountability reporting requirements on the effectiveness of agency programs. The coordinator for U.S. assistance to Afghanistan, as well as others responsible for the coordination of U.S. assistance, lacked complete and accurate financial data in fiscal years 2002–2003. Program managers need financial data to, among other things, monitor performance, allocate resources, and determine whether strategic goals are being met. Further, relevant information needs to be identified, collected, and distributed in a form and time frame so that duties can be performed efficiently. Most of the agencies providing assistance to Afghanistan could not readily provide complete or accurate data on assistance obligations and expenditures, and some agencies were unable to disaggregate the information by fiscal year or province. Consequently, over the course of our review, we worked with the agencies to obtain reliable data. In fiscal years 2002–2003, the Coordinator’s office did not require U.S. agencies to regularly report obligation and expenditure data. As a result, the Coordinator for U.S. Assistance to Afghanistan lacked information that could have helped decision-makers manage the overall assistance effort, including the targeting of resources to key efforts. Despite efforts to synchronize multiple donors’ efforts, coordination of international assistance was weak in 2002 and problems remained in 2003. The Bonn Agreement urged donors to defer responsibility for assistance coordination to the Afghan government. According to the UN, coordination is the responsibility of the Afghan government; efforts by the aid community should reinforce national authorities; and the international community should operate, and relate to the Afghan government, in a coherent manner rather than through a series of disparate relationships. In April 2002, the Afghan government initiated efforts to exert leadership over the highly fragmented reconstruction process. To accomplish this task, the government published its National Development Framework, which provided a vision for a reconstructed Afghanistan and broadly established national goals and policy directions. In addition, the Afghan government established a government-led coordination mechanism, the implementation group, to bring coherence to the international community’s independent efforts and broad political objectives. The mechanism’s structure was based on the National Development Framework. Individual coordination groups, led by Afghan ministers and composed of assistance organizations, were established for each of the 12 programs in the framework. The implementation group mechanism proved to be largely ineffective. In August 2002, officials from the Afghan government, the UN, the Department of State, and USAID, as well as a number of nongovernmental bodies, expressed concern over the lack of meaningful and effective coordination of assistance in Afghanistan. For example, the Ministers of Foreign Affairs, Rural Rehabilitation and Development, Irrigation, and Agriculture stated that the donor community’s effort to coordinate with the government was poor to nonexistent. The ineffectiveness of the implementation group mechanism resulted from its inability to overcome several impediments. First, each bilateral, multilateral, and nongovernmental assistance agency had its own mandate (established by implementing legislation or charter) and sources of funding, and each donor pursued development efforts in Afghanistan independently. Second, the international community asserted that the Afghan government lacked the capacity and resources to effectively assume the role of coordinator and, that these responsibilities therefore could not be delegated to the government. Third, no single entity within the international community had the authority and mandate to direct the efforts of the myriad bilateral, multilateral, and nongovernmental organizations providing assistance. In December 2002, the Afghan government replaced the implementation group with the consultative group mechanism to increase the effectiveness and efficiency of assistance coordination in support of the goals and objectives in the National Development Framework. The consultative group mechanism in Afghanistan is similar to the implementation group in (1) its National Development Framework–based hierarchical structure and stated goals, (2) the role of the Afghan government, and (3) the membership and leadership of sector-specific groups. (See fig. 18.) By the end of fiscal year 2003, the consultative group had not surmounted the conditions that prevented the implementation group from effectively coordinating assistance. In an August 2003 review of the status of the consultative group process, the Afghan government stated that the terms of reference for the sectoral groups were unclear and too broad, the groups were too large and lacked strong leadership, member commitment was uneven, and the overall potential of the mechanism was not utilized. In October 2003, the Minister of Rural Rehabilitation and Development stated that the consultative group process had not yet proven effective, that the consultative groups were too large to be effective decision-making bodies, and that assistance organizations continued to implement projects not included in the Afghan government’s national budget and priorities. The Minister of Agriculture stated that despite the efforts of consultative groups to coordinate donor efforts, donor governments and assistance agencies continued to develop their own strategies and implement projects outside the Afghan government’s national budget. The attainment of the U.S. goal of a stable, democratic Afghanistan remained uncertain given the historical precedents and the current Afghan environment, where numerous obstacles threatened reconstruction efforts in fiscal years 2002–2003. Afghanistan exhibits many of the characteristics that other nations have faced in their efforts to transition from a postconflict environment to a stable democracy. In fiscal years 2002–2003, deteriorating security and increasing opium cultivation in particular jeopardized U.S. reconstruction efforts, and efforts to counter these obstacles have had little success. Other hindrances to U.S. reconstruction efforts in Afghanistan during this period included small staff size, inadequate working conditions and equipment, and the timing of funding for reconstruction activities. In September 2003, the U.S. government announced an initiative called “Accelerating Success” to increase funding and expedite projects. Afghanistan displays many of the characteristics that have obstructed transitions to peace and stability in other postconflict countries. Analyses conducted by various experts on postconflict reconstruction have identified a number of such characteristics, including multiple competing parties, valuable and disposable resources such as opium, and a weakened state. In addition, our past work has shown that despite variations in postconflict situations, efforts to rebuild require a secure environment, adequate resources, and the support of the host government and civil society. Figure 19 compares characteristics of Afghanistan that we—and experts from the World Bank and other nongovernmental institutions— found to have affected reconstruction in other postconflict countries. Terrorist attacks by the Taliban and al Qaeda and the criminal activity of warlords contributed to the overall environment of insecurity throughout Afghanistan and threatened the U.S. reconstruction effort in fiscal years 2002–2003. In March 2002, in a report to the UN Security Council, the UN Secretary General stated that security will remain the essential requirement for protecting the peace process in Afghanistan. In a report to the council 1 year later, he identified security as the most serious challenge to the peace process. Others in the international community, including the United States, recognize security as a prerequisite for the implementation of reconstruction efforts. According to UN, nongovernmental organization, and U.S. reports, the security situation deteriorated throughout 2003. Incidents over the 2-year period included numerous skirmishes between coalition, al Qaeda, and Taliban troops in the border regions between Afghanistan and Pakistan; the attempted assassinations of the Minister of Defense and the the assassination of Vice President Qadir; the murder of an International Committee of the Red Cross worker; attacks on contractors working on USAID’s Kabul-Kandahar road project that resulted in 14 injuries and 9 deaths; rocket attacks on U.S. and international military installations; sniper fire and grenade attacks on UN and nongovernmental organization vehicles and offices; and bombings in the center of Kabul and Kandahar, at the International Security Assistance Force headquarters, and of UN compounds. The increase in violence against aid organizations forced suspensions of assistance activities. For example, attacks against deminers forced the UN to suspend all humanitarian demining activities in 10 provinces in May 2003 including demining activities along the Kabul–Kandahar road. Similarly, the killings of three nongovernmental organization staff in August 2003 and a UN High Commissioner for Refugees staff member in November 2003 resulted in, among other things, the agency’s removing its international staff and its reduced ability to deliver assistance to refugees and internally displaced people. Furthermore, the criminality of the warlords’ private armies continued to destabilize the country and impede reconstruction, according to the Department of State, the UN, Human Rights Watch, and other international experts. The warlords foster an illegitimate economy fueled by the smuggling of arms, drugs, and other goods. They also, in violation of the Bonn Agreement, control private armies of tens of thousands of armed men and illegally withhold hundreds of millions of dollars in customs duties collected at border points in the regions they control, depriving the central government of revenues needed to fund the country’s central government and reconstruction effort. Repeated violent clashes among the warlords continued throughout fiscal years 2002–2003, forcing USAID and other assistance agencies to periodically suspend their assistance activities in the affected areas. The situation is further complicated by the fact that the United States uses warlord-commanded militias in its continuing counterinsurgency effort against the Taliban. The militia forces also provide security for PRTs. For example, troops commanded by one of the warlords in control of Hirat and its adjoining provinces provide security to U.S. civil affairs units stationed in Hirat. The United States and the international community have taken several steps to improve security in Afghanistan. First, beginning in 2002, the Department of Defense established PRTs in several locations in Afghanistan. These company-sized units of 50 to 100 soldiers were charged with enhancing security over immense geographical areas in an effort to create a safe environment for reconstruction activities. For example, the PRT in Gardez, with 77 security personnel and 52 other personnel, had an area of responsibility that covered five provinces with a total land area of 70,000 square kilometers—an area about the size of South Carolina. Nongovernmental organization officials, as well as others, have criticized the size of the PRTs, stating that the units were too small to provide security for their areas of responsibility or create a secure environment for reconstruction projects. In 2002, Department of Defense began funding efforts to help establish a national army in Afghanistan. As of late fiscal 2003, its efforts to train the first corps of the new army had fallen behind schedule, due in part to higher than expected rates of attrition among Afghan recruits. As of September 2003, approximately 5,500 soldiers had been trained. In 2003, the Department of State and the German government (the designated lead nation for police training in Afghanistan) began implementing plans to train 20,000 Afghan police by June 2004 and 50,000 by the end of 2005. By March 2004, 9,000 officers received training. Finally, the U.S. government considers the demobilization and reintegration of the warlords’ forces a prerequisite for improving the country’s security and succeeding in the international recovery effort. According to the Department of State, this program is critical to efforts to reduce the destabilizing presence of these militias. As of March 2004, 5,200 soldiers had been disarmed. The illicit international trade in Afghan opiates also threatened Afghanistan’s stability during fiscal years 2002–2003. The drug trade provided income for terrorists and warlords, fueling the factions that worked against stability and national unity. According to UN and International Monetary Fund estimates, in 2002, Afghan farmers produced 3,422 metric tons of opium, providing $2.5 billion in trafficking revenue. This amount was equal to 68 percent of the total international assistance to Afghanistan disbursed for that year, or nearly 4.5 times the Afghan government’s 2003 operating budget. In 2003, UN estimates indicated that opium production in the country increased to approximately 3,600 metric tons, the second largest harvest in the country’s history. Further, heroin laboratories have proliferated in Afghanistan in recent years. As a result of the increased poppy production and in-country heroin production, greater resources were available to Afghan criminal networks and others at odds with the central government. According to the Department of State, at the provincial and district levels, drug-related corruption is believed to be pervasive. Involvement ranges from direct participation in the criminal enterprise, to benefiting financially from taxation or other revenue streams generated by the narcotics trade. The International Monetary Fund and Afghanistan’s Minister of Finance have stated that the potential exists for Afghanistan to become a “narcostate,” in which all legitimate institutions are infiltrated by the power and wealth of drug traffickers. The overall increase in opium production in 2002-2003 occurred despite the counternarcotics efforts implemented by the Afghan government and a number of international donors. During the 2-year period, the Afghan government and the international community, with funding from the United Kingdom and the United States, instituted alternative livelihood and poppy eradication programs in Afghanistan. Total U.S. funding dedicated to counternarcotics was $23.4 million in fiscal 2002. The Department of State did not request or receive funding for counternarcotics efforts in fiscal 2003. Although the programs failed to stem the increase in opium production, the long-term effects of these programs remain to be seen. During fiscal years 2002–2003, limited resources further obstructed U.S. reconstruction efforts in Afghanistan. The USAID mission in Kabul was insufficiently staffed to carry out its responsibilities. In addition, inadequate working conditions and equipment—including cramped workspace, limited mobility, and unreliable communications and transportation equipment—hindered the implementation of assistance activities. Further, most reconstruction funding was not available until mid–fiscal year 2003. To help expedite reconstruction efforts and create more visible results, the U.S. initiated an “Accelerating Success” program in fiscal year 2004. The USAID mission in Kabul was inadequately staffed to accomplish its management and oversight responsibilities. In its August 2002 action plan for assistance to Afghanistan, USAID stated that the number of positions it was allotted (12 slots) through the embassy’s staffing allocation process was clearly inadequate to design and implement the large program planned for Afghanistan. USAID’s mission in Afghanistan managed a $505 million program in 2003, one of the largest in the world; however, its staff size is one of the smallest. On average, an overseas USAID mission has a staff of 73 and a budget of approximately $51 million, or one staff member per about $700,000. In Afghanistan, that ratio in fiscal year 2003 was approximately one staff member per about $13 million. Although USAID/ Kabul indicated in its 2003 staffing plan that it needed 113 staff, only 39 of these positions were filled during the year. In its March 2003 risk assessment, USAID’s Inspector General cited delays in the assignment and retention of qualified personnel as one of three material weaknesses in USAID’s system of management controls in Afghanistan. It also reported that the risks associated with this material weakness were amplified by, among other things, the magnitude of the funding being provided to Afghanistan and the pressure to implement projects in extremely short time frames. In August 2003, we reported that as a result of the decreases in U.S. direct-hire foreign service staff levels, increasing program demands, and a mostly ad hoc approach to workforce planning, USAID faces several human capital vulnerabilities, including the lack of a “surge capacity” to respond to emergencies such as postconflict situations in Afghanistan and Iraq. Because of the small number of USAID staff in Afghanistan and the numerous vacancies, staff members were often required to work long hours and take on additional responsibilities. For example, from March 2002 through June 2003, USAID’s General Development Officer also periodically served as USAID’s Acting Deputy Mission Director and Acting Mission Director and as the Department of State’s Acting Deputy Chief of Mission and Chargé d’Affaires. During our visit in October 2003, USAID’s mission had been without a Director for two months. At the time, the Acting Mission Director was also the Cognizant Technical Officer overseeing the largest USAID project in Afghanistan. USAID tried to compensate for the gaps by deploying staff to Kabul on temporary duty. However, this did not ensure the continuity needed to administer a program effectively and efficiently. As a result of the small staff size, staff members were overworked and found it difficult to keep up with their myriad responsibilities, including monitoring and evaluating projects. The lack of monitoring was evidenced by the USAID staffs’ inability to provide us with the exact location of the projects we asked to visit. In its December 2003 midterm program assessment of projects in Afghanistan, OTI noted that deficiencies in monitoring at construction sites contributed to a high rate of faulty construction, serious post-construction problems, and added costs. Inadequate working conditions and equipment—such as cramped workspace, limited mobility, and unreliable communications and transportation equipment—also hindered the implementation of assistance activities. In its August 2002 action plan for Afghanistan, USAID stated that without adequate working and living space, it might not be able to achieve its goals. In its March 2003 risk assessment for USAID activities in Afghanistan, USAID’s Inspector General cited unsuitable working and living conditions as material weaknesses, stating that existing conditions in Afghanistan were “unsuitable for carrying out program design and implementation in an effective and efficient manner.” During our visit in October 2003, we found that staff at the USAID mission faced severe space constraints. For example, we observed as many as eight USAID staff, their files, and office furniture and equipment sharing one small office. USAID took steps to obtain additional space at the embassy and in other U.S. locations in Kabul, but it was not available during fiscal year 2003. In addition, Department of State security restrictions, imposed due to increasing levels of insecurity, severely limited USAID staff’s ability to travel to field sites and monitor ongoing reconstruction efforts. In its March 2003 assessment, USAID’s Inspector General cited the security restrictions as another material weakness, stating that staff members are not able to travel to project sites and monitor project implementation in an adequate manner with the frequency required. To improve its ability to monitor field sites, USAID contracted for program managers through the International Organization for Migration (IOM). Although some IOM staff contracted by USAID are U.S. citizens, they are not bound by the same security rules as direct-hire USAID staff and, therefore, can visit projects in the field. However, despite this action, we found that USAID was unable to adequately monitor projects. The limitations on mobility made communications capability essential. However, according to U.S. and international officials in Afghanistan, e- mail and cellular phone service is intermittently reliable within Kabul and less reliable between provinces, making it difficult to contact staff and contractors in the field. PRT staff stated that they lacked adequate mobile secure communications equipment, and some had to purchase their own geographic positioning systems. In addition, PRT staff in the field relied on old vehicles that the United States leased from local vendors. The frequent breakdown of the vehicles and the lack of replacement parts severely limited staff’s ability to carry out their responsibilities. For example, according to PRT officials we spoke with, most of the vehicles used are approximately 10 years old—with some having logged more than 100,000 miles—break down frequently, and are not designed for the rigorous terrain of Afghanistan. For example, senior PRT officials in Hirat told us that, in 2003, they made two unsuccessful attempts to reach Chaghcharan, the capital of Ghor, the province adjoining Hirat province. During a third attempt, one vehicle experienced 14 flat tires in 3 days. The PRT staff said that because the vehicles were in such poor condition, the staff spent much of their time on the road searching for spare parts and repairing vehicles instead of identifying assistance needs and implementing projects. Although the United States provided significant humanitarian assistance to Afghanistan in fiscal 2002, very little money was available to USAID for reconstruction until the second half of fiscal year 2003. USAID considers adequate funding a prerequisite for the success of the reconstruction effort. However, according to USAID officials, because they did not know when they would receive additional funding, they were unable to develop and plan for long-term resource-intensive reconstruction projects and instead focused on short-term projects that required less money; some of these served as pilots for the longer-term projects begun later in fiscal year 2003. During fiscal years 2002–2003, funding for reconstruction projects in Afghanistan was allocated to USAID programming offices in four increments. According to USAID, an initial allotment for $52 million for reconstruction was made in February 2002; at the time, the programming offices were assured that more funding was imminent. About 8 months later, USAID obtained an additional $40 million; however, some of the money was used for emergency winterization measures, such as providing food and shelter, to stave off another humanitarian crisis. Since there was no Afghanistan— specific request for fiscal 2002, $80 million was supplemental funding, while the remaining $12 million was reprogrammed funds from existing assistance accounts. As a result, USAID was able to initiate only two major reconstruction programs, infrastructure rehabilitation and the reform and development of economic governance, by the first anniversary of the Bonn Agreement in late 2002. In contrast, the rate of funding for rebuilding Iraq was much faster. Specifically, in less than 1 month after the U.S. announced an end to major hostilities in Iraq, USAID obligated $118 million for reconstruction activities from the Iraq Relief and Reconstruction Fund account. By the end of December 2003, 7 months later, USAID obligated about $1.5 billion for Iraq reconstruction from this account. Although there was no specific request for funding for Afghanistan included in the President’s fiscal year 2003 budget, funding became available when Congress appropriated $295.5 million for Afghanistan in February 2003. USAID officials reported that the allotments from this appropriation began in April 2003, and USAID targeted about $265 million toward longer-term reconstruction projects and $30 million for short-term projects. In April 2003, Congress passed the fiscal 2003 supplemental appropriations bill that included $167 million for Afghanistan. The allotments from this appropriation began in June 2003. All of this funding was used for longer-term reconstruction. (See fig. 20.) Because of the delays in funding during the 17-month period following the signing of the Bonn Agreement, USAID had to cancel projects, reallocate funding from some projects in order to keep other projects operating, and delay the implementation of 5 of its 7 major reconstruction contracts until spring and summer of 2003. According to USAID officials responsible for the management of USAID’s assistance to Afghanistan in fiscal years 2002– 2003, if funding had been provided sooner and in greater amounts, major contracts could have been awarded sooner, a greater number of projects could have been implemented over the 2-year period, and more results could have been achieved. The funding provided by the United States in fiscal years 2002–2003 was part of the larger international reconstruction effort in Afghanistan. The Afghan government estimated that Afghanistan needs $30 billion over the 5- year period 2004–2008 for what it defines as high-priority reconstruction efforts. According to the Center on International Cooperation, as of May 2003, $947 million of the international disbursements had been used to begin reconstruction projects. Despite Afghanistan’s stated need and the importance that the United States and the international community assigned to the reconstruction effort, Afghanistan received significantly less international assistance over fiscal years 2002–2003 than was provided during the first 2 years of other recent postconflict, complex emergencies over a similar time period. According to analyses by the International Monetary Fund, RAND Corporation, and others, Afghanistan received about $67 in annual per capita assistance in 2002 and 2003; by contrast, the annual per capita aid provided during the first 2 years in other recent postconflict settings was greater. For example, annual per capita assistance was $256 in East Timor (1999–2001) and $249 in Bosnia (1995–1997). At the October 19, 2003, meeting of the Consultative Group Standing Committee, the Afghan government warned the international community that the reconstruction effort might fail and that success would occur only if the rate of international obligations were increased and national reconstruction projects were fully funded. The U.S. government announced in September 2003 a new initiative called “Accelerating Success,” to increase funding and expedite the reconstruction efforts, particularly regarding infrastructure, democratization and human rights, and security. The initiative was designed to be implemented in the 9-months leading up to the presidential elections planned for June 2004. The U.S. government plans to provide $1.76 billion for the acceleration effort. Approximately $1 billion of that amount would provide funding for elections, major and secondary road construction, health and education programs, economic and budget support to the Afghan government, senior advisers and technical experts, and private sector initiatives. The remaining $700 million would be targeted toward building the Afghan National Army, training and equipping the police force, expanding the counternarcotics program, and establishing rule of law. Funding for the initiative was appropriated in November 2003; however, USAID did not receive the money until January/February 2004, leaving only 7 months to complete visible reconstruction projects before the September election. Moreover, the need to evaluate projects quickly will increase under the initiative, but no additional funds have been included for this purpose. In April 2003, prior to the “Accelerating Success” initiative, at the request of President Karzai, the United States decided to complete the first layer of pavement of the Kabul-Kandahar road by December 2003 instead of December 2005. Under the original plan, the estimated cost to bring the road up to international standards was $113 million; the United States pledged $80 million, while Saudi Arabia and Japan each pledged an additional $50 million. In shortening the timeline by 2 years, the United States assumed responsibility for 389 kilometers of the 482-kilometer distance. (See fig. 21.) Consequently, the United States hired several more subcontractors, increased the labor and security forces, imported additional equipment, and tapped the world market of asphalt. The first layer of pavement was completed about 17 months after the contract was signed, and the road opened on December 16, 2003. By the time in 2004 that contractors lay the final layers of asphalt, repair the road’s bridges, and construct the culverts, USAID projects that the road’s total cost to the United States will be $270 million, more than double the original cost estimate, due to accelerating the project. After 23 years of war, the reconstruction needs of Afghanistan are immense. Since the fall of the Taliban regime in October 2001, the United States has viewed the establishment of a stable, democratic Afghanistan as essential to U.S. national security. The United States, in cooperation with the international community, is attempting to rebuild Afghanistan and help the country become a stable and functioning democracy. U.S.-led efforts in fiscal years 2002–2003 helped avert a humanitarian crisis; however, conditions in Afghanistan, such as the deteriorating security situation, the relative weakness of the central government, and the increase in opium production, complicate the longer-term reconstruction process and threaten its ultimate success. In addition, despite a consensus that reconstruction assistance is essential to achieving the U.S. goal in Afghanistan, most funding for reconstruction in fiscal years 2002–2003 was not allocated until 17 months after the signing of the Bonn Agreement. This delay, as well as a lack of staff and equipment, further hindered U.S. efforts. Consequently, overall progress towards Afghanistan’s reconstruction goals by the end of fiscal year 2003 was limited. The President’s broad strategy published in February 2003 and reported on semiannually states that success in Afghanistan demands that the U.S. government follow a coherent, consistent, and closely coordinated strategy. However, for most of fiscal years 2002–2003, the United States lacked such a strategy. In addition, USAID, which provided the majority of U.S. assistance to Afghanistan, lacked a complete operational strategy to guide its nonsecurity-related efforts, making it difficult for the agency to integrate projects, focus available resources, and be held accountable for achieving measurable results. The need for such a strategy has become more vital given that, between August 2002 and July 2003, USAID awarded seven major multiyear reconstruction contracts worth hundreds of millions of dollars. Further, most of the U.S. agencies providing assistance to Afghanistan did not have readily available comprehensive financial data on their efforts, limiting the ability of individuals and institutions charged with coordinating and overseeing the assistance to execute these responsibilities. We recommend that the Administrator of USAID revise its strategy for the agency’s assistance program in Afghanistan. The revised strategy should, among other things, (1) contain measurable goals, specific time frames, and resource levels; (2) delineate responsibilities; (3) identify external factors that could significantly affect the achievement of its goals; and (4) include a schedule for program evaluations that assess progress against the strategy’s goals. In addition, to improve oversight of U.S. assistance to Afghanistan, we are making two recommendations to the Secretary of State. We recommend that the Secretary of State direct the Coordinator for U.S. Assistance to Afghanistan to (1) produce an annual consolidated budget report for all assistance to Afghanistan and (2) semiannually report obligations and expenditures for the assistance provided, delineated by relevant U.S. agencies and the bureaus and offices within each agency semiannually. We provided a draft of this report to the Departments of State and Defense and to the U.S. Agency for International Development. State’s and USAID’s written comments are presented in appendixes VI and VII, respectively. State and USAID generally concurred with much of the information presented on the situation in Afghanistan for the period covered by our review. State emphasized that despite security and other challenges, significant progress had been made, not only with respect to humanitarian and short-term assistance, but also in advancing long-term security, reconstruction, and governance objectives. USAID stated that the report presented a fair picture of the situation in Afghanistan at the end of fiscal year 2003, when USAID’s large reconstruction efforts were just beginning. Both agencies included in their response additional information on more recent activities taken and progress made. The Department of Defense did not provide official written comments, but provided technical comments, as did USAID, that we have incorporated where appropriate. In response to our recommendation that USAID revise its operational strategy for Afghanistan to include details such as measurable goals, timeframes, and required resources, USAID said that its less comprehensive interim strategy was appropriate given the situation in Afghanistan during the early phases of the ongoing efforts. While we recognize in the report that the strategy was an interim strategy, the need for a more complete strategy is vital due to the large increase in USAID assistance funding for Afghanistan. USAID said that it is committed to developing a standard strategic plan for Afghanistan during 2004, which would be consistent with our recommendation. The Department of State disagreed with our finding that the United States lacks a complete and integrated assistance strategy, citing its December 15, 2003 report to Congress, titled Fiscal Year 2004 Strategic and Financial Plan for Reconstruction and Related Activities in Afghanistan. In the plan, State noted that the United States is pursuing a three-fold strategy in Afghanistan, focusing on security, reconstruction, and governance. We found that most of the strategies that were published in fiscal years 2002 and 2003 lacked details on funding and other resources, measurable goals, timeframes, as well as a means to measure progress. However, in the report, we also cite State’s June 2003 Mission Performance Plan as meeting many of the requirements for a government-wide operational strategy. Although the fiscal year 2004 plan cited by State in its comments includes more details on the U.S. assistance budget for Afghanistan, like some of the previously published strategies, it lacks operational details, including time frames, measurable goals, and a means to measure progress toward those goals. In response to our recommendation that State produce an annual consolidated budget for all U.S. assistance to Afghanistan and report to Congress semiannually on obligations and expenditures, State emphasized that policymakers are provided with information on U.S. obligations weekly, and that close interagency collaboration occurs regarding all funding issues. In addition, State said that it already keeps Congress regularly informed through staff briefings, hearings, and mandated reports. We disagree. As we reported, complete and readily accessible obligation and expenditure data were not available, and consequently, it is difficult for the Coordinator to determine the extent to which U.S. assistance dollars are being used to achieve measurable results in Afghanistan. Moreover, we found that government-wide expenditure data on U.S. assistance to Afghanistan is not collected, obligation data is collected on an ad hoc basis, and that the Coordinator’s office experienced difficulty in consistently collecting complete and accurate obligation data from U.S. government agencies. Further reporting obligation data alone is insufficient. Obligation data measures the extent to which contracts have been awarded, orders placed, and similar transactions, not the extent to which money actually has been spent on the ground on visible projects. Consequently, reporting obligations alone does not provide an accurate portrayal of the progress of the assistance effort. For example, as our report shows, although $647 million was obligated for reconstruction projects in fiscal 2002 and 2003, less than a third of the total, or $214 million was actually spent. Regular reporting of both obligations and expenditures for U.S. assistance to Afghanistan would provide the Coordinator and Congress a more complete picture of what funds actually have been spent on visible projects. We are sending copies of this report to other interested congressional committees. We are also sending copies to the Administrator of USAID, the Secretary of State, and the Secretary of Defense. 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) 512-3149. Other GAO contacts and staff acknowledgements are listed in appendix VIII. Section 106 of the Afghanistan Freedom Support Act of 2002 directs GAO to monitor U.S. humanitarian and reconstruction assistance to Afghanistan. To meet the requirements of the directive and provide Congress with a comprehensive accounting of U.S. assistance to Afghanistan for fiscal years 2002–2003, we (1) analyzed U.S. obligations and expenditures; (2) identified the results of assistance projects through September 30, 2003; (3) evaluated U.S. and international assistance coordination mechanisms and the U.S. assistance strategy; and (4) examined the major obstacles that affected the achievement of U.S. policy goals and the reconstruction effort. We collected data on fiscal years 2002 and 2003 obligations and expenditures from the U.S. departments and agencies responsible for implementing U.S. government–funded projects in Afghanistan. These include U.S. Departments of Agriculture, Defense, Health and Human Services, State, and Treasury; the U.S. Trade and Development Agency; and the U.S. Agency for International Development (USAID). Because there is no single repository of financial information for all U.S. assistance in Afghanistan, we contacted each agency directly. In addition, because the Department of State does not have a consolidated financial reporting mechanism for programs in Afghanistan, we contacted each bureau and office separately—including the Bureaus of Population, Refugees, and Migration, and International Narcotics and Law Enforcement; and the Offices of International Information Programs, Humanitarian Demining Programs, and Trafficking in Persons. To determine which funds were applied to humanitarian and quick-impact projects and which were applied to longer-term reconstruction funding, we requested the agencies to designate their funding accordingly. In the case of USAID, we relied on the stated mission of the responsible funding bureau to make the determination. For example, the missions of the Office of Foreign Disaster Assistance and Office of Transition Initiatives include addressing emergency situations and implementing quick-impact projects, respectively. Since USAID did not provide separate financial management records for fiscal years 2002 and 2003, we, in consultation with USAID, sorted the obligation and expenditure data by year to arrive at the fiscal year breakdowns that appear in this report. The Department of Defense was unable to disaggregate PRT project data by fiscal year. The fiscal 2002 obligations and expenditures in the report include only funds spent on humanitarian daily rations, while the fiscal 2003 figures include all PRT funds in 2002 and 2003. To delineate how funding and projects were distributed by province, we combined information from both USAID and the Department of Defense. USAID provided the information from a programmatic, rather than a financial database, as the financial database did not include data by location. Because the programmatic database had been updated only to September 17, 2003, the numbers used for figure 5 are less than the total obligations reported as of September 30, 2003. However, according to USAID, it can be assumed that the proportion of assistance by province did not change during that time lag. Also as a result of the data being drawn from a programmatic database, we are unable to show expenditures by province, because the database tracks only obligations. To assess the reliability of the obligations and expenditures data from U.S. agencies providing assistance to Afghanistan, we (1) interviewed officials at the Departments of Defense, State, and USAID regarding their methods of gathering, managing, and using data; (2) reviewed USAID’s financial audit statement; and (3) compared the data we gathered with USAID’s Congressional Budget Justifications and the Department of State’s 150 account documentation, as well as with the government-wide Afghanistan assistance compilation done by the Department of State’s Resource Management bureau. A Department of State official stated that the data State compiled are not completely accurate, due in part to the lack of a requirement for all agencies to report to one central office on a regular basis, which results in variation in the frequency of reporting by individual agencies and differences in how agencies track data. However, the Department of State relies on these data for decision-making purposes and to track how quickly money for Afghanistan is being used. Based on our assessment, we conclude that the data are sufficiently reliable for the purposes of showing, in gross numbers, the level of nonsecurity-related assistance that the U.S. government provided to Afghanistan in fiscal years 2002 and 2003. To assess the reliability of the data on the pledges and disbursements made by international donors, we (1) interviewed the official at the Department of State who is responsible for compiling these data based on information provided by the Government of Afghanistan and (2) performed some basic reasonableness checks of the data against other sources of information. We determined that the data are sufficiently reliable for the purpose of making a broad comparison of the United States’ contributions to those of other major donors and the combined total for all other donors. However, we also noted several limitations in the data, notably the fact that the data are largely self-reported by donor nations to the Afghan government and are affected by differences in exchange rates. In addition, donors both over- and under-report due to varying definitions of disbursement. Furthermore, the data on larger donors are considered more reliable than the data on smaller donors, according to the Department of State. Due to these limitations, and the fact that we could not contact each of the donors, we were unable to determine the reliability of the precise dollars amounts pledged and disbursed by every donor. Nevertheless, because these are the only available data and are used by the Department of State, we present the dollar amounts reported to have been pledged and disbursed by each donor in appendix V. To examine the results of assistance projects through September 30, 2003, we collected and analyzed information from the Departments of State and Defense, and USAID in Washington, D.C., which outlined policy goals, basic strategies, program objectives, and monitoring efforts. We also collected and analyzed pertinent reports and testimony these agencies presented to Congress. In October 2003, we traveled to Afghanistan to examine the implementation of USAID and the Department of Defense’s assistance- related operations. While in country, we spent 13 days in the capital city, Kabul, interviewing officials from the Afghan Ministries of Finance, Health, Agriculture, and Rural Rehabilitation and Development; the Afghan commissions on Human Rights and the Judicial Reform; the UN Assistance Mission in Afghanistan; the UN Development Program (UNDP); and the U.S. Departments of State and Defense and USAID. We also met with most of USAID’s primary implementing partners (including the Louis Berger Group, Creative Associates, Management Sciences for Health, and Bearing Point) as well as nongovernmental organizations not funded by the United States, such as the Afghanistan Research and Evaluation Unit and the Danish Committee for Aid to Afghan Refugees. In Kabul, we inspected Afghanistan’s new banking system, customs house, and the rehabilitation of the Rabia Balkhi Women’s Hospital. We also spent a total of 7 days in the Bamian, Kunduz, and Hirat provinces, where we inspected U.S.-funded projects, implemented primarily by either the OTI or the Department of Defense’s PRTs. While in the provinces, we met with an Afghan shura (community council), teachers, and other community members involved in, or affected by, U.S. reconstruction projects. Constraints placed on our movement within Afghanistan by the U.S. Embassy due to security concerns limited the number of project sites we could visit. To analyze the assistance coordination mechanisms developed by the U.S. government and the international community, we met with Department of State staff responsible for assistance coordination and staff from USAID, and the Departments of Agriculture, Commerce, Defense, Health and Human Services, Labor, Treasury, and State involved in the provision of assistance, to obtain their views on coordination. In addition, we reviewed the U.S. National Security Strategy, the Department of State/USAID consolidated strategic plan for 2004-2009, the President’s Security Strategy for Afghanistan, the U.S. Embassy Kabul Mission Performance Plan, and USAID’s strategy and action plan for Afghanistan. Using the criteria contained in the U.S. Government Performance and Results Act and USAID Automated Directives System, we examined USAID strategies to determine whether they contained the basic elements of an operational strategy articulated in the act and in agency guidance. Our analysis of international coordination mechanisms included a review of UN and Afghan government documents, including the Afghan National Development Framework and Budget, pertaining to the international coordination mechanisms utilized in Afghanistan in fiscal years 2002–2003. In addition, we met with officials from the Afghan Ministries of Agriculture, Finance, Health, and Rural Rehabilitation and Development to obtain their views on the evolution and status of the consultative group mechanism. To analyze the obstacles that affected the implementation of U.S. reconstruction assistance, we examined analyses of common obstacles found in postconflict environments produced by the Carnegie Endowment for International Peace, the Center for Strategic and International Studies, the World Bank, Stanford University, and the RAND Corporation. We also reviewed as previous GAO work on the subject. We then compared those obstacles with the conditions present in Afghanistan in fiscal years 2002– 2003. In addition, we reviewed reports produced by the Departments of Defense and State, the UN, the International Crisis Group, Human Rights Watch, the Bonn International Center for Conversion, as well as a U.N. Office on Drugs and Crime report on opium production in Afghanistan. To analyze other obstacles, including the lack of staff, equipment, and funding, we spoke with officials from the Department of Defense and USAID. In addition, we examined appropriation legislation, USAID’s Congressional Budget Justifications, and the Inspector General’s risk assessment of major activities managed by USAID/Afghanistan. Finally, we visited the USAID mission in Kabul, Afghanistan, and PRTs in Bamian, Kunduz, and Hirat, Afghanistan. We conducted our review from August 2003–April 2004 in accordance with generally accepted government auditing standards. After coalition forces ousted the Taliban government, the United Nations (U.N.) convened four Afghan groups to establish a blueprint for a power-sharing, interim government; the Taliban were not included in these talks. The resulting document, officially entitled the “Agreement on Provisional Arrangements in Afghanistan Pending the Re-establishment of Permanent Government Institutions,” commonly called the Bonn Agreement or the Bonn Accord, was signed in Bonn, Germany on December 5, 2001. Establish an Interim Authority by December 22, 2001. Establish the composition, functions, and governing procedures for the interim administration. Convene an emergency loya jirga, or grand council, within 6 months of December 22, 2001 to decide on the Transitional Authority, which will govern until the Afghan population elects a representative government. Decide on a Transitional Authority by the emergency loya jirga until such time as a fully representative government can be elected through free and fair elections within 2 years of the convening of the emergency loya jirga. Hold constitutional loya jirga to establish a new constitution within 18 months of December 22, 2001. II. Legal framework and judicial system The 1964 constitution and existing laws and regulations should be applied until the new constitution is written, excepting where provisions of 1964 constitution are inconsistent with the Bonn Agreement, or relate to the monarchy or constitutional, executive, and legislative bodies where existing laws and regulations are inconsistent with the Bonn Agreement, Afghanistan’s international legal obligations, or the 1964 constitution. The interim authority shall have power to amend existing laws and regulations. Afghanistan shall have independent judicial power vested in a Supreme Court and other courts established by the Interim Administration. A Judicial Commission established by the Administration shall rebuild the justice system in accordance with Islamic principles, international standards, the rule of law, and Afghan legal traditions. Composition: A chairman will preside over the cabinet-style interim government, which includes five vice chairmen and 24 other members. Procedures: Decisions will be made by consensus, or by majority vote where necessary, as long as 22 members are present. If the vote is split equally, the chairman holds the deciding vote. Functions: The Interim Authority shall conduct the day-to-day affairs of state. Among other things, it may, with the assistance of the UN, establish a single national currency and a central bank, a Civil Service Commission, a Human Rights Commission, and any other commission to review matters not covered in the agreement. IV. The Special Independent Commission for the Convening of the Emergency Loya Jirga A 21-member, special, independent commission will be established to convene an emergency loya jirga within 6 months of the establishment of the Interim Authority. The emergency loya jirga will decide on a transitional authority to lead Afghanistan until a fully representative government is elected within 2 years of the convening of the loya jirga. Upon official transfer of power, all mujahidin, Afghan armed forces, and armed groups shall come under the command and control of the Interim Authority. The Interim Authority and emergency Loya Jirga shall act in accordance with basic human rights and international humanitarian law. The Interim Authority shall cooperate in the fight against terrorism, drugs, and organized crime. The Interim Authority and Special Independent Commission for the convening of the emergency Loya Jirga shall ensure the participation of women and the equitable representation of all ethnic and religious communities in the Interim Authority and emergency Loya Jirga. The Interim Authority shall adhere to Security Council resolution 1378. The Interim Authority shall elaborate on rules of procedure for the government as appropriate with UN guidance. Assure U.S. security. Address humanitarian crisis. Fight illicit narcotics. Promote a broad-based, multi-ethnic, gender-sensitive, and fully representative government. Support Afghan government’s projects. Foster civil society. Support reconstruction (create jobs, clear landmines, rebuild the agriculture, health care and educational sectors). Provide resources to the Ministry for Women’s Affairs. Foster a pluralistic society that respects religious freedom. Designate a coordinator within the Department of State to: Design an overall strategy to advance U.S. interests in Afghanistan; Ensure coordination among U.S. agencies; Pursue coordination with other countries; Ensure proper management, implementation, and oversight of Resolve disputes among U.S. agencies with respect to Afghan assistance. Authority expires after September 30, 2006. 2 (Continued From Previous Page) GAO was not able to determine the reliability of the specific dollar figures in this table. While we determined that the data are sufficiently reliable for broadly comparing U.S. contributions to those of major donors, we noted several limitations, namely (a) that they are affected by differences in exchange rates, (b) donors both over- and under-report due to varying definitions of disbursement, and (c) the data on larger donors are considered more reliable than the data on smaller donors. In addition to those named above, Miriam A. Carroll, Martin de Alteriis, Ernie Jackson, Reid Lowe, and Christina Werth made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In October 2001, in response to the Taliban regime's protection of al Qaeda terrorists who attacked the United States, coalition forces forcibly removed the regime from Afghanistan. In December 2002, Congress passed the Afghanistan Freedom Support Act authorizing assistance funds to help Afghanistan rebuild a stable, democratic society. The act directed GAO to monitor the implementation of U.S. humanitarian and development assistance. This report analyzes, for fiscal years 2002-2003, (1) U.S. obligations and expenditures in Afghanistan, (2) results of assistance projects, (3) the assistance coordination mechanisms and strategy, and (4) major obstacles that affected the achievement of U.S. goals. Of the $900 million that the U.S. government spent on nonsecurity-related assistance in Afghanistan in fiscal years 2002-2003, over 75 percent supported humanitarian efforts, including emergency food and shelter, and over 20 percent supported longer-term reconstruction. USAID, the Department of State, and the Department of Defense spent $508 million, $254 million, and $64 million, respectively, for humanitarian, quick-impact, and some longer-term projects. U.S. funding represented about 38 percent of the $3.7 billion the international community disbursed over the 2-year period. U.S. humanitarian and short-term assistance benefited Afghanistan, but longerterm reconstruction efforts achieved limited results by the end of fiscal year 2003 due to late funding. By providing food and shelter to returning refugees and other vulnerable populations, early U.S. assistance helped avert a humanitarian crisis. USAID's and Defense's quick-impact projects also helped rebuild smallscale infrastructure such as schools and bridges. USAID initiated several longerterm reconstruction activities, such as repairing the Kabul-Kandahar road and starting a democracy program. However, because of delays in funding most major assistance contracts were not signed until summer 2003, limiting the results in fiscal years 2002-2003. U.S. coordination mechanisms for Afghanistan assistance were generally effective, but international assistance was not well coordinated in fiscal years 2002-2003. In addition, the United States lacked a complete and integrated assistance strategy, which hampered the U.S. government's ability to focus available resources and hold itself accountable for measurable results. Further, U.S. officials responsible for coordinating efforts lacked complete financial data, which hindered their ability to oversee the assistance. In fiscal years 2002-2003, Afghanistan confronted many obstacles that other postconflict nations have faced, such as multiple competing parties. In addition, security deteriorated and opium production increased, thereby jeopardizing U.S. reconstruction efforts. Lack of staff, poor working conditions, and delayed reconstruction funding further impeded U.S. efforts. In September 2003, to expedite progress, the U.S. government announced the "Accelerating Success" initiative, providing $1.76 billion for reconstruction in 2004. |
In 1990, the Congress enacted the Global Change Research Act. This act, among other things, required the administration to (1) prepare and at least every 3 years revise and submit to the Congress a national global change research plan, including an estimate of federal funding for global change research activities to be conducted under the plan; (2) in each annual budget submission to the Congress, identify the items in each agency’s budget that are elements of the United States Global Change Research Program (USGCRP), an interagency long-term climate change science research program; and (3) report annually on climate change “expenditures required” for the USGCRP. In 1992, the United States signed and ratified the United Nations Framework Convention on Climate Change, which was intended to stabilize the buildup of greenhouse gases in the earth’s atmosphere, but did not impose binding limits on emissions. Five years later, the United States participated in drafting the Kyoto Protocol, an international agreement to specifically limit greenhouse gas emissions. The Protocol did not impose limits on developing nations’ emissions, and its possible effect on the U.S. economy was the subject of numerous studies. Although the U.S. government signed the Protocol in 1998, it was not submitted to the Senate for ratification. In March 2001, President Bush announced that he opposed the Protocol. In response to the requirements of the 1990 act, the administration reported annually from 1990 through 2004 on funding for climate change science in reports titled Our Changing Planet. From 1990 through 2001, the reports presented detailed science funding data for the USGCRP. Federal climate change science programs were reorganized in 2001 and 2002. In 2001, the Climate Change Research Initiative (CCRI) was created to coordinate short-term climate change research focused on reducing uncertainty, and in 2002, CCSP was created to coordinate and integrate USGCRP and CCRI activities. Since 2002, CCSP has been responsible for meeting the reporting requirement and has published the Our Changing Planet reports. The most recent report in this series was published in July 2004, and the next report is expected to be available in late-2005. In March 1998, OMB, in response to a congressional requirement for a detailed account of climate change expenditures and obligations, issued a brief report summarizing federal agency programs related to global climate change. In August 1998, the Congressional Budget Office (CBO), in response to a request from the Senate Committee on the Budget, issued a more detailed report on the same topic. OMB produced another climate change expenditures report in March 1999, in response to a similar requirement. OMB’s 1999 report and CBO’s 1998 report both presented federal climate change funding using four categories: technology, science, international assistance, and tax expenditures. As we testified in 1999, these reports presented generally comparable information. In response to a request at that hearing, OMB provided climate change funding data for 1993 through 1998 for the hearing record. Each year since 1999, the Congress has included a provision in annual appropriations laws requiring OMB to report in detail all federal agency obligations and expenditures, domestic and international, for climate change programs and activities. As a result of these reporting requirements, OMB annually publishes the Federal Climate Change Expenditures Report to Congress, which presents federal climate change funding for the technology, science, and international assistance categories, and tax expenditures. The climate change activities and associated costs presented in OMB reports must be identified by line item as presented in the President’s budget appendix. OMB has interpreted this to mean that the data in the reports must be shown by budget account. For the last 3 years, the Congress has required that the administration produce reports for climate change expenditures and obligations for the current fiscal year within 45 days after the submission of the President’s budget request for the upcoming fiscal year. OMB’s most recent report was released in March 2005. OMB reports include a wide range of federal climate-related programs and activities. Some activities, like scientific research on global environmental change by USGCRP, are explicitly climate change programs, whereas others, such as many technology initiatives, are not solely for climate change purposes. For example, OMB reports included some programs that were started after the United States ratified the Framework Convention in 1992, and were specifically designed to encourage businesses and others to reduce their greenhouse gas emissions, for example, by installing more efficient lighting. OMB reports also included programs that were expanded or initiated in the wake of the 1973 oil embargo to support such activities as energy conservation (to use energy more efficiently), renewable energy (to substitute for fossil fuels), and fossil energy (to make more efficient use of fossil fuels), all of which can help to reduce greenhouse gas emissions, but were not initially developed as climate change programs. Federal climate change funding, as reported by OMB, increased from $2.35 billion in 1993 to $5.09 billion in 2004 (116 percent), or from $3.28 billion to $5.09 billion (55 percent) after adjusting for inflation and also increased for technology, science, and international assistance between 1993 and 2004, as shown in table 1. However, changes in reporting methods limit the comparability of funding data over time, and therefore it is unclear whether funding increased as much as reported by OMB. Technology funding increased as a share of total funding over time, while science and international assistance funding declined as shares of the total because technology funding increased at a faster rate than the other categories. OMB did not report estimates for existing climate-related tax expenditures during this time period, although climate-related tax expenditures amounted to hundreds of millions of dollars in revenue forgone by the federal government in fiscal year 2004. OMB officials told us that changes in reporting methods were due to such reasons as the short amount of time available to prepare the report, the fact that the reporting requirement is not permanent law, but appears each year in appropriations legislation, and changes in administration policy and priorities. From 1993 through 2004, technology funding increased as a share of total federal climate funding from 36 percent to 56 percent, as reported by OMB. Over this time period, technology funding increased from $845 million to $2.87 billion (239 percent), or adjusted for inflation, from $1.18 billion to $2.87 billion (143 percent). For example, funding for energy conservation increased from $346 million to $868 million, and funding for renewable energy increased from $249 million to $352 million. Funding data for the seven largest accounts, which accounted for 92 percent of technology funding in 2004, are presented for selected years in table 2. Year-by-year data on technology funding are available in appendixes II and IV. We identified three ways that the figures on technology funding presented in OMB’s three most recent reports may not be comparable to the figures presented in previous reports. First, OMB added accounts that were not previously presented. For example, OMB reported that NASA had $152 million in funding for technology-related activities that included research to reduce emissions associated with aircraft operations in 2003. OMB did not report this account in the technology category in 2002. Additional NASA funding in the same account was reported in the science category in 2002 and 2003. Further, OMB reported that the Department of Commerce’s National Institute of Standards and Technology received funding of $40 million in 2003, to develop climate change measurement instruments and standards, among other activities. OMB did not report this account in 2002. About 47 percent of the reported $918-million increase in technology funding from 2002 to 2003, the largest year-to-year increase of the time period we studied, was due to the inclusion of new accounts that were not previously reported. In addition, OMB included and removed some accounts, without explanation, from reports in years other than 2003. For example, OMB reported combined funding of $195 million in 1999, and $200 million in 2000, for bio-based products and bio-energy at the Departments of Energy and Agriculture. No funding for these accounts was reported from 1993 through 1998 or from 2001 through 2004. In each of these cases, OMB did not explain whether the new accounts reflected the creation of new programs, a decision to count an existing program for the first time, or a decision to re-classify funding from different categories as technology funding. According to OMB officials, these changes in report structure and content for technology funding, as well as similar changes in science and international assistance funding, were the result of time constraints and other factors. They told us that the short timeline required by the Congress for completing the report (within 45 days of submitting the upcoming year’s budget for the three most recent reports) limited OMB’s ability to analyze data submitted by agencies. They said that they must rely on funding estimates quickly developed by agencies in order to produce the report within the specified timeframe, and that the reports are often compilations of agency activities and programs, some of which may or may not have been presented separately in prior years. Moreover, these officials told us that the presentation of data has changed over time for a variety of other reasons, including changes in administration priorities and policy, changes in congressional direction, changes to budget and account structures, and attempts to more accurately reflect the reporting requirement as specified in the annual appropriations language. The officials also stated that in each report, they ensured consistency for the 3 years covered (prior year, current year, and budget year). Furthermore, OMB officials told us that the presentation of new accounts in the technology category, as well as the international assistance category, was due to the establishment of new programs and the inclusion of existing programs. They told us that the account-by-account display in the reports has been changed over time as the CCSP and the Climate Change Technology Program (CCTP), a multi-agency technology research and development coordinating structure similar to the CCSP, have become better defined. Second, OMB reported that it expanded the definitions of some accounts to include more activities, but did not specify how the definitions were changed. We found that over 50 percent of the increase in technology funding from 2002 to 2003 was due to increases in two existing DOE accounts: nuclear energy supply and science (fusion, sequestration, and hydrogen). OMB reported funding of $32 million in 2002, and $257 million in 2003, for the nuclear energy supply account. Further, OMB reported funding of $35 million in 2002, and $298 million in 2003, for the science (fusion, sequestration, and hydrogen) account. Although OMB stated in its May 2004 report that 2003 funding data included more activities within certain accounts, including the research and development of nuclear and fusion energy, the report was unclear about whether the funding increases for these two existing accounts were due to the addition of more programs to the accounts or increased funding for existing programs already counted in the accounts. Further, if new programs were counted in these accounts, OMB did not specify what programs were added and why. OMB officials told us that the definitions of some accounts were changed to include more nuclear programs because, while the prior administration did not consider nuclear programs to be part of its activities relating to climate change, the current administration does consider them to be a key part of the CCTP. Third, OMB did not maintain the distinction that it had made in previous reports between funding for programs whose primary focus is climate change and programs where climate change is not the primary focus. As a result, certain accounts in the technology category were consolidated into larger accounts. From 1993 through 2001, OMB presented funding data as directly or indirectly related to climate change. The former programs are those for which climate change is a primary purpose, such as renewable energy research and development. The latter are programs that have another primary purpose, but which support climate change goals. For example, grants to help low-income people weatherize their dwellings are intended primarily to reduce heating costs, but may also help reduce the consumption of fossil fuels. OMB did not maintain the distinction between the two kinds of programs for 2002, 2003, and 2004 funding data. For example, OMB presented energy conservation funding of $810 million in 2001, including $619 million in direct research and development funding, and $191 million in indirect funding for weatherization and state energy grants. In contrast, 2002 funding data presented by OMB reflected energy conservation funding of $897 million, including $622 million in research and development, $230 million for weatherization, and $45 million for state energy grants, but did not distinguish between direct and indirect funding. OMB presented energy conservation funding of $880 million in 2003, and $868 million in 2004, as single accounts without any additional detail. OMB officials stated that they had adopted a different approach to reporting climate change funding to reflect the new program structures as the CCSP and CCTP were being established. They stated that the result was, in some cases, an aggregation of activities that may have previously been reported in separate accounts. According to the officials, the 2003 and 2004 data more accurately reflect the range of climate change-related programs as they are now organized. OMB included a crosswalk in its May 2004 report that showed 2003 funding levels as they would have been presented using the methodology of previous reports. While the crosswalk identified funding for accounts that were presented in previous reports, it did not identify new funding reported by OMB or specify whether such funding was the result of counting new programs, a decision to start counting existing programs as climate change-related, or shifts between categories. OMB officials told us that the reporting methodology has changed since the initial reports and that it may be difficult to resolve the differences because of changes in budget and account structure. Finally, they noted that each report has been prepared in response to a one-time requirement and that there has been no requirement for a consistent reporting format from one year to the next or to explain differences in methodology from one report to another. According to both OMB and CCSP, the share of total climate change funding devoted to science decreased from 56 percent in 1993 to 39 percent in 2004, even though science funding increased from $1.31 billion to $1.98 billion (51 percent), or from $1.82 billion to $1.98 billion (9 percent) after adjusting for inflation. For example, according to OMB, funding for NASA on activities such as the satellite measurement of atmospheric ozone concentrations increased from $888 million to $1.26 billion. OMB reported new science funding for 2003 and 2004 to reflect the creation of CCRI. Funding for CCRI increased from $41 million in 2003, the first year funding for CCRI was presented, to $173 million in 2004, and included funding by most of the agencies presented in table 3. We present funding for CCRI as a separate program to illustrate the new organization’s role in increasing reported climate change funding. Table 3 presents funding as reported by OMB for the eight largest agencies and programs in the science category, which account for 99 percent of the science total for 2004. Year- by-year data on science funding are available in appendixes II and IV. Science funding data from 1993 through 2004, as reported by OMB and CCSP, were generally comparable, although there were more discrepancies in earlier years than in later years. Science funding totals reported by CCSP from 1993 through 1997 were within 3 percent of the OMB totals for all years except 1996 and 1997. Science funding totals reported by CCSP in 1996 and 1997 were $156 million (9 percent) and $162 million (10 percent) higher than those reported by OMB. Over 90 percent of the difference for these years occurred because CCSP reported greater funding for NASA than OMB reported. CCSP stated in its fiscal year 1998 report that it increased its 1996 and 1997 budget figures to reflect the reclassification of certain programs and activities in some agencies that were not previously included in the science funding total. Total science funding reported by OMB and CCSP from 1998 through 2004 was identical for 4 of the 7 years. The largest difference for the 3 years that were not identical was $8 million in 2001, which represented less than 1 percent of the science funding total reported by OMB for that year. The other differences in total science funding were $3 million in 2002, and $1 million in 1999, and each represented less than 1 percent of the OMB science total for those years. Science funding by agency, as presented by OMB and CCSP from 1993 through 1997, differed in many cases, with the exception of funding for the National Science Foundation (NSF), which was nearly identical over that time period. For example, CCSP reported $143 million more funding for NASA in 1996 than OMB reported, and OMB reported $24.9 million more funding for DOE in 1994 than CCSP reported. The greatest dollar difference related to NASA’s funding in 1997. Whereas OMB reported funding of $1.22 billion, CCSP reported funding of $1.37 billion—$151 million, or 12 percent more than the OMB amount. The greatest percentage difference related to the Department of the Interior’s funding in 1993. Whereas OMB reported funding of $22 million, CCSP reported funding of $37.7 million—$15.7 million, or 71 percent more than reported by OMB. Further, from 1993 through 1997, OMB did not report science funding by some agencies that were reported by CCSP. For example, CCSP reported that DOD’s funding ranged from $5.7 to $6.6 million from 1993 through 1995, and that the Tennessee Valley Authority received funding of $1 million or less per year from 1993 through 1997, but OMB did not report any such funding. OMB officials told us that data used for the 1993 through 1997 science funding comparison with CCSP were collected too long ago to be able to identify the differences. However, they stated that the data from early years were produced in a very short period for use in testimony or questions for the record. According to OMB, this quick turnaround did not allow time for a thorough consistency check with other data sources. From 1998 through 2004, OMB and CCSP data on funding by agency were nearly identical. Both OMB and CCSP reported science funding for nine agencies over the entire 7-year period, for a total of 63 agency funding amounts. Of these, 52, or 83 percent, matched exactly. Of the 11 differences, there was one difference of $8 million, one of $2 million, and nine of $1 million or less. The greatest difference from 1998 through 2004 was $8 million in funding for the Department of Commerce in 2001, which was 9 percent of the Department of Commerce total, or less than 1 percent of total science funding as reported by OMB for that year. In addition to presenting data on funding by agency and total science funding, CCSP included more detailed science data in its Our Changing Planet reports. CCSP used several ways of categorizing data on science funding in its reports, but the data were difficult to compare over the entire time period because CCSP periodically introduced new categorization methods without explaining how the new methods could be compared with the ones they replaced. Specifically, from 1993 through 2004, in addition to reported funding by agency, CCSP used seven different methods to present detailed science funding data, making it impossible to develop consistent funding trends over the entire timeframe. For example, CCSP presented climate change science funding from 1993 through 1998 by budget function, a method that presents funding by agency in categories such as energy, agriculture, and natural resources and environment. CCSP presented science funding data for 1998 by budget function and also by research element, a new categorization method that divided funding by major components of the earth’s environmental systems, such as “Global Water Cycle” and “Atmospheric Composition.” In subsequent Our Changing Planet reports, CCSP continued to use the research element categorization method to present science funding, but stopped using the budget function method without explaining how the two methods compared to each other. As a consequence, the detailed science funding trends presented by budget function from 1993 through 1998 cannot be compared to funding presented by research element from 1998 through 2004. From 1999 through 2004, in addition to funding by agency, CCSP used two categorization methods, but these methods changed, making comparisons over time difficult. The two other categorization methods employed by CCSP included research element, described above, and program by agency, which listed funding by specific programs within each agency. Both of these methods changed from 1999 through 2004. For example, the research elements used to categorize funding in 2000 included “Understanding the Climate System,” “Understanding the Composition and Chemistry of the Atmosphere,” “Global Water Cycle,” “Global Carbon Cycle,” “Understanding Changes in Ecosystems,” “Understanding the Human Dimensions of Global Change,” and “Paleoclimate: The History of the Earth System.” In contrast, the research elements that were used to categorize 2004 funding eliminated the “Paleoclimate” element and added a “Land Use” element. Further, the program by agency categorization method became less detailed over time. For funding from 1993 through 2001, this method included comparable program descriptions and presented program-specific funding by agency. Reported funding for 2002, 2003, and 2004 generally continued this presentation style, but some agencies replaced the program- specific funding with less detailed funding categorizations. For example, from 1993 through 2000, CCSP presented detailed funding for certain NASA programs, including funding for the Earth Observing System, a series of satellites and advanced data systems designed to study clouds, atmospheric chemistry, and other processes. However, CCSP presented less detail for NASA’s funding from 2001 through 2004, and did not present funding by specific program over this time period. As a consequence, NASA’s funding for the Earth Observing System and other specific programs can no longer be identified in the CCSP reports. Similarly, CCSP presented less detail for NSF funding from 2002 through 2004. The director of CCSP told us that changes to reports, such as the creation and deletion of different categorization methods, were made because CCSP is changing towards a goals-oriented budget, and that categorization methods changed as the program evolved. The director also said that future reports will explicitly present budget data as they were reported in prior reports to retain continuity, even if new methods are introduced. Another CCSP official told us that CCSP now works with OMB to ensure that consistent funding information is presented in Our Changing Planet reports and OMB reports, and that, beginning with the fiscal year 2006 report (to be published in late-2005), CCSP will attempt to explain when and why changes are made to reporting methods. From 1993 through 2004, international assistance funding decreased from 9 percent to 5 percent of total federal funding on climate change, as reported by OMB. Over the same time period, international assistance funding increased from $201 million to $252 million (an increase of 25 percent), but after adjusting for inflation, decreased from $280 million to $252 million (a decrease of 10 percent). For example, reported funding for the Department of the Treasury to help developing countries invest in energy efficiency, renewable energy, and the development of clean energy technologies, such as fuel cells, increased from zero in 1993 to $32 million in 2004. Table 4 presents funding as reported by OMB for the three largest accounts in the international assistance category. Year-by-year data on international assistance funding are available in appendixes II and IV. International assistance funding reported by OMB was generally comparable over time, although some new accounts were added without explanation. For example, OMB reported climate change funding of $2 million in 2003 and $3 million in 2004 by USAID on the Andean Counterdrug Initiative, but OMB did not report funding for this account in previous years. According to OMB, the Andean Counterdrug Initiative promoted carbon capture and sequestration by reducing illicit coca production in Peru. In its reports, OMB did not provide an explanation of whether such new accounts reflected the creation of new programs or a decision to count existing programs as climate change-related for the first time. OMB officials told us that the presentation of new accounts in the international assistance category was due to the establishment of new programs and the inclusion of existing programs. They told us that the account-by-account display in the reports has been changed over time as climate change programs have become better defined. Although not required to provide information on tax expenditures related to climate change, OMB reported certain information related to climate- related tax expenditures for each year. Specifically, it listed proposed climate-related tax expenditures appearing in the President’s budget, but it did not report revenue loss estimates for existing climate-related tax expenditures from 1993 through 2004. Based on the Department of the Treasury’s tax expenditure list published in the 2006 budget, we identified four existing tax expenditures that have purposes similar to programs reported by OMB in its climate change reports. In 2004, estimated revenue losses amounted to hundreds of millions of dollars for the following tax expenditures: $330 million in revenue losses was estimated for new technology tax credits to reduce the cost of generating electricity from renewable resources. A credit of 10 percent was available for investment in solar and geothermal energy facilities. In addition, a credit of 1.5 cents was available per kilowatt hour of electricity produced from renewable resources such as biomass, poultry waste, and wind facilities. $100 million in revenue losses was estimated for excluded interest on energy facility bonds to reduce the cost of investing in certain hydroelectric and solid waste disposal facilities. The interest earned on state and local bonds used to finance the construction of certain hydroelectric generating facilities was tax exempt. Some solid waste disposal facilities that produced electricity also qualified for this exemption. $100 million in revenue losses was estimated for excluded income from conservation subsidies provided by public utilities to reduce the cost of purchasing energy-efficient technologies. Residential utility customers could exclude from their taxable income energy conservation subsidies provided by public utilities. Customers could exclude subsidies used for installing or modifying certain equipment that reduced energy consumption or improved the management of energy demand. $70 million in revenue losses was estimated for tax incentives for the purchase of clean fueled vehicles to reduce automobile emissions. A tax credit of 10 percent, not to exceed $4,000, was available to purchasers of electric vehicles. Purchasers of vehicles powered by compressed natural gas, hydrogen, alcohol, and other clean fuels could deduct up to $50,000 of the vehicle purchase costs from their taxable income, depending upon the weight and cost of the vehicle. Similarly, owners of refueling properties could deduct up to $100,000 for the purchase of re- fueling equipment for clean fueled vehicles. OMB officials said that they consistently reported proposed tax expenditures where a key purpose was specifically to reduce greenhouse gas emissions. They also stated that they did not include existing tax expenditures that may have greenhouse gas benefits but were enacted for other purposes, and that the Congress has provided no guidance to suggest additional tax expenditure data should be included in the annual reports. OMB’s decision criteria for determining which tax expenditures to include differed in two key respects from its criteria for determining which accounts to include. First, OMB presented funding for existing as well as proposed accounts, but presented information only on proposed, but not existing, tax expenditures. Second, OMB presented funding for programs where a key purpose was specifically to reduce greenhouse gas emissions, as well as for programs that may have greenhouse gas benefits but were enacted for other purposes. However, OMB presented information only on proposed tax expenditures where a key purpose was specifically to reduce greenhouse gas emissions. OMB reported that 12 of the 14 agencies that received funding for climate change programs in 2004 received more funding in that year than they had in 1993. However, it is unclear whether funding changed as much as reported by OMB because unexplained modifications in the reports’ contents limit the comparability of agencies’ funding data. From 1993 through 2004, climate change funding for DOE increased more than any other agency, from $963 million to $2.52 billion, for an increase of $1.56 billion (162 percent). Adjusted for inflation, such funding increased from $1.34 billion to $2.52 billion, for an increase of $1.18 billion (88 percent). The second largest increase in agency funding was for NASA, which received a $660 million (74 percent) increase in funding over the same time period. NASA’s funding increased $310 million (25 percent) over this period after adjusting for inflation. The funding increases for these two agencies accounted for 81 percent of the reported total increase in federal climate change funding from 1993 through 2004. Conversely, USAID experienced the largest decrease in funding—from $200 million in 1993 to $195 million in 2004 (3 percent), or, in inflation-adjusted terms, from $279 million to $195 million (30 percent). From 1993 through 2004, eight agencies’ funding increased as a share of the total federal funding for climate change, while the other six agencies’ funding decreased as a share of the total. DOE’s funding increased at a faster rate than other agencies from 1993 through 2004, meaning its share increased more than the funding shares of other agencies. For example, DOE’s share of total climate change funding increased from 41 percent in 1993, to 49 percent in 2004, for a share increase of almost 9 percent. The Environmental Protection Agency (EPA) experienced the next largest share increase from 1 percent of the total in 1993, to 2 percent of the total in 2004, for a share increase of 1 percent. By contrast, although NASA’s climate change funding increased by $660 million, its share decreased from 38 percent in 1993, to 30 percent in 2004, because its funding did not increase as fast as some other agencies, most notably DOE. Table 5 presents funding as reported by OMB for selected agencies. Year-by-year data on funding by agency are available in appendix III. Unexplained changes in the content of OMB reports limit the comparability of agencies’ funding data, and therefore it is unclear whether funding changed as much as was reported by OMB. Because agency funding totals are composed of individual accounts, the changes in the reports’ contents discussed earlier, such as the unexplained addition of accounts to the technology category, limit the comparability of agencies’ funding data over time. For example, OMB reported Army, Navy, Air Force, and Defense-wide funding totaling $83 million in 2003, and $51 million in 2004, in accounts titled Research, Development, Test, and Evaluation, but did not report these accounts for prior years. OMB did not explain whether these accounts reflected the creation of new programs or a decision to count existing programs for the first time. Accordingly, there is some uncertainty about DOD’s climate change funding over time. Similarly, OMB reported funding for other agencies in some years but not in others, without explanation. For example, OMB did not report any funding for the Department of Transportation from 2000 through 2002, but reported funding of $27 million in 2003, and $9 million in 2004, for the development of hydrogen fuel cells.OMB also presented $10 million of funding for the Department of Housing and Urban Development in 1999 and 2000, but in no other years. OMB officials told us that agencies can be included in reports for the first time when new initiatives or programs are started, such as the CCTP. In some cases, those initiatives or programs are made up of entirely new funding but in other cases they may be additions on top of a small amount of base funding. These officials told us that agencies sometimes include data that were not previously reported when they requested funding for those initiatives, but they assured us that the data are reported consistently for the 3 years presented in each report. The federal budget process is complex, and there are numerous steps that culminate in the outlay of federal funds. Among the key steps in this process are the following, as defined by OMB: Budget authority means the authority provided in law to incur financial obligations that will result in outlays. Obligations are binding agreements that will result in outlays, immediately or in the future. Outlays are payments to liquidate an obligation. The Congress, in the Congressional Budget and Impoundment Control Act of 1974, as amended, has defined outlays as being the expenditures and net lending of funds under budget authority. In simplified terms, budget authority precedes obligations, which precede outlays in the process of spending federal funds. As noted above, since 1999, the Congress has required the President to submit a report each year to the Senate and House Committees on Appropriations describing in detail all federal agency obligations and expenditures, domestic and international, for climate change programs and activities. In response, OMB has annually published the Federal Climate Change Expenditures Report to Congress that presents budget authority information in summary data tables instead of obligations and expenditures, as the title of the report and the table titles suggest. For example, although the March 2005 report’s summary table is entitled in bold as a “Summary of Federal Climate Change Expenditures,” the table’s data are presented in terms of budget authority. The only indication that the table presents budget authority information, rather than expenditures, is a parenthetical statement to that effect in a significantly smaller font. OMB officials told us that the term “expenditures” is used in the report title and text because that is the term used most often in the legislative language. They also said that the reports present data in terms of budget authority because OMB has always interpreted the bill and report language to request the budget authority levels for each activity in a particular year. They stated further that, from a technical budget standpoint, expenditures are usually synonymous with outlays, and that one way to think of budget authority is that it is the level of expenditures (over a period of one or more years) that is made available in a particular appropriations bill. OMB views this as an appropriate interpretation of the congressional requirements since the Committees on Appropriations work with budget authority and not outlays. Moreover, OMB told us that the Appropriations Committees have never objected to its interpretation of “obligations and expenditures” as budget authority and that OMB has always identified the data provided in the table as budget authority. We have several concerns with OMB’s approach. First, OMB’s approach of reporting budget authority does not comply with the language of the annual legal requirements to report on climate change “obligations and expenditures.” Second, in reviewing the legislative history of these reporting requirements, we found no support for OMB’s interpretation that when the Congress called for “obligations and expenditures” information, it actually meant “budget authority” information. Third, OMB’s interpretation is not consistent with its own Circular A-11, which defines budget authority as stated above, not as actual obligations and expenditures. Nonetheless, we recognize that it is not possible for OMB to meet the most recent reporting requirements because it must provide a report on climate change obligations and expenditures for the current fiscal year within 45 days of submitting the President’s budget for the following fiscal year (which must be submitted the first Monday of February). For example, the President submitted the fiscal year 2006 budget on February 7, 2005, so OMB’s report on fiscal year 2005 climate change expenditures and obligations had to be submitted in March 2005—approximately halfway through the 2005 fiscal year. However, complete expenditures data are available only after the end of each fiscal year. Thus, OMB could not meet both the timing requirement and report all actual expenditures and obligations in fiscal year 2005. CCSP has also reported budget authority data in its Our Changing Planet reports. As noted above, CCSP, or its predecessor organization, initially was required to report annually on certain climate change “amounts spent,” “amounts expected to be spent,” and “amounts requested,” but this reporting requirement was terminated in 2000. Currently, CCSP is responsible for reporting information relating to the federal budget and federal funding for climate change science, not climate change expenditure information. Since 2000, CCSP has fulfilled these reporting requirements by providing budget authority information in its Our Changing Planet reports. The Congress has required the administration to provide reports on federal climate change spending, funding, and requested funding. From year to year there were numerous changes in the format and content of OMB and CCSP reports, but the reasons for such changes have generally not been well explained. Consequently, these reports—taken collectively—do not provide a fully comparable picture of funding or spending trends, and the Congress and the public cannot consistently track federal climate change funding or spending over time. Accordingly, it is unclear whether funding or spending has changed as much as was reported. Even though the agencies have not been required to follow a consistent reporting format from one year to the next, we believe the Congress would have better information for policy decisions if OMB and CCSP clearly explained changes in report content and format when they occurred and communicated how such changes affected trends over time. Further, even though OMB is not required to include information on tax expenditures in its reports, it included certain information on proposed tax expenditures each year. In order to present a complete picture of federal resources supporting climate-related activities, we believe that OMB should also include information on existing tax expenditures. For the same reason, we believe that OMB should use the same criteria for determining what types of tax expenditures to include in its reports as it uses in determining which funding accounts to include. We found that OMB reports presented information on budget authority, not—as required by the Congress--on expenditures and obligations. OMB is aware of this discrepancy because it uses the term “expenditures” in the reports’ titles and tables, but presents budget authority data. Although OMB asserts that this approach is sufficient because the Committees on Appropriations have not objected, and while we recognize that it is not possible for OMB to meet both the substantive and timing requirements for the reports, we believe that OMB should take the initiative regarding future reporting requirements and request that the Congress specify that the reports should include budget authority information or provide OMB with additional time so that it can report actual expenditures and obligations. To better ensure that the Congress and the public can consistently track federal climate change funding or spending over time, we are making the following seven recommendations. We recommend that OMB and CCSP, from year-to-year, each use the same format for presenting data, to the extent that they may do so and remain in compliance with reporting requirements; explain changes in report content or format when they are introduced; provide and maintain a crosswalk comparing new and old report structures when changes in report format are introduced. We also recommend that OMB include information on existing climate-related tax expenditures in its use the same criteria for determining which tax expenditures to include as it uses for determining which accounts to include; request that the Congress clarify whether future reports should be presented in terms of expenditures and obligations or in terms of budget authority, and if the Congress prefers the former, OMB should request the necessary time to prepare reports on that basis; and if it continues to report budget authority rather than expenditures and obligations, clearly identify the information reported as budget authority throughout the report. We provided a draft of this report to the Director, OMB, and the Director, CCSP, for their review and comment. The Deputy Associate Director of OMB’s Natural Resources Division provided oral comments on August 1, 2005. He said that OMB agreed with most of our recommendations. Specifically, he said OMB agreed with our recommendations regarding the format and content of its reports, and was studying the recommendations on its presentation of tax expenditure data and use of budget terminology. The Director, CCSP, provided comments in a letter dated July 28, 2005, (see app. V). CCSP stated that the report presents a fair assessment of how CCSP documents and presents budget information, and agreed with all of our recommendations. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its issuance. At that time, we will send copies of this report to the Director, CCSP; Director, OMB; and other interested officials. We will 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. This report examines federal climate change funding from 1993 through 2004, as reported by OMB and CCSP to determine (1) how total funding and funding by category changed and the extent to which data on such funding are comparable over time and (2) how funding by agency changed and the extent to which data on such funding are comparable over time. To answer these objectives we analyzed annual reports and congressional testimony on climate change funding. If changes in the reports were not explained, we asked responsible officials to explain the changes. To examine whether OMB and CCSP reports presented the data required by the Congress, we reviewed the reporting requirements, the legislative history of the requirements, and the data provided by OMB and CCSP in their reports. OMB presented federal climate change funding from 1993 through 1998 in testimony before the Congress, and from 1999 through 2004 in annual reports. The administration also reported annually from 1993 through 2004 on funding for climate change science, one of the four categories used in OMB reports. The term “funding” in this report reflects discretionary budget authority, or the authority provided in law to incur financial obligations that will result in outlays, as reported by OMB and CCSP in their reports. For each annual report, OMB and CCSP generally presented estimated funding for the year of the report, actual funding for the previous year, and proposed funding for the next year. For example, OMB’s July 2002 report includes actual funding for fiscal year 2001, estimated funding for fiscal year 2002, and proposed funding for fiscal year 2003. We analyzed the most recently reported actual funding (not estimates) reported by OMB and CCSP. The exceptions were 1993, 1994, and 2004, where we present estimated science funding for CCSP. We consolidated actual funding data presented in OMB and CCSP reports and testimony. OMB reports presented climate change funding in four categories (technology, science, international assistance, and tax expenditures), and reports prior to 2002 also distinguished between direct and indirect climate change funding. We assembled a consolidated OMB account table (shown in app. IV) using the four category direct/indirect framework. We used OMB’s 1999 testimony (which presented funding data from 1993 through 1998) as the baseline for the consolidated table, and analyzed OMB’s annual reports to identify whether accounts listed in the reports matched those presented in the testimony. If the account matched an account from the testimony, we included the value for the existing account in the consolidated table. If the account was not presented in the testimony, we added the account to the consolidated table. We continued this process until the consolidated table presented in appendix IV included all the accounts reported by OMB from 1993 through 2004, and used a similar methodology to consolidate CCSP reports. We did not include accounts in the appendixes where OMB presented data on proposed, but not actual, funding. We calculated totals for some accounts using data presented by OMB in its reports. These accounts are labeled in appendix IV. After consolidating the OMB and CCSP report accounts, we developed totals for funding by category and agency for each year. We presented category totals as developed by OMB, when available, and calculated category totals when no OMB total was available. To develop agency funding totals, we identified accounts in appendix IV associated with each agency and summed them. However, OMB stated, and our analysis confirmed, that the sum of the accounts for a category or agency may not match the category or agency totals presented by OMB in its reports. According to OMB, the differences in account sums and category and agency totals were due to removal of programs that were counted in more than one account or category. OMB officials said they were unable to determine the effect of these double counts over time because they did not keep a single database with the report information for each year. Accordingly, we presented OMB category totals when they were available. If OMB did not present a funding category total, we calculated it by summing the accounts for each category. OMB presented agency funding totals for 2003 and 2004, but not for the other years. To ensure consistency over the entire time period, we calculated agency funding totals for all years by adding the accounts in appendix IV associated with each agency. In 2003 and 2004, the account sums we calculated and the agency totals presented by OMB were within $1 million of each other in all cases but one, 2004 funding for USAID. According to OMB, $6 million of USAID funding was presented in two different places in the report. Our methodology would have counted this $6 million twice, so we adjusted the USAID total to reflect OMB’s agency total. We did not adjust the agency totals we calculated in any other cases. CCSP reports already presented climate change science funding by agency. We then used the funding by agency, funding by category, and consolidated account tables to analyze funding trends over time and compare OMB and CCSP science totals. Funding by category is presented in appendix II, and funding by agency is presented in appendix III. To identify existing tax expenditures aimed at promoting energy conservation and encouraging supply of renewable and alternative energy, we reviewed the list of tax expenditures developed by the Department of the Treasury for the fiscal year 2006 budget. We present the estimated 2004 revenue losses due to these tax expenditures as reported in the Budget of the U.S. Government, Fiscal Year 2006 edition, Analytical Perspectives, chapter 19. We determined that the data available in the OMB and CCSP reports were sufficiently reliable for our purposes because the reports were supplements to the budget (in the case of CCSP) or assembled from the budget (in the case of OMB). Unless otherwise specified, we report funding in nominal terms (not adjusted for inflation), and all years refer to fiscal years. When we adjusted for inflation, to put the data in fiscal year 2004 dollars, we used a fiscal year price index that we calculated based on the calendar year price index in the National Income and Product Accounts Table 3.10.4: Price Indexes for Government Consumption Expenditures and General Government Gross Output, Line 34: Nondefense consumption expenditures, published by the Department of Commerce’s Bureau of Economic Analysis. In this report, the term “agency” includes executive departments and agencies, and we use the term “account” to describe the budget accounts, line items, programs, and activities presented in the OMB and CCSP reports. For consistency, we characterize all Our Changing Planet reports from 1993 through 2004 as CCSP reports, even though CCSP has been in existence only since 2002, and prior reports were published by the USGCRP. Totals and percentages may not add due to rounding. For presentation purposes, we show federal climate change funding for 1993, 1997, 2001, and 2004 in report tables. Funding data for 1993 through 2004 are available in appendixes II, III, and IV. We performed our work between July 2004 and August 2005 in accordance with generally accepted government auditing standards. In addition to the individual named above, David Marwick, Assistant Director, Anne K. Johnson, and Joseph D. Thompson made key contributions to this report. Also, John Delicath, Anne Stevens, and Amy Webbink made important contributions. | The Congress has required the administration to report annually on federal spending on climate change. The Office of Management and Budget (OMB) reports funding in four categories: technology (to reduce greenhouse gas emissions), science (to better understand the climate), international assistance (to help developing countries), and tax expenditures (to encourage reductions in emissions). The Climate Change Science Program (CCSP), which coordinates many agencies' activities, reports only on science. To measure funding, OMB and CCSP use budget authority, the authority provided in law to enter into financial obligations that will result in government outlays. GAO was asked to examine federal climate change funding for 1993 through 2004, as reported by both agencies, including (1) how total funding and funding by category changed and whether funding data are comparable over time and (2) how funding by agency changed and whether funding data are comparable over time. Federal funding for climate change increased from $2.4 billion in 1993 to $5.1 billion in 2004 (116 percent), as reported by OMB, or from $3.3 billion to $5.1 billion (55 percent) after adjusting for inflation. During this period, inflation-adjusted funding increased for technology and science, but decreased for international assistance. The share for technology increased (36 to 56 percent), while the shares for science and international assistance decreased (56 to 39 percent and 9 to 5 percent, respectively). However, it is unclear whether funding changed as much as reported because modifications in the format and content of OMB reports limit the comparability of funding data over time. For example, OMB reported that it expanded the definitions of some accounts to include more activities, but did not specify how it changed the definitions. Also, while OMB's totals for science funding were generally comparable to CCSP's totals, the more detailed data in CCSP reports were difficult to compare over time because CCSP introduced new categorization methods without explaining how they related to the previous methods. OMB officials stated that changes in their reports were due, in part, to the short timeline for completing them, and that it has not been required to follow a consistent reporting format from one year to the next. The Director of CCSP said that its reports changed as the program evolved. GAO was unable to compare climate-related tax expenditures over time because OMB reported data on proposed, but not on existing tax expenditures. For example, while OMB reported no funding for existing climate-related tax expenditures in 2004, GAO identified four such tax expenditures in 2004, including revenue loss estimates of $330 million to develop certain renewable energy sources. OMB reported that 12 of the 14 agencies that funded climate change programs in 2004 increased such funding between 1993 and 2004, but unexplained changes in the reports' contents limit the comparability of data on funding by agency. GAO found that OMB reported funding for certain agencies in some years but not in others, without explanation. For example, OMB reported funding of $83 million for the Department of Defense in 2003, but did not list any such funding in prior reports. OMB told GAO that it relied on agency budget offices to submit accurate data. |
The serious breakdown in internal controls at the SPAWAR Systems Center San Diego and the Navy Public Works Center San Diego are the result of a weak overall internal control environment, flawed or nonexistent policies and procedures, and employees that do not adhere to valid policies. We found significant problems with every aspect of purchase card management that we reviewed at SPAWAR and the Navy Public Works Center. To fix these problems, SPAWAR and Navy Public Works Center management will need to demonstrate leadership in this area and establish accountability, proper incentives, and consequences for their employees in order to ensure acceptable behavior. The following are our recommendations to address the key findings related to the weak management control environment discussed in our testimony. Proliferation of Cardholders We recommend that the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego work with the Naval Supply Systems Command and DOD’s Purchase Card Joint Program Management Office to do the following. Establish specific policies and strategies governing the number of purchase cards to be issued with a focus on minimizing the number of cardholders. Develop criteria for identifying employees eligible for the privilege of cardholder status. As part of the effort to develop these criteria, assess the feasibility and cost-benefit of performing credit checks on employees prior to assigning them cardholder responsibilities to ensure that employees authorized to use government purchase cards have demonstrated credit worthiness and financial integrity. Develop policies and strategies on credit limits provided to cardholders with a focus on minimizing specific cardholder spending authority and minimizing the federal government’s financial exposure. We recommend that the Commander of the Naval Supply Systems Command confirm that required training has been completed and documented, and incorporate into purchase card training programs any relevant changes in policies and procedures made as a result of the recommendations in this report. We recommend that the Commander of the Naval Supply Systems Command work with the Navy Comptroller and the Defense Finance and Accounting Service to investigate ways to maximize potential rebates, such as (1) working with Citibank to facilitate timely receipt of monthly purchase card statements and (2) reducing the time associated with mailing and receipt of hard copy billing statements, establish effective policies and procedures for routinely calculating and verifying Citibank rebates, and develop guidance for routine distribution of rebate earnings to Navy units and activities. We recommend that the Commander of the Naval Supply Systems Command establish in NAVASUP Instruction 4200.94, further guidelines for an effective internal review program, such as having reviewers analyze monthly summary statements to identify (1) potentially fraudulent, improper, and abusive purchases and (2) any patterns of improper cardholder transactions, such as purchases of food or other prohibited items, revise NAVSUP Instruction 4200.94 to require that (1) written reports on the results of internal reviews along with any recommendations for corrective actions be prepared and submitted to local management and cognizant commands and (2) commands identify and report systemic weaknesses and corrective action plans to the Naval Supply Systems Command for monitoring and oversight, require purchase card Agency Program Coordinators to report in writing to the unit commander and the Commander of Naval Supply Systems Command any internal control weakness identified during the semiannual program reviews, and disclose systemic purchase card control weaknesses along with corrective action plans in the Secretary of the Navy’s Annual Statement of Assurance prepared under 31 U.S.C. 3512(d) (commonly referred to as the Federal Managers’ Financial Integrity Act of 1982). The following are our recommendations to address breakdowns in key controls over the purchase card program at the SPAWAR Systems Center San Diego and the Navy Public Works Center San Diego. the Commander of the Naval Supply Systems Command revise NAVSUP Instruction 4200.94 to eliminate ambiguous language suggesting that advance independent authorization of a purchase can be substituted for independent confirmation that goods and services ordered and paid for with a purchase card have been received and accepted by the government, and the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego implement procedures to require and document independent confirmation of receipt of goods and services acquired with a purchase card. To provide assurance that certifications of monthly purchase card statements for payment reflect certifying officer responsibilities in 31 U.S.C. 3325, 3528, and the approving official’s informed judgment that purchases are proper, we recommend that the Commander of the Naval Supply Systems Command revise NAVSUP Instruction 4200.94 to require that (1) cardholders notify approving officials prior to payment that purchase card statements have been reconciled to supporting documentation, (2) approving officials certify monthly statements only after reviewing them for potentially fraudulent, improper, and abusive transactions, and (3) approving officials verify, on a sample basis, supporting documentation for various cardholders’ transactions prior to certifying monthly statements for payment, and the Navy Comptroller withdraw the June 3, 1999, policy memorandum or revise the policy guidance to be consistent with the preceding recommendation for revising payment certification guidance in NAVSUP Instruction 4200.94. the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego monitor and confirm that purchase card transactions are recorded to projects that benefited from the goods and services or to relevant overhead accounts in a timely manner, in accordance with internal control standards and federal accounting standards, the Commander of the Naval Supply Systems Command revise NAVSUP Instruction 4200.94 to require that purchase card expenses be properly classified in the Navy’s detail accounting records, and the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego verify that their detail purchase card transaction records reflect the proper object classification of expense. We recommend that the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego require and verify that accountable property obtained using a purchase card is promptly recorded in property records as it is acquired, in accordance with DOD and Navy policies and procedures. The following are our recommendations to identify and address potentially fraudulent, abusive and improper purchase card transactions prior to payment. We recommend that the Commander of the Naval Supply Systems Command do the following. Act immediately to cancel all known active compromised purchase card accounts. Determine whether purchases of excessive cost, questionable government need, or both, such as items for personal use, including personal digital assistants (such as Palm Pilots), and flat screen computer monitors, that were identified by GAO are proper government purchases. If not, the Commander should prohibit their purchase. Establish written policies and criteria requiring documented justifications and procurement management approval for types of items that can be acquired with a government purchase card. Examine purchase card acquisition guidance to determine whether the purchase card is the right vehicle for acquiring certain goods and services, such as vehicle and equipment maintenance, installation of upgraded computer software, and other recurring or installationwide services, or whether these items should be subject to negotiated contracts. Work with the Under Secretary for Acquisition, Technology, and Logistics and DOD’s Purchase Card Joint Program Office to determine whether the purchase card should be used to acquire computers and other equipment or property items individually that could be more economically and efficiently procured through bulk purchases. Revise NAVSUP Instruction 4200.94 to make the Instruction consistent with the Federal Acquisition Regulation, 48 C.F.R. 13.301(a), which states that the “card may be used only for purchases that are otherwise authorized by law or regulation.” The clarifying guidance should specifically state that in the absence of specific statutory authority, purchases of items for the personal benefit of government employees, such as flowers or food, are not permitted and are therefore improper transactions. We recommend that the Commanding Officer of the SPAWAR Systems Center San Diego and the Commanding Officer of the Navy Public Works Center San Diego prohibit splitting purchases into multiple transactions as required by the Federal Acquisition Regulation and emphasize this prohibition in purchase card training provided to cardholders and approving officials, and require approving officials to monitor monthly purchase card statements and identify and report to them regarding any split purchases and the names of cardholders who made the transactions. To help ensure that cardholders adhere to applicable purchase card laws, regulations, internal control and accounting standards, and policies and procedures, we recommend that the Commander of the Naval Supply Systems Command revise NAVSUP Instruction 4300.94 to include specific consequences for noncompliance with these guidelines and enforce the guidelines. In commenting on a draft of this report, DOD stated that it was in overall agreement with 19 of our 29 recommendations. DOD did not concur with three recommendations, and it partially concurred with seven other recommendations. In addition, DOD indicated that the SPAWAR Systems Center San Diego and the Navy Public Works Center San Diego have initiated or completed corrective actions on certain of our recommendations. We plan to assess the adequacy and effectiveness of the corrective actions during the next few months and advise you of the results of our assessment. The DOD comment letter is reprinted in appendix II. The recommendations that DOD disagreed with related to four major issues addressed in our work—(1) the need for specific policies and strategies on minimizing the number of cardholders, (2) the need for Navy- wide criteria on the types of items that can be acquired using a government purchase card, (3) whether their purchases of food and flowers are proper, and (4) the need for Navy guidelines setting forth specific consequences for noncompliance with applicable purchase card laws, regulations, internal controls and accounting standards, and policies and procedures. DOD stated that the Navy executes the department’s purchase card program in a decentralized manner consistent with DOD policy. We are concerned that the lack of adequate Navy-wide guidance and the delegation of policy-making responsibility to local commands without Navy Department oversight will continue to result in a weak management control environment and the types of problem transactions identified in this report. We plan to examine this issue as part of our ongoing, broader review of the Navy's purchase card program. DOD stated that it believed that the intent of our recommendation to establish specific policies and strategies governing the number of credit cards to be issued was to encourage a manageable span of control between billing officials and cardholders. DOD maintained that in accordance with DOD policy, the Navy's decentralized execution of the purchase card program allows individual commands to issue purchase cards to employees as mission requirements warrant. DOD noted that the Naval Supply Systems Command’s recently released policy implementing DOD “Span of Control Goals” will result in approving officials being responsible for review and payment certification of a reasonable number of cardholder statements. DOD's "Span of Control Goals" states that as a general rule, billing officials should have no more than five to seven cardholders assigned to them for oversight. We agree with DOD that our recommendation is intended, in part, to ensure a manageable span of control between approving, or billing, officials and cardholders. At SPAWAR, we found only one approving official responsible for reviewing and certifying payment of 1,526 cardholders' monthly purchase card statements, creating a substantial span of control issue. Providing several hundred approving officials to create a reasonable span of control over SPAWAR's 1,526 cardholders would not be a practical or economical course of action for SPAWAR. We found no valid justification for 1,526, 36 percent, of SPAWAR's employees to have purchase cards. Further, the intent of our recommendation is broader than the span of control issue. We are also concerned about the financial exposure associated with the excessive number of cardholders. As stated in our testimony, the two Navy units had given purchase cards to over 1,700 employees, most of whom had credit limits of $20,000 or more and the authority to make their own purchase decisions. For example, most of SPAWAR's 1,526 cardholders had a $25,000 credit limit and most of the Navy Public Works Center's 254 cardholders had a $20,000 credit limit. The proliferation of cardholders, particularly at SPAWAR San Diego, significantly increased the government's financial exposure and created a situation where it was virtually impossible to maintain a positive control environment. To reduce the financial exposure associated with the large number of cardholders, we continue to recommend that the two Navy commands establish specific policies and strategies governing the number of purchase cards to be issued with a focus on minimizing the number of cardholders. In addition, the Naval Supply Systems Command guidance implementing the Department's "Span of Control Goals" merely restates DOD’s guideline that approving officials should have no more than five to seven cardholders under their purview—it does not provide specific guidance for reducing the number of cardholders. DOD also stated that the criteria for employees being issued purchase cards should be a function of mission requirements and the level of trust between the cardholder and supervisor. Further, DOD stated that the Navy believes the supervisor's judgment is sufficient as to the trustworthiness of the employee to obligate on the part of the government. We continue to believe that DOD should assess the feasibility and cost benefit of performing credit checks on employees prior to issuing a purchase card. Individuals who have a history of personal credit problems are more likely to improperly use their government purchase cards if their access to personal credit has been limited. In fact, our review of the Navy purchase card fraud cases discussed in our testimony shows this to be true for at least one of the cases. Further, as discussed in our testimony, we identified several cases of potentially fraudulent, improper, and abusive transactions at both the SPAWAR Systems Center San Diego and the Navy Public Works Center San Diego that had been certified as proper for payment. We are continuing to investigate several of these cases as part of our follow-up work and plan to assess the correlation between fraudulent, abusive, and improper use of the government purchase card and cardholders who have personal credit problems. DOD stated that it is the responsibility of the local Navy commands to establish written policies and procedures and ensure that purchases are made for official use, meet mission requirements, and are made at a fair and reasonable price. DOD also stated that due to differing and unique mission requirements throughout the Navy, it is difficult to develop a general listing of what items can be purchased with or without special justification. For example, DOD stated that ticket purchases to Disneyland may be an appropriate purchase not requiring special justification within a “Non-Appropriated Funded activity,” but may require such documentation for an “Appropriated Funded activity.” We continue to believe there is a need for Navy-wide guidance in the form of written policies and criteria requiring documented justifications and procurement management approval for types of items can be acquired with a government purchase card. For example, we found some instances where employees were buying flat panel monitors costing from $800 to $2,500 each while others were buying traditional monitors costing about $300 each. In addition, at SPAWAR, we found that employees made abusive purchases of high-cost personal items, including two designer brief cases costing about $400 each and several designer palm pilot cases costing about $100 each. In these instances, the decision of what to buy and the quality of the items purchased often appeared to be a matter of cardholder preference. Further, the fact that such purchases were not questioned supports our recommendation that specific written guidelines be established for purchases of these types of items. DOD’s example of the purchase of tickets for Disneyland is another example of the type of purchase card use that should be specifically addressed in the NAVSUP Instruction 4200.94 to avoid misuse of the card and abusive purchases. Establishing criteria for determining the propriety of purchases of high- cost items and prohibiting the purchase of personal preference items, such as designer brief cases and designer palm pilot cases, would help prevent abusive purchases in the future and avoid unnecessary federal expenditures. DOD stated that the present language in the policy section of NAVSUP Instruction 4200.94 provides clear guidance on the propriety of buying food and flowers using the purchase card. We disagree. The policy section of NAVSUP Instruction 4200.94 merely states that the “purchase card shall only be used for authorized U.S. Government purchases.” We found numerous potentially fraudulent, improper, and abusive purchases that had been approved by supervisors as authorized government purchases. The Federal Acquisition Regulation (FAR), 48 C.F.R. 13.301(a), states that the Governmentwide Commercial Purchase Card "may be used only for purchases that are otherwise authorized by law or regulations." Therefore, a procurement using the purchase card is lawful only if it would be lawful using conventional procurement methods. Further, the Treasury Financial Manual (TFM) requires agencies to establish guidance on approved uses of the government purchase card and limitations on types of transactions permitted. The NAVSUP Instruction 4200.94 policy statement does not address these specific purchase card requirements of the FAR or the TFM. As stated in our testimony, without statutory authority, appropriated funds may not be used to furnish meals or refreshments to employees within their normal duty stations. Free food and other refreshments normally cannot be justified as a necessary expense of an agency's appropriation because these items are considered personal expenses that federal employees should pay for from their own salaries. Likewise, appropriated funds may not be used to purchase gifts for employees or others unless an agency can demonstrate that the items further the purposes for which the appropriation was enacted. The purchase of the flowers and food were both personal rather than official in nature and, therefore, may not be paid for with appropriated funds. Given the problems we found, clarifyng the current guidance on the propriety of purchasing food, flowers, and similar personal items could help reduce improper purchase card use for these items. DOD stated that the present language in the NAVSUP Instruction 4200.94 policy section clearly identifies the consequences for fraud, abuse, and misuse of the purchase card. We disagree. The policy section of the NAVSUP Instruction only states that deliberate misuse of the purchase card may be prosecuted as fraud. It does not identify any specific consequences for failure to follow control requirements, such as the failure to (1) obtain independent documentation of receipt and acceptance of goods and services, (2) notify property book officers of accountable items acquired with a purchase card, (3) properly certify purchase card statements for payment, and (4) comply with prohibitions on certain purchases and split transactions. Our work identified pervasive failures to follow established controls in these and other areas. To ensure that the Navy's purchase card controls are effective, it is critical that the Navy enforce those controls by establishing specific disciplinary consequences—such as removal of cardholder status, reprimands, suspension from employment for several days, and firing—for those employees who fail to follow established controls even if their action does not amount to fraud against the United States. Unless cardholders and approving officials are held accountable for following key internal controls, the Navy is likely to continue to experience the types of fraudulent, abusive, and improper transactions identified in our work. As agreed with your offices, unless you announce the contents of this report earlier, we will not distribute this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of Defense, the Under Secretary of Defense (Acquisition, Technology, and Logistics), the Director of the Department’s Purchase Card Joint Program Management Office, the Under Secretary of Defense (Comptroller), the Secretary of the Navy, the Navy Comptroller, the Commander of the Naval Supply Systems Command, the Commander of the Space and Naval Warfare Systems Command, the Commanding Officer of the Space and Naval Warfare Systems Command’s Systems Center in San Diego, the Commander of the Navy Public Works Center, the Commanding Officer of the Navy Public Works Center in San Diego, and the Director of the Defense Finance and Accounting Service. We are also sending copies to the Chairman of the Senate Committee on Finance; the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member of the House Committee on Government Reform; the Ranking Minority Member of the Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, House Committee on Government Reform; other interested congressional committees; and the Director of the Office of Management and Budget. Copies will be made available to others upon request. Please contact Gregory D. Kutz at (202) 512-9095 or [email protected], Robert H. Hast at (202) 512-7455 or [email protected], or Gayle Fischer, Assistant Director at (202) 512-9577 or [email protected], if you or your staff have any questions concerning this report. Major contributors to this work are acknowledged in appendix III. Mr. Chairman, Members of the Subcommittee, and Senator Grassley: Thank you for the opportunity to discuss Department of Defense (DOD) internal controls and accounting practices for purchase card transactions and payments. DOD reported that it used purchase cards—MasterCard or VISA cards issued to its civilian and military personnel—for more than 10 million transactions valued at $5.5 billion in fiscal year 2000. DOD has increased the use of purchase cards with the intention of eliminating the bureaucracy and paperwork long associated with making small purchases and intends to expand the use of purchase cards over the next several years. Given the rapid growth of purchase card use at DOD, ensuring that key controls are in place over the program is critical to protecting the government from fraud, waste, and abuse. We began looking into this issue at the request of Senator Grassley, who was concerned about internal control weaknesses that may have contributed to reports of purchase card fraud related to Navy programs based in San Diego, California. As a result, we agreed to obtain and review DOD fraud case information related to Navy purchase card programs in the San Diego area and to review purchase card controls and accounting for two Navy units based in San Diego—the Space and Naval Warfare Systems Command (SPAWAR) Systems Center and the Navy Public Works Center. Further background information on the Navy purchase card program is included in appendix I. Today, I will discuss the results of our review of Navy purchase card controls, including (1) the purchase card control environment at the two Navy units’ San Diego activities and overall management issues that affect the Navy-wide purchase card program, (2) the results of our test work on statistical samples of purchase card transactions at the two Navy units, which identified control weaknesses in four critical areas, and (3) potentially fraudulent, improper, and abusive transactions made by the two Navy units. Some of these transactions are similar to those involved in five specific fraud cases related to Navy programs based in San Diego that had been identified at the time of our work. Information on the five fraud cases is presented in appendix II. The Navy’s purchase card program is part of the Governmentwide Commercial Purchase Card Program, which was established to streamline federal agency acquisition processes by providing a low-cost, efficient vehicle for obtaining goods and services directly from vendors. DOD reported that it used purchase cards for 95 percent of its eligible transactions—more than 10 million transactions, valued at $5.5 billion—in fiscal year 2000. The Navy’s reported purchase card activity represented nearly one third of the reported DOD total during fiscal year 2000—2.7 million transactions, valued at $1.7 billion. According to unaudited DOD data, SPAWAR and Navy Public Works Center San Diego-based activities accounted for $68 million (about 15 percent) of the $451 million in fiscal year 2000 Navy purchase card payments processed by DFAS San Diego. Although SPAWAR San Diego and the Navy Public Works Center San Diego are both working capital fund activities, their missions are very different. SPAWAR San Diego is a highly technical systems operation staffed by scientists and engineers who provide research, technology, and engineering support to other Navy programs worldwide. The Navy Public Works Center San Diego provides maintenance, construction, and operations support to other Navy programs in the San Diego area. Under the Federal Acquisition Streamlining Act of 1994, the Defense Federal Acquisition Regulation Supplement guidelines, eligible purchases include (1) micro-purchases (transactions up to $2,500 for which competitive bids are not needed); (2) purchases for training services up to $25,000; and (3) payment of items costing over $2,500 that are on the General Services Administration’s (GSA) pre-approved schedule, including items on requirements contracts. The streamlined acquisition threshold for such contract payments is $100,000. Accordingly, cardholders may have single transaction purchase limits of $2,500 or $25,000, and a few cardholders may have transaction limits of up to $100,000 or more. Under the GSA blanket contract, the Navy has contracted with Citibank for its purchase card services, while the Army and the Air Force have contracted with U.S. Bank. the Assistant Secretary of the Army for Acquisition, Logistics, and Technology, has established departmentwide policies and procedures governing the use of purchase cards. The Under Secretary of Defense (Comptroller) has established related financial management policies and procedures in various sections of DOD’s Financial Management Regulation. The Navy Supply Systems Command is responsible for the overall management of the Navy’s purchase card program, and has published the Navy Supply Command (NAVSUP) Instruction 4200.94, Department of the Navy Policies and Procedures for Implementing the Governmentwide Purchase Card Program. Under the NAVSUP Instruction, each Navy Command’s head contracting officer authorizes purchase card program coordinators in local Navy units to obtain purchase cards and establish credit limits. The program coordinators are responsible for administering the purchase card program within their designated span of control and serve as the communication link between Navy units and the purchase card issuing bank. When a supervisor requests that a staff member receive a purchase card, the agency program coordinator is to first provide training on purchase card policies and procedures and then establish a credit limit and issue a purchase card to the staff member. The Navy had a total of about 1,700 purchase card program coordinators during fiscal year 2000, including one program coordinator at SPAWAR San Diego and one at the Navy Public Works Center San Diego. Purchase cardholders are delegated contracting officer ordering responsibilities, but they do not negotiate or manage contracts. SPAWAR San Diego and Navy Public Works Center San Diego cardholders use purchase cards to order goods and services for their units as well as their customers. Cardholders may pick up items ordered directly from the vendor or request that items be shipped directly to end users (requestors). Upon receipt of items acquired by purchase cards, cardholders are to record the transaction in their purchase log and obtain independent confirmation from the end user, their supervisor, or another individual that the items have been received and accepted by the government. They are also to notify the property book officer of accountable items received so that these items can be recorded in the accountable property records. The purchase card payment process begins with receipt of the monthly purchase card billing statements. Section 933 of the National Defense Authorization Act for Fiscal Year 2000, Public Law 106-65, requires DOD to issue regulations that ensure that purchase card holders and each official with authority to authorize expenditures charged to the purchase card reconcile charges with receipts and other supporting documentation. NAVSUP Instruction 4200.94 states that upon receipt of the individual cardholder statement, the cardholder has 5 days to reconcile the transactions appearing on the statement by verifying their accuracy to the transactions appearing on the statement and notify the approving official in writing of any discrepancies in the statement. In addition, under the NAVSUP Instruction, the approving official is responsible for (1) ensuring that all purchases made by the cardholders within his or her cognizance are appropriate and that the charges are accurate and (2) the timely certification of the monthly summary statement for payment by DFAS. The Instruction further states that within 5 days of receipt, the approving official must review and certify for payment the monthly billing statement, which is a summary invoice of all transactions of the cardholders under the approving official’s purview. The approving official is to presume that all transactions on the monthly statements are proper unless notified in writing by the purchase cardholder. However, the presumption does not relieve the approving official from reviewing for blatant improper purchase card transactions and taking the appropriate action prior to certifying the invoice for payment. In addition, the approving official is to forward disputed charge forms to the unit’s comptroller’s office for submission to Citibank for credit. Under the Navy’s contract, Citibank allows the Navy up to 60 days after the statement date to dispute invalid transactions and request a credit. generates a tape for payment by electronic funds transfer to the purchase card bank, and sends the file to the accounting station for recording the payment as a summary record in the Navy’s accounting system. Figure 1 illustrates the current purchase card payment process used by SPAWAR and the Naval Public Works Center in San Diego. The Navy earns purchase card rebate revenue from Citibank of up to 0.8 percent based on sales volume (purchases) and payment timeliness. According to the DOD Deputy Director of DOD’s Purchase Card Joint Program Management Office, rebate revenue is generally to be recorded to the purchase card statements and used to offset monthly charges. Pursuant to Senator Grassley’s request, we identified five fraud cases related to Navy programs based in the San Diego, California, area and investigated by the Naval Criminal Investigative Service (NCIS). All of these cases can be linked to the types of internal control weaknesses discussed in this testimony. Of these five cases, two involved Navy Public Works Center San Diego employees and one involved 2,600 compromised purchase card accounts, including 22 currently active SPAWAR San Diego accounts. One of the remaining cases, which has been concluded, was related to a fraud that occurred at the Navy’s Millington (Tennessee) Flying Club—an activity of the Navy Morale, Welfare, and Recreation entity, which is based in San Diego. The other case involved a military officer and other service members who were assigned to the Marine Corps Station in Miramar, near San Diego. The first San Diego-related purchase card fraud case is an example of the lack of segregation of duties. This case involved the cardholder at the Navy’s Millington (Tennessee) Flying Club, an entity of the U.S. Navy’s Morale, Welfare, and Recreation activity, which is based in San Diego, California. The cardholder, who was having financial problems, was hired by her stepfather, who was the club’s treasurer. The stepfather delegated nearly all purchase card duties to the cardholder, as well as the authority for writing checks to pay the Flying Club’s monthly purchase card statements. The cardholder made over $17,000 in fraudulent transactions to acquire personal items from Wal-Mart, The Home Depot, shoe stores, pet stores, boutiques, an eye care center, and restaurants over an 8-month period from December 1998 through July 1999. The fraud was identified when the club’s checking account was overdrawn due to excessively high purchase card payments and a bank official contacted the president of the Flying Club. The cardholder pleaded guilty and was sentenced to 15 months in jail and assessed about $28,486 in restitution due to purchase card fraud and bounced checks. The defendant commented that illegal use of the card was “too easy” and that she was the sole authorizer of the card purchases. documentation of independent confirmation of receipt and acceptance and recording accountable items in property records would have made detection easier. In this instance, the military officer allegedly conspired with cardholders under his supervision to make nearly $400,000 in fraudulent purchases from five companies—two that he owned, one owned by his sister, and the other two owned by friends or acquaintances. They charged thousands of dollars for items such as DVD players, Palm Pilots, and desktop and laptop computers. The officer also allegedly made cash payments to employees to keep silent about the fraud and provided auditors with falsified purchase authorizations and invoices to cover the fraud. The fraud occurred from June 1999 through September 2000. The total amount of the alleged fraud is unknown. The alleged fraud was identified based on a tip from a service member. The U.S. Attorney’s Office in San Diego has accepted the case for prosecution and four other active service members are under investigation. The third case involved a Navy Public Works Center San Diego maintenance/construction supervisor who allegedly made at least $52,000 in fraudulent transactions to a suspect contractor on work orders for which the work was not performed by that contractor. Adequate monitoring of purchase card transactions along with enforcing controls such as independent, documented receipt and acceptance and recording accountable items in property books would have made detection easier. Navy investigators believe that the employee also may have used his government purchase card to make unauthorized purchases for personal use, including jewelry, an air conditioner, and other personal items from The Home Depot from April 1997 through October 1998. The total amount of this alleged purchase card fraud is unknown. The alleged fraud was identified when the employee’s supervisor reviewed Navy Public Works Center work orders and noticed that four work orders totaling approximately $7,000 were completed by the employee and paid for with the suspect’s government purchase card. Further inquiry by the supervisor revealed that Navy Public Works Center employees, not the contractor, had completed the work. NCIS investigators and Naval Audit Service auditors identified approximately $52,000 in purchase card transactions made by the employee to a suspect contractor for work that was performed by either the Public Works Center or other legitimate contractors. The employee has resigned and an investigation by the Federal Bureau of Investigation and NCIS is ongoing. The U.S. Attorney’s Office in San Diego has accepted the case for prosecution. The fourth case involved a Navy Public Works Center San Diego purchasing agent that allegedly made at least $12,000 in fraudulent purchases and planned to submit approximately $103,000 in fraudulent disputed charge forms, including payments for hotels, airline tickets, computers, phone cards, and personal items from The Home Depot. The alleged fraud occurred from April 1997 through July 1999. As with the other cases, adequate monitoring of purchase card transactions along with enforcing controls such as independent, documented receipt and acceptance and recording accountable items in property books would have made detection easier. The alleged fraud was identified during an investigation of a possible bribery/kickback scheme. The employee has resigned and an NCIS investigation is ongoing. The U.S. Attorney’s Office in San Diego has accepted the case for prosecution. The fifth Navy purchase card fraud case is ongoing and involves the compromise of up to 2,600 purchase card accounts assigned to Navy activities in the San Diego area. Investigators were only able to obtain a partial list consisting of 681 compromised accounts so the exact number is not known. At least 45 of the compromised accounts were for SPAWAR San Diego and one of the compromised accounts was for the Navy Public Works Center in San Diego. Of these 46 compromised accounts, 22 SPAWAR San Diego accounts were still active in May 2001. None of the active accounts on the partial listing found by investigators were for the Navy Public Works Center San Diego. Although the account numbers showed up on a computer printer in a community college library in San Diego in September 1999, the Navy has not canceled all of the compromised accounts. Instead, according to NCIS and Navy Supply Command officials, the Navy is canceling the compromised accounts as fraudulent transactions are identified. Naval Supply Systems Command, SPAWAR San Diego, and Navy Public Works Center San Diego officials told us that they were aware of this incident but did not have a listing of the account numbers affected. As a result, the Navy did not take any measures to flag the compromised accounts and implement special monitoring procedures to detect any potential fraudulent use of these accounts. associated with the 22 compromised accounts showed that SPAWAR continued to have an aggregate monthly financial exposure of $900,000 associated with these accounts nearly 2 years after the compromised list was discovered in a San Diego community college library in September 1999. Further, with the lack of controls over receipt of goods and certification of purchase card statements that we identified at the two activities we reviewed, it is impossible for the Navy to identify fraudulent purchases as they occur or to determine the extent of the fraudulent use of the compromised accounts. As a result, when fraudulent use of one of the comprised accounts was identified, the Navy could not determine if the incident was due to cardholder fraud or use of the compromised account by an outside party. A joint task force in San Diego, comprised of NCIS, the U.S. Secret Service, local police, and the U.S. Attorney’s Office, investigated this fraud. The task force investigators recently traced the list of compromised accounts to a vendor used by the Navy, which acknowledged that the list came from its database. The vendor identified two former employees as possible suspects. Pursuant to Senator Grassley’s request, we obtained and reviewed information on five fraud cases related to Navy purchase card programs in the San Diego, California, area and to review purchase card controls and accounting for two Navy units based in San Diego—the Space and Naval Warfare Systems Command (SPAWAR) Systems Center and the Navy Public Works Center. Our assessment of SPAWAR San Diego and the Navy Public Works Center San Diego purchase card controls covered the overall management control environment, including (1) span of control issues related to the number of cardholders, (2) training for cardholders and accountable officers, (3) management of rebates, and (4) monitoring and audit of purchase card activity; tests of statistical samples of key controls over purchase card transactions, including (1) documentation of independent confirmation that items ordered by purchase card were received, (2) proper certification of purchase card statements for payment, and (3) proper accounting for purchase card transactions; substantive tests of accountable items in our sample transactions to verify whether they were recorded in property records and whether they could be found; and analysis of the universe of transactions to identify (1) any potentially improper, fraudulent, and abusive transactions and (2) purchases that were split into one or more transactions to avoid micro-purchase thresholds or other credit limits. concepts and standards in the GAO internal control standards to the practices followed by management in the four areas reviewed. To test controls, we selected stratified random probability samples of 135 SPAWAR San Diego purchase card transactions from a population of 47,035 transactions totaling $38,357,656, and 121 Navy Public Works Center San Diego transactions from a population of 53,026 transactions totaling $29,824,160 that were recorded by the Navy during fiscal year 2000. We stratified the samples into two groups—transactions from computer vendors and other vendors. With this statistically valid probability sample, each transaction in the population had a nonzero probability of being included, and that probability could be computed for any transaction. Each sample element was subsequently weighted in the analysis to account statistically for all the transactions in the population, including those that were not selected. Table 7 presents our test results on three key transaction-level controls and shows the confidence intervals for the estimates for the universes of fiscal year 2000 purchase card transactions made by SPAWAR and the Navy Public Works Center in San Diego. Projection (millions) Projection (millions) Projection (millions) 65% (+/- 10%) $14.5 (+/- $4.4) 83% (74-90%) $20.4 (+/- $5.1) 47% (+/- 12%) $12.9 (+/- $6.3) 35% (+/- 11.4%) $11.2 (+/- $ 6.2) The projections represent point estimates for the population based on our sampling tests at a 95- percent confidence level. All seven approving officials with certifying officer responsibilities told us that they did not review support for transactions before certifying purchase card statements for payment. of store receipts (such as those from The Home Depot) were missing, we were unable to determine whether certain purchases were made for personal use. In addition, we did not physically examine purchases made to determine whether goods and services were received and used for government purposes. While we identified some improper and potentially fraudulent and abusive transactions, our work was not designed to identify, and we cannot determine, the extent of fraudulent, improper, or abusive transactions. We briefed DOD managers, including officials in DOD’s Purchase Card Joint Program Management Office and the Defense Finance and Accounting Service, and Navy managers, including Navy Supply Command, Navy Comptroller, SPAWAR San Diego, and Navy Public Works Center San Diego officials on the details of our review, including our objectives, scope, and methodology and our findings and conclusions. We conducted our audit work from August 2000 through June 2001 in accordance with generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President’s Council on Integrity and Efficiency. Following this testimony, we plan to issue a report, which will include recommendations to DOD and the Navy for improving internal controls over purchase card activity. (918994) The following are GAO’s comments on the DOD letter dated October 3, 2001. Comment 1. See the "Agency Comments and Our Evaluation" section of this report. Comment 2. We are concerned that DOD’s support of the current process whereby Agency Program Coordinators report the results of their purchase card internal reviews to their unit’s contracting activity or their local commanding officer will not ensure that the results of purchase card internal reviews are fully communicated to central Navy management to support oversight and corrective actions on systemic control weaknesses. During our review, we found documented evidence that SPAWAR management ignored written reports on results of Agency Program Coordinator internal reviews, which identified problems that are consistent with the control weaknesses discussed in our testimony and summarized in this report. For example, SPAWAR Agency Program Coordinator reviews identified the lack of independent documentation that the Navy had received items ordered by purchase card, accountable items that were not recorded in the property records, inadequate documentation for transactions, split purchases, and transactions that did not appear to be related to government business purposes. SPAWAR San Diego management ignored the internal review results, primarily due to complaints from cardholders and their supervisors regarding the administrative burden associated with procedural changes that would be needed to address the review findings. Further, although the Naval Audit Service reviewed Navy Public Works Center San Diego purchase card activity and the SPAWAR San Diego Command Inspector General reviewed SPAWAR Systems Center San Diego purchase card activities, reports were not issued on the results of either of these reviews. Therefore, we continue to recommend that Agency Program Coordinators report any internal control weaknesses identified during semiannual reviews to the Commander of the Naval Supply Systems Command in addition to their unit commanders. Comment 3. While DOD stated that using a single object class for all micro- purchases streamlines the accounting process and reduces the numbers of problem disbursements resulting from manual keystrokes when entering such data, this practice results in unreliable expense data. As we stated in our testimony, aggregating all micro-purchases under one object class does not show the nature and type of expenditures made using purchase cards. Because SPAWAR San Diego and the Navy Public Works Center San Diego did not ensure that their detail transaction records reflected the proper classification of expense, 100 percent of the SPAWAR and Navy Public Works Center transactions in our samples were recorded to the wrong object class. For example, although the majority of the SPAWAR purchase card transactions in our sample—76 transactions totaling over $73,000— were for equipment purchases, none of these transactions were properly classified and recorded. Further, SPAWAR did not maintain sufficient documentation to determine the correct object class for 15 of the transactions in our sample totaling $12,000. Office of Management and Budget (OMB) Circular A-11, Preparation and Submission of Budget Estimates, requires federal agencies to report obligations and expenditures by object class, such as salaries, benefits, travel, supplies, services, and equipment, to indicate the nature of expenditures of federal funds. Accurate object classification data are critical to the reliability of information reported in the President's budget submission and budget projections and other analyses that are based on these data. In addition, because the Congress has asked for and is using object class information for its oversight activities, it is important that these data be properly recorded. Therefore, we continue to recommend that detail purchase card transaction records reflect the proper object classification of expense. Further, an appropriate procedure for summarizing detail purchase card transactions would be to record a separate summary record for each classification of expense--such as services, supplies, and equipment. Comment 4. The steps outlined in DOD's response do not ensure that cardholders will obtain reasonable prices or the best value. For example, we found numerous examples of individual purchases of computers and property items, and purchases of services, such as the installation of upgraded computer software, that were not made as part of a negotiated contract or a bulk purchase. Because these purchases did not appear to be cost-effective, we continue to recommend that the Navy determine whether the purchase card is (1) the right vehicle for acquiring certain items and services and (2) if items, such as computers, should be procured individually or through bulk purchases. The intent of our recommendation is that these determinations would result in Navy-wide policy guidance on the cost-effective use of purchase cards. Staff making key contributions to this report were Bertram Berlin, Francine DelVecchio, Steve Donahue, Douglas Ferry, Kenneth Hill, Jeffrey Jacobson, John Kelly, and John Ryan. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents 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 our home page and complete the easy-to-use electronic order form found under “To Order GAO Products.” Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: [email protected], or 1-800-424-5454 (automated answering system). | GAO reviewed purchase card activity at the Space and Naval Warfare Systems Command (SPAWAR) Systems Center and the Navy Public Works Center in San Diego and found significant breakdowns in internal controls over purchase card transactions, including fraudulent, improper, and abusive purchases and theft and misuse of government property. Neither SPAWAR nor the Navy Public Works Center had effective policies for issuing purchase cards, establishing credit limits, and minimizing the federal government's financial exposure. Any employee having supervisory approval could get a card. GAO found that the units did not do credit checks on prospective cardholders. GAO also found that nearly half of SPAWAR's fiscal year 2000 purchase card transactions and more than half of the Navy Public Works Center's transactions were made by employees who did not have documented evidence of timely training. Policies for rebate management were deficient, including a lack of procedures to maximize rebates and ensure that bank calculations of rebates were correct. Management was not effectively using internal reviews and audits to determine whether purchase card internal controls were effectively implemented. These internal control weaknesses allowed purchases that were potentially fraudulent, improper, or abusive. GAO summarized this report in testimony before Congress ( GAO-01-995T , July 2001). |
The Air Force began the F/A-22 development program in 1986 and expected to complete development in 9 years for an estimated cost of $12.6 billion. Today, after being in development for almost two decades, the estimated development cost is $28.7 billion, a 127 percent increase. The average unit procurement cost to buy the F/A-22 has also increased 122 percent. The result of these changes has been a loss of buying power that has reduced the initial buy quantity from 750 to 277 aircraft. Table 1 shows the changes in the development program from 1986 to 2002. We have reported in the past that the F/A-22 acquisition approach was a major contributor to the cost increases and delays in schedule that led to reduced buying power. In testimony last year, we identified lessons to be learned in the F/A-22 program, which did not follow a knowledge-based acquisition approach used by successful commercial firms. Leading commercial firms that we studied employ an acquisition approach that evolves a product to its ultimate capabilities on the basis of mature technologies and available resources. These firms then ensure that high levels of knowledge exist at three critical junctures in a development program. First, a match must be made between a customer’s needs and the available resources—technology, engineering knowledge, time, and funding—before a new development program is launched. Second, a product’s design must demonstrate its ability to meet performance requirements and be stable about midway through development. Third, the developer must show that the product can be manufactured within cost, schedule, and quality targets and is demonstrated to be reliable before production begins. DOD issued new acquisition policy in May 2003 that governs the development of major acquisition systems. This new policy embraces the best practice concepts of knowledge-based, evolutionary acquisition and represents a good first step toward achieving better outcomes from major acquisition programs. The initial F-22 acquisition strategy did not employ an evolutionary approach. Instead, it sought to develop revolutionary capabilities from the outset of the program taking on significant risk and onerous technology challenges. Three critical technologies were immature at the start of the program—low-observable materials, propulsion, and integrated avionics. Integrated avionics has been a source of major schedule delays and cost increases in the F/A-22 program. Starting the program with these immature technologies prevented the program from knowing cost, schedule, and performance ramifications until late in the development program, after significant investments had already been made. Efforts to mature technology cascaded into development, delaying attainment of design and production maturity. The JSF, which started in 1996, is not as far along in its development, but is experiencing problems that could similarly threaten DOD’s investment. It is at a critical crossroad, one that, based on our prior work, was approached and passed by several other DOD programs without capturing the appropriate knowledge for the sizable investment decisions being made. While the JSF program started with higher risks by failing to mature its technologies, it is considering a delay to its investment decision that determines the need to invest in tooling, labor, and facilities to manufacture aircraft until the airframe design has become more stable. The basic mission of the F/A-22, initially focused on air-to-air dominance, has changed to include a significantly greater emphasis on attacking ground targets. To accomplish this expanded mission, the Air Force will need additional investments to develop and expand air-to-ground attack capabilities for the F/A-22. Moreover, the efforts to expand its capability will also add risks to an already challenged program. To accommodate planned changes will also require a new computer architecture and processor to replace the current less capable ones. The expanded air-to-ground attack capability will allow the F/A-22 to engage a greater variety of ground targets, such as surface-to-air missile systems, that have posed a significant threat to U.S. aircraft in recent years. This was not previously considered a primary role for the aircraft as it was intended to be primarily an air-to-air fighter to replace the F-15. From the outset the F/A-22 was built to counter expected large numbers of new advanced Soviet fighter aircraft, but this expected threat never materialized. The Air Force has a modernization program to improve the capabilities of the F/A-22 focused largely on a more robust air-to-ground capability. It intends to do so using five developmental spirals planned over more than a 10-year period, with the initial spiral started in 2003. In March 2003, the Office of Secretary of Defense’s Cost Analysis Improvement Group (CAIG) estimated that the Air Force would need $11.7 billion for the planned modernization program. The CAIG estimate included costs for development, production, and the retrofit of some aircraft. As of March 2003, the Air Force F/A-22 approved program baseline did not include estimated costs for the full modernization effort. Instead, the Air Force estimate included $3.5 billion for modernization efforts planned through fiscal year 2009. Table 2 shows each spiral as currently planned. To complete the planned enhancements, the F/A-22 will also need a new computer architecture and avionics processors. Current architecture and processors will be upgraded to support enhancement through the Global Strike Enhanced development spiral. However, because the current architecture and processors are old and obsolete and do not have sufficient capacity to meet the increased processing demands required for planned new air-to-ground capabilities beyond the Global Strike Enhanced spiral, they must be replaced. Rather than start a new development program, the F/A-22 program office plans to leverage two other ongoing Air Force development or modification programs for this new processing capability: the new architecture being developed for the JSF and the new commercial off-the-shelf general-purpose processors designed for newer versions of the F-16. According to F/A-22 program officials, they do not expect the new architecture to be fully developed and ready for installation in the F/A-22 for at least 5 to 6 years. Additional risks are likely because the new processor and architecture are being developed by other major aircraft programs and will require extensive integration and operational testing to ensure that the F/A-22 program does not encounter similar problems that have delayed integration and testing of the F/A-22’s current avionics suite. F/A-22 program officials acknowledge that this mass changeover of the F/A-22 computer architecture and avionics processor will be a time-consuming and costly effort and will likely create additional program risks. Air Force cost estimates are not yet available, but program officials estimate the nonrecurring engineering costs alone could be at least $300 million. At the time of our review, the Air Force had not made a decision about retrofitting aircraft equipped with the old microprocessor. The Air Force schedule includes plans to make the full rate production decision in December 2004, but initial operational test and evaluation (IOT&E) has not started. The Air Force’s efforts to stabilize avionics software and improve its performance have not been sufficiently demonstrated to start IOT&E, and the planned entrance criterion was changed. In addition, the F/A-22 program is not performing as expected in some other key performance areas like system reliability. These problems have contributed to the need for a new test schedule and an additional 7- month delay in the start IOT&E. Together these problems increase the potential for additional development costs and delays in the full rate production decision. Since our report in March 2003, the Air Force has corrected some key design problems identified at that time, but others remain. The stability and performance of F/A-22 avionics has been a major problem causing delays in the completion of developmental testing and the start of IOT&E. Because the F/A-22 avionics encountered frequent shutdowns over the last few years, many test flights were delayed. As a result, the Air Force Operational Test and Evaluation Center wanted assurances that the avionics would work before it was willing to start the IOT&E program. It established a requirement for a 20-hour performance metric that was to be demonstrated before IOT&E would begin. This metric was subsequently changed to a 5-hour metric that included additional types of failures, and it became the Defense Acquisition Board’s criterion to start IOT&E. In turn, Congress included the new metric, known as Mean Time Between Avionics Anomaly or MTBAA, in the National Defense Authorization Act for Fiscal Year 2004. As of January 2004, the Air Force had not been able to demonstrate that the avionics could meet either of these criteria. Testing as of January 2004 showed the program had achieved 2.7 hours— 54 percent of the 5-hour stability requirement to begin IOT&E. While the Air Force has not been able to meet the new criteria, major failures, resulting in a complete shutdown of the avionics system, have significantly diminished. These failures are occurring only about once every 25 hours on average. This is the result of a substantial effort on the part of the Air Force and the contractor to identify and fix problems that led to the instability in the F/A-22 avionics software. However, less serious failures are still occurring frequently. The F/A-22 program is not meeting its requirements for a reliable aircraft, and it is not using a knowledge-based approach. The Air Force established reliability requirements to be achieved at the completion of development and at system maturity. As a measure of the system’s overall reliability, the Air Force established a requirement for 1.95-hours mean time between maintenance by the completion of development and 3-hours mean time between maintenance at system maturity. This measure of reliability represents the average flight time between maintenance actions. As of October 2003, the Air Force had only been able to demonstrate a reliability of about 0.5 flying hours between maintenance actions or about 26 percent of the development requirement and 17 percent of system maturity requirement. This has led to test aircraft spending more time than planned on the ground undergoing maintenance. In addition to the high level of maintenance required, failures in F/A-22 parts and components also caused reliability problems. During 2003, the Air Force identified 68 parts that had a high rate of failure causing them to be removed or replaced and affecting the F/A-22 system reliability. The contractor has initiated programs to eliminate the high failure rates experienced by these parts. The canopy has also been experiencing failures during testing, allowing it to achieve only about 15 percent of its expected 1,600-hour life. The Air Force is considering using a second manufacturer for canopies, but until it has passed qualification testing, it cannot be used as an alternative source for the high-failing canopies. The F/A-22 program began limited production before demonstrating reliability. Our work has shown that product development engineers from leading commercial firms expect to achieve reliability requirements before entering production. They told us reliability is attained through an iterative process of design, testing, analysis, and redesign. Commercial firms understand that once a system enters production, the costs to achieve reliability through this iterative design change process become significantly more expensive. The F/A-22 aircraft has been in production since fiscal year 1999, and the Air Force has on contract 52 production aircraft, and an additional 22 aircraft on long lead contracts representing 27 percent of the planned buy quantity. With 83 percent of the reliability requirement yet to be achieved through this iterative design change process, the Air Force can expect to incur additional development and design change costs. If the Air Force fails to improve the F/A-22’s reliability before fielding the aircraft, the high failure rates will result in higher operational and support costs to keep the aircraft available for training or combat use. Avionics and reliability problems were the major contributors to delays in F/A-22 flight-testing in 2003. As a result, the start of IOT&E was delayed an additional 7 months. Realizing the Air Force would not be ready to enter initial operational testing as previously planned, the Office of the Secretary of Defense requested the F/A-22 program to establish a new operational test plan that includes measures to ensure the aircraft and its avionics are ready before entering operational testing. In response, the Air Force put in place a two-phase operational test program. Phase 1, also called an operational assessment, is not the official start of operational testing. It is intended to assess the F/A-22’s readiness for IOT&E. Started in October 2003, it calls for testing two F/A-22 aircraft. Phase 2 testing is considered the actual start of IOT&E. To begin this phase, the Air Force must meet a number of criteria. Perhaps most importantly, it must demonstrate that the F/A-22’s integrated avionics will be able to operate for sufficient lengths of time, without shutting down. Figure 2 compares the changes in the planned test program since our March 2003 report. According to Air Force test officials, results of some phase 1 tests could be used to satisfy IOT&E requirements if the aircraft and software configurations do not change for IOT&E testing. This could reduce the scope of the test effort planned during IOT&E. The Defense Acquisition Board is scheduled to review the F/A-22’s readiness for IOT&E later this month. At the present time, the Air Force expects to complete IOT&E in October 2004, before the full rate production decision, now expected in December 2004. The time allotted to complete IOT&E under the new test plan, however, has been compressed by 4 months, assuming phase 1 testing results are not permitted to be used for IOT&E. This means the Air Force would have less time than previously planned to complete the same amount of testing. If the Air Force continues to experience delays in testing prior to IOT&E, then the full rate production decision would also have to be delayed until IOT&E is complete and the Beyond Low Rate Initial Production Report is delivered to Congress. The Air Force has corrected design problems discussed in our March 2003 report. To correct the movement or buffeting of the vertical fins in the tail section of the aircraft, the Air Force designed and implemented modifications, which strengthen the fin and hinge assemblies. Because of this problem, the Air Force placed restrictions on flights below 10,000 feet. Testing was done above and below 10,000 feet, and the flight restrictions were removed. Likewise, the Air Force modified the aircraft to prevent overheating concerns in the rear portion of the aircraft by adding thermal protection and strengthened strategic areas in the aft tail sections. The Air Force also plans to modify later production aircraft using a new venting approach to resolve the heat problems. We reported that the Air Force had also experienced separations in the horizontal tail materials. After additional testing, the Air Force deemed that the original tails met requirements established for the life of the airframe. However, the Air Force redesigned the tail to reduce producibility costs. Tests will be performed on the redesigned tail in late 2004. The business case made to justify the F/A-22 program at its outset is no longer valid. Since that time, program cost and schedule have grown substantially and affordable quantities have been reduced by 60 percent. The expected threat, for which this aircraft was originally designed, never materialized, and new, more demanding ground threats, like surface-to-air missile systems, have evolved, requiring expanded capabilities that will require significant new developmental investments. In addition, technical problems have not been resolved, and uncertainty about the outcome of operational testing could lead to additional development costs and further delays. Today, the Air Force estimates the total F/A-22 acquisition program will cost about $72 billion, excluding about $8 billion estimated by the CAIG to complete modernization activities. Including these costs brings the estimated total investment for the F/A-22 program to about $80 billion. Through fiscal year 2004, about one-half of this investment has been funded, leaving key investment decisions in the near future on the remaining $40 billion for aircraft production and upgrades in capability. Last year, in light of the changes in the program and investments that remained, the Subcommittee on National Security, Emerging Threats, and International Relations of the House Committee on Government Reform asked DOD to provide a new business case justifying the Air Force’s planned number of F/A-22s (276 at that time) as well as how many F/A-22s are affordable. In its response, DOD did not sufficiently address key business case questions such as how many F/A-22s are needed, how many are affordable, and if alternatives to planned investments increasing the F/A-22 air-to-ground capabilities exist. Instead, DOD stated it planned to buy 277 F/A-22s based on a “buy to budget” concept that determines quantities on the availability and efficient use of funds by the F/A-22 program office. Furthermore, justification for expanding the capability to a more robust air-to-ground attack capability was not addressed in DOD’s response. While ground targets such as surface-to-air missile systems are acknowledged to be a significant threat today, the response did not establish a justification for this investment or state what alternatives were considered. For example, the JSF aircraft is also expected to have an air-to-ground role, as are planned future unmanned combat air vehicles. These could be viable alternatives to this additional investment in F/A-22 capability. While the business case information submitted to the subcommittee called for 277 aircraft, DOD stated it could only afford to acquire between 216 and 218 aircraft within the congressionally imposed cap on production costs—currently at $36.8 billion. DOD expects improvements in manufacturing efficiencies and other areas will provide it with sufficient funds to buy additional F/A-22 aircraft. However, this seems to be an unlikely scenario given the program’s history. Previously, DOD, under its “buy to budget” approach, used $876 million mostly from production funds to cover increases in development costs, thus reducing aircraft quantities by 49. With testing still incomplete and many important performance areas not yet demonstrated, the possibility for additional increases in development costs is likely. The analysis and conclusions in our recent report led us to recommend that DOD complete a new business case that justifies the need for the F/A-22 and that determines the quantities needed and affordable to carry out its air-to-air and air-to-ground mission. In preparing the business case, we also recommended DOD look at alternatives to the F/A-22 for dealing with the ground threats that were driving the need for an expanded air-to- ground capability. In response to a draft of that report, DOD partially concurred, stating that it evaluates the F/A-22 business case elements as part of the annual budget process. Additionally, DOD’s response acknowledged that this year the department is undertaking a broader set of reviews under the Joint Capabilities Review process and that the F/A-22 will be a part of that review. In our report, as part of the evaluation of DOD’s comments, we noted that an independent and in-depth study of the F/A-22 program has been requested by the Office of Management and Budget and that such a study provided an opportunity for completing a business case analysis. The JSF acquisition program is approaching a key investment decision point in its development as it prepares to stabilize the design for its critical design reviews. The program has many demands and requirements to satisfy before it is completed. It is the most expensive acquisition program in DOD’s history with plans to buy almost 2,500 aircraft for an estimated acquisition cost of about $200 billion. The design plans are for three variants for the Air Force, Navy, and Marine Corps, with development partners and potential customers that span the globe. Upcoming investment decisions will be a prominent indicator of the risk program management and senior leadership will assume for this program. The program’s size—in terms of funding, number of aircraft, and program participants—will create challenges for decision makers over the next several years. They will face decisions that need to be guided by a sound business case and an evolutionary, knowledge-based acquisition process that will provide more predictable cost, schedule, and performance outcomes. The JSF is a joint, multi-national acquisition program for the Air Force, Navy, Marine Corps, and eight cooperative international partners. The program’s objective is to develop and deploy an affordable weapon system that satisfies a variety of war fighters with different needs. The system is intended to consist of a family of highly common and affordable strike aircraft designed to meet an advanced threat and a logistics system to enable the JSF to be self-sufficient or part of a multisystem and multiservice operation. This family of strike aircraft will consist of three variants: conventional takeoff and landing, aircraft carrier suitable, and short take off and vertical landing. The JSF program began in November 1996. After a five-year competitive concept demonstration phase between Boeing and Lockheed-Martin, DOD awarded Lockheed-Martin a contract in October 2001 to begin system development and demonstration. We are aware that program managers are contemplating changes to the program that could delay the schedule and increase costs, but confirmation and details are not yet available. Nonetheless, current program office estimates do provide some insights. Since the JSF acquisition program began in 1996, the cost of development has grown by about 80 percent. As shown in figure 3, the majority of this cost growth, from an estimated $24.8 to $34.4 billion, was recognized at the time the program transitioned from concept development to system development and demonstration in 2001. The program office cited schedule delays, implementation of a new block development approach that extended the program by 36 months, and a more mature cost estimate as the major causes for the increase. Since the start of system development and demonstration, the estimate has increased by an additional $10.3 billion because of continued efforts to achieve international commonality, optimize engine interchangeability, further refinements to the estimating methodology, and schedule delays for additional design work. In both 2000 and 2001, when the program was making the critical decision to move into system development and demonstration, we reported and testified that technologies had not been sufficiently demonstrated to reduce risk to a level commensurate with a decision to commit major capital and time to product development. While some of these technologies continue to be troublesome, in March 2003, the program’s preliminary design review revealed significant issues related to aircraft design maturity. Weight has become the most significant design risk for the program as it approaches its critical design review. The increased weight of each variant design could degrade aircraft range and maneuverability if not brought under control. According to the program office, the airframe design has matured more slowly than anticipated and software development and integration is posing a significant design challenge. Also, in a 2003 annual report, the Director of Operational Test & Evaluation stated that weight growth is a significant design risk for all the variants, that the development schedule is aggressive, and that efforts to reduce weight have eroded a large part of the schedule. We also note that the program’s funding profile assumes almost $90 billion of funding over the next 10 years, an average of almost $9 billion a year. This will require the JSF program to compete with many other large programs for scarce funding during this same time frame. Sustaining this level of high funding for such a long period will be a challenge. The JSF program’s latest planned funding profile for development and procurement—as of December 2002—is shown in figure 4. The JSF program faces critical decisions over the next 24 months. Decisions made today will greatly influence the efficiency of the rest of its funding—almost 90 percent of the total. As a result of current concerns over system integration risk, the program office is currently restructuring the development program, which will add significant cost and delay the development schedule. For example, it is considering delaying its critical design reviews, its first flights of development aircraft, and its limited rate production decision to allow more time to mitigate design risk and gather more knowledge before moving forward with continued major investments. While no one wants to delay critical reviews, now is the time to get the design right rather than later. Going forward with an incomplete review may cause more problems later in the effort. Indeed, based on our past best practices work and lessons learned from the F/A-22 development effort, we have seen many examples where programs moved forward past their critical design review without gathering the knowledge needed to verify that their design was stable. This has led to poor cost and delivery outcomes for these programs. We have also seen the reverse, where programs have gathered appropriate knowledge before their critical design review. These programs had much more predictable cost and schedule outcomes. The F/A-22 program held its critical design review in 1995 with only about 26 percent of its design drawings complete. Best practice criteria calls for 90 percent of drawings to be complete before a design can be considered stable enough to commit to additional significant investments of time, labor, material, and capital. Figure 5 shows the engineering drawing completion history of the F/A-22 along with changes to development cost estimates as the program progressed. An incomplete F/A-22 critical design review contributed to several design and manufacturing problems that resulted in design changes, labor inefficiencies, cost increases, and schedule delays. Since the time of its critical design review, the F/A-22’s development costs have increased by about 50 percent. The JSF program has the opportunity to avoid a similar situation. We believe that, given the apparent design challenges at this point in the program, a delay to gather more knowledge before increasing the investment is warranted and may help to reduce turbulence later in development, before the program begins “bending metal” for development aircraft. The JSF program is at a pivotal point, one in which the effort will turn from a paper design to actually manufacturing a product, something that requires considerably more money. While we believe the program moved forward with too much technology risk up to this point, it has an opportunity now to achieve critical design knowledge by taking the time to develop a mature design before moving into manufacturing. The program can use lessons learned from the F/A-22 acquisition right now to keep on track and deliver an affordable, high quality weapon system sooner rather than later. The JSF program is based on a complex set of relationships among all three services and governments and industries from eight foreign partners. The program is expected to benefit the United States by reducing its share of development costs, increasing future aircraft sales, giving it access to foreign industrial capabilities, and improving interoperability among the services and allies. For their part, partner governments expect to benefit from relationships with U.S. aerospace companies, access to JSF program data, and influence over aircraft requirements. They will also benefit financially by obtaining waivers of nonrecurring aircraft costs on an aircraft they could otherwise not afford to develop on their own. The partners expect a return on their investment through JSF contract awards for their industries that will improve their defense industrial capability, a critical condition for their participation. They have agreed to contribute about $4.5 billion to the JSF development program and are expected to purchase several hundred aircraft once it enters production. With these mutual benefits come challenges. Support for the program from our international partners hinges in large part on expectations for financial returns, technology transfer, and information sharing. If these expectations are not met, that support could deteriorate. In addition, a large number of export authorizations are needed to share information and execute contracts. These authorizations must be done in a timely manner to maintain schedule and ensure competition. Finally, transfer of sensitive U.S. military technologies needed to achieve commonality and interoperability goals will push the boundaries of U.S. disclosure policies. DOD is not immune to efforts to address the fiscal imbalance confronting the nation and will continue to face challenges based on competing priorities, both within and external to its budget. This will require decisions based on a sound and sustainable business case for DOD’s acquisition programs based on clear priorities, comprehensive needs assessments, and a thorough analysis of available resources. In addition, it will require an acquisition process that provides for knowledge-based decisions at critical investment junctures in order to maximize available dollars. DOD has instituted a new acquisition policy that embraces evolutionary and knowledge-based acquisition concepts. However, policy alone will not solve the problems DOD faces. This will also require disciplined actions on the part of DOD’s leadership to employ the concepts established in its new policy. While it is too late for the F/A-22 to go back and follow these concepts, there still is time to evaluate the need for additional aircraft; over fifty F/A-22’s are presently on contract. Because of the nation’s fiscal challenges, tough choices will need to be made regarding future spending priorities, including the remaining potential $40 billion investment in the F/A-22. In light of this substantial investment and the many changes that have occurred in the F/A-22 program, we believe decision makers would benefit from a new business case that justifies the need for the full air-to- air and air-to-ground capabilities and the quantities needed and affordable. The JSF program has a greater opportunity to make critical investment decisions using a knowledge-based approach. While the program started off with a high-risk approach by not maturing technologies before starting system development, it has the opportunity to manage the system development phase and stabilize the design before committing to large investments in manufacturing capability—tooling, labor, and facilities—to build test aircraft. The JSF program is considering a delay in its critical design review to attain greater design stability in its airframe. In addition to seeking greater design stability, leadership in DOD can reap the benefits of its new acquisition policy by actively promoting and maintaining a disciplined approach throughout the remaining critical decision points over the next few years. With these activities in place, DOD will be in a better position to request continued JSF funding and support. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have. If you have future questions about our work on the F/A-22 or JSF, please call Allen Li at (202) 512-4841. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of Defense's (DOD) two major tactical aircraft fighter programs, the F/A-22 and the Joint Strike Fighter, represent an investment of about $280 billion. Problems in the F/A-22 development program have led to a 10-year delay in delivering the initial capability and development cost increases of $16 billion. The Joint Strike Fighter, which experienced problems early in the program, is now at a critical crossroad in development. Any discussion of DOD's sizeable investment that remains in these programs must also be viewed within the context of the fiscal imbalance facing the nation within the next 10 years. GAO was asked to testify on the status of the F/A-22 and draw comparisons between both F/A-22 and Joint Strike Fighter programs' acquisition approaches. The F/A-22 program has experienced several significant challenges since it began development in 1986. First, the Air Force had originally planned to buy 750 aircraft, but it now estimates it can only afford about 218 aircraft. Second, in order to develop an expanded air-to-ground attack capability, DOD estimates that the Air Force will need $11.7 billion in modernization funding. Third, the Air Force has determined that new avionics computer processors and architecture are needed to support most planned enhancements, which will further increase program costs and risk. Lastly, the development test program continues to experience problems and risks further delays primarily due to avionics failures and problems meeting reliability requirements. Because of the risks of future cost increases and schedule delays, a congressional subcommittee requested that DOD provide business case information on the F/A-22. However, the information DOD provided did not address how many aircraft the Air Force needs to accomplish its missions, how many the Air Force can afford considering the full life-cycle costs, whether investments in new air-to-ground capabilities are needed, and what are the opportunity costs associated with purchasing any proposed quantities of this aircraft. The Joint Strike Fighter program started system development and demonstration in 2001 and has already encountered some cost and schedule problems. It is now working toward maturing the aircraft design and is considering delays in its critical design reviews to attain greater knowledge before making a decision to increase its investment significantly. In contrast, the F/A-22 program encountered poor cost and schedule outcomes because it had not gathered the appropriate knowledge at critical junctures in the program. The Joint Strike Fighter program is still early in its development program, with a greater opportunity to efficiently apply knowledge to its critical investment decisions. |
Awareness of the environmental and economic importance of the Arctic region is growing. The Arctic region is a very harsh operating environment, making research expensive and risky. NSF is the largest federal provider of funds for research in this region. The U.S. Coast Guard, part of the Department of Transportation, is charged with providing and operating icebreakers to meet U.S. military, logistic, and research needs in the Arctic and Antarctic regions. From 1966 to 1991, the U.S. Coast Guard operated the nation’s icebreakers. The mission of the Coast Guard’s Ice Operations Division, Office of Navigation Safety and Waterways Services, includes assisting other governmental and scientific organizations in scientific research and supporting national interests in the polar regions. Investigators representing or sponsored by universities, private institutions, and government agencies—including the Office of Naval Research, the U.S. Geological Survey, and the National Oceanic and Atmospheric Administration—conduct research aboard the Coast Guard icebreakers. The Arctic Research and Policy Act of 1984, as amended, calls for coordination among agencies over the use of logistics resources, including icebreakers, in the conduct of research. The act established the Arctic Research Commission to promote research in the Arctic region and to recommend Arctic research policy. Also under the act, responsibility for promoting the coordination of all Arctic research activities among agencies, including logistics (e.g., icebreaker support), rests with the Interagency Arctic Research Policy Committee. The Committee is headed by NSF and includes the Coast Guard among its members. Furthermore, in a 1987 agreement aimed at minimizing conflict and serving national interests, NSF and the Coast Guard pledged “to plan together, to the maximum extent possible, for the use of U.S. icebreakers in the support of polar research.” The Arctic research community has sought a vessel dedicated to Arctic research for many years. The Arctic Research Commission recommended that such a vessel be acquired. The Interagency Arctic Research Policy Committee echoed this recommendation. Beginning in 1987, the scientific community, through the University National Oceanographic Laboratory System (UNOLS), used funds from NSF to study the requirements for, and possible designs of, an Arctic research vessel. Comments from the Arctic scientific community from 1990 to 1992, discussions in the Interagency Arctic Research Policy Committee, and other forums were used to define the characteristics of the vessel. From 1990 to the present, NSF and UNOLS, working with a private engineering firm, developed preliminary designs for Arctic research vessels of increasing size and icebreaking capability. The first design called for a 200-foot vessel with modest icebreaking capability whose estimated cost was about $40 million. After the Arctic scientific community reviewed and commented on this design, it was agreed that a larger vessel with greater icebreaking capacity was needed. Accordingly, a 340-foot vessel was designed with significant icebreaking capability and the capacity to perform 90-day missions in the Arctic region. This vessel is expected to cost about $120 million. Acquisition of the proposed vessel is not supported by a quantified analysis of the nation’s requirements for icebreakers or by the scientific community’s criticism of the Coast Guard’s support for research. Moreover, records of actual and projections of future icebreaker use suggest that a fifth icebreaking vessel may not be needed. A 1990 interagency study of national polar icebreaker requirements (PIRS),the most recent such quantified study, did not call for the construction of the proposed vessel. NSF justifies the proposed vessel on the grounds that (1) Arctic research needs are increasing and (2) the United States does not have a vessel dedicated to Arctic research. However, NSF has not demonstrated that another icebreaker is required to meet research needs. The study documented the nation’s icebreaker requirements and recommended a fleet of four icebreakers. These are the Polar Sea and Polar Star (currently operating Coast Guard icebreakers); Nathaniel B. Palmer (an Antarctic icebreaking research vessel); and Michael A. Healy (a planned Coast Guard icebreaker). The proposed vessel would be the fifth U.S. icebreaker, one more than recommended by the 1990 study. Funds for the Healy have been approved, and the vessel is scheduled to begin duty in 1998. According to Coast Guard officials, the Healy will serve primarily as an Arctic research vessel except when circumstances require its use elsewhere. To determine icebreaker requirements, the 1990 study quantified operational and research mission needs. To quantify needs, the number of days icebreakers were required to accomplish the missions was totaled. Operational missions consisted of the annual resupply of the Thule Air Force Base in Greenland and the McMurdo Antarctic research station (an NSF mission), as well as treaty inspection duties in the Antarctic. Research requirements for icebreaker support were also quantified and used in the study. However, these requirements do not reflect subsequent changes in users’ needs, such as the military’s reduced needs for icebreaker services resulting from the end of the Cold War and other agencies’ increased needs attributed to higher priorities for Arctic research. Areas of increased research emphasis include Arctic fisheries, because of concern over fluctuating fish catches, and Arctic water quality, because of concern over radionuclide and other contamination originating in the former Soviet Union. The scientific community has produced several reports recommending the acquisition of an icebreaking vessel dedicated to Arctic research. None of these reports attempts to justify the proposed vessel by comparing the realistic demand for icebreakers to be used for research with the availability of existing and planned Coast Guard icebreakers. Reports of the Polar Research Board of the National Academy of Sciences, the U.S. Arctic Research Commission, and the Interagency Arctic Research Policy Committee justify an additional vessel on the basis of (1) the increasing (although not quantified) needs for research in the Arctic and (2) the observation that the United States does not possess a vessel dedicated to Arctic research. These reports do not balance the increased needs for icebreakers to support research with the decreased needs for icebreakers to support defense missions. Nor do the reports state why existing and planned Coast Guard icebreakers, whose missions include supporting Arctic research, cannot meet these needs. Finally, the reports do not consider where the additional funding for research will be obtained to fully employ a five-icebreaker fleet. To address these shortcomings, NSF requested that the National Research Council, which is affiliated with the National Academy of Sciences, examine the scientific community’s needs for icebreaker support and how they can best be met. Neither the NSF program manager nor the study’s director is certain whether the study will attempt to quantify the needs for icebreakers to support research in the Arctic. Planning for the study began in November 1994, and the final results are expected in the summer of 1995. The potential for underutilizing existing and planned Coast Guard icebreakers has led that agency to oppose the construction of the proposed vessel. Both the actual use of Coast Guard vessels for research in the Arctic over the past 4 years and the projected use in 1995 and 1996 are lower than estimated in the 1990 study. Coast Guard records for 1994 show 83 days of icebreaker use for the Arctic research of NSF and others, compared with the 143 days of use projected for NSF’s research in the 1990 PIRS. Furthermore, no use of Coast Guard vessels for research in the Arctic region is scheduled, or likely, for 1995. Prospects for a scientific mission in 1996 are not good, according to Coast Guard and NSF officials, because of funding constraints. Many in the Arctic scientific community justify the acquisition of the proposed vessel on the grounds that the Coast Guard, because it has multiple missions, does not possess the desire, skills, or facilities to provide adequate support for Arctic science. However, this justification is not convincing, given improvements in the Coast Guard’s commitment and ability to support research in the region. Some Arctic scientists assert that the Coast Guard values its other missions over supporting science. As a result, say these scientists, the Coast Guard lacks the desire to ensure the successful completion of scientific cruises to the Arctic. For example, supporting the U.S. military is a significant and traditional Coast Guard mission. The Coast Guard’s adherence to this mission may result in approaches and goals on cruises that differ from those of the scientists on board. For instance, the strict chain of command on Coast Guard vessels has made communication between the chief scientist and the Captain of the vessel cumbersome, limiting flexibility in the accomplishment of research. Scientists, on the other hand, are generally not accustomed to seeking authorization for minor changes in the conduct of research projects. In recent years, the Coast Guard has placed greater emphasis on its role in supporting science. This increased priority is evidenced by an agreement between the Coast Guard and NSF on support for polar research, Coast Guard directives concerning such research, and a decline in the military mission for the Coast Guard’s icebreaker fleet. The Coast Guard’s operating authority includes supporting oceanographic research as a Coast Guard mission. In addition, in 1987, the Coast Guard pledged in an agreement with NSF to maintain trained personnel and icebreakers with adequate facilities to support polar research. Also, following an unsuccessful and contentious scientific cruise in 1991, high-ranking Coast Guard officials, including the Commandant, issued several directives stressing the importance of supporting Arctic science as a Coast Guard mission. Finally, Coast Guard officials in the Division of Ice Operations observed that the scientific mission has taken on added importance for the Coast Guard icebreaker fleet as emphasis on the military mission for these vessels has declined. Arctic scientists who participated in scientific cruises aboard Coast Guard icebreakers have noted significant improvements in the willingness of Coast Guard personnel to work with and support scientists. However, many Arctic scientists have maintained that Coast Guard personnel lack the skills necessary to adequately support research in the Arctic. Furthermore, some of the scientists believe that acquiring the proposed vessel would allow them to employ a crew that is highly skilled in supporting research. Scientists also point to Coast Guard rotation policies that prevent personnel from acquiring and maintaining skills in planning scientific cruises, navigating and maneuvering in ice, and maintaining and operating scientific equipment, such as oceanographic winches. The Coast Guard recognizes these shortcomings and has taken steps to address them. First, to represent the needs of scientists before the Coast Guard, the agency created a position for a liaison with the civilian scientific community at the icebreakers’ home port of Seattle, Washington. This representation includes ensuring that scientists’ needs are met when the vessels are prepared for scientific cruises. Second, the Coast Guard arranged with the Canadian Coast Guard for an informal officer exchange/training program to improve the officers’ skills and began sending new officers on trips aboard the icebreakers to familiarize them with icebreaker operations. In addition, the liaison has arranged training for Coast Guard technicians with equipment manufacturers on the proper use of scientific equipment found aboard the icebreakers. Some Arctic scientists believe that the two currently operating Coast Guard icebreakers are unreliable and lack necessary scientific facilities. The scientists cite mechanical failures that have hindered or prevented the completion of research projects. Scientists also cite poor laboratory facilities and research equipment as limiting research opportunities. The Coast Guard has taken steps to enhance the reliability of its two icebreakers and boost their basic scientific capabilities. First, the Coast Guard strengthened and rebuilt the faulty propeller hubs on the icebreakers to improve their reliability. From 1987 to 1992, the two icebreakers underwent the Polar Science Upgrade Project to improve the scientific capabilities of both vessels. This project upgraded laboratory spaces, oceanographic instrumentation, and communication equipment and provided new oceanographic and trawling winches. These upgrades improved the vessels’ ability to support Arctic research. In addition, beginning in the spring of 1995, the Coast Guard plans to conduct midlife refits of its two existing icebreakers as part of the Reliability Improvement Project, which is designed to correct original design flaws and replace deteriorated and outdated equipment, although it will not result in further significant upgrades of scientific equipment and facilities. In addition to improving its two existing icebreakers, the Coast Guard is acquiring another icebreaker with significant research support capabilities. The Healy was justified and designed, in part, to support polar research. Coast Guard officials told us that the Healy will be used primarily as an Arctic research vessel. Compared with the two existing Coast Guard icebreakers, this icebreaker will provide significantly improved facilities for supporting science. Although the Healy was justified largely as a research vessel, the Coast Guard requires that it be capable of supporting other Coast Guard missions, namely, annually breaking the channels to allow the resupply of Thule Air Force Base, Greenland, and McMurdo Station, Antarctica. Accordingly, the Healy was designed with greater icebreaking and seakeeping capabilities than the vessel proposed by NSF. The Arctic scientific community is largely dissatisfied with the design compromises the Coast Guard made to the Healy. As a result, some scientists believe that the vessel’s overall design does not adequately reflect the scientific community’s needs and suggestions for changing the vessel’s design. The scientists point to factors such as an outdated hull design, poor fuel efficiency (high costs), and an inefficient deck layout resulting from the engines’ placement as areas that the scientists had rejected. The Coast Guard maintains that the hull’s design is not outdated and that, while it may not be the most efficient icebreaking design, it is necessary to ensure the Healy’s open-ocean transit capability. The Coast Guard conferred with leading Arctic scientists when designing the scientific facilities for the Healy through a survey and during several meetings. Some of the scientists’ suggestions were incorporated into the vessel’s design. For example, the arrangement of laboratory spaces was changed, and hatch sizes were increased to accommodate scientific equipment. However, the scientific community was not consulted on the vessel’s basic design. According to Coast Guard officials, the procurement of the Healy involved the use of performance-based specifications that were defined in consultation with the user community. The officials said that the shipbuilder relied heavily on consultants who had designed and built the majority of the world’s icebreakers. NSF and the Arctic scientific community have not demonstrated that the proposed vessel is needed. The most recent (1990) quantified assessment of national icebreaker requirements did not support a need for the proposed vessel. Reports identified by NSF as justifying the acquisition of the proposed vessel cite only increasing research needs and the lack of a dedicated research icebreaker without quantifying those needs and explaining why the current arrangement with the Coast Guard is inadequate. NSF recognizes the deficiencies in its justification for the proposed vessel, as evidenced by its recently contracting with the National Research Council, affiliated with the National Academy of Sciences, to study the need for icebreakers to support polar research. Furthermore, the Coast Guard improved its responsiveness to the needs of the scientific community, enhanced the capabilities of existing vessels, and is building a vessel whose primary mission is to support Arctic research. Further cooperation between the Coast Guard and the scientific community should facilitate more cost-effective research and the achievement of other national goals in the Arctic region. NSF provided written comments on a draft of this report. (See app. III for NSF’s comments and our evaluation of them.) NSF had three general comments: (1) the agency does not agree with our conclusion that NSF and the scientific community have not demonstrated the need for the proposed vessel; (2) the agency believes that final judgment on the need for a dedicated Arctic research vessel should be deferred until the National Academy of Sciences has completed its study of this issue; and (3) the agency recognizes that interagency communication must be improved. We disagree with NSF’s assessment that adequate need for the proposed vessel has been demonstrated. In our view, though scientific needs are important, fiscal constraints and the capacity of existing and planned icebreakers with scientific capability have not been taken into account when justifying an Arctic research vessel. We agree with NSF that the National Academy of Sciences’ study is important. We note that our report is not, nor does it purport to be, the final judgment on the acquisition of an Arctic research vessel. We also support NSF’s efforts to improve interagency cooperation in order to increase the effective use of resources for Arctic research. We discussed a draft of this report with Department of Transportation officials, who generally agreed with our findings and conclusions. On the basis of NSF’s comments and our discussion with Transportation officials, we have made changes to our report, where appropriate. In examining the justification for the proposed vessel, we reviewed the Arctic Research Policy Act, as amended, and other relevant laws, regulations, and publications. We also reviewed the 1984 and 1990 Polar Icebreaker Requirements studies; relevant congressional testimony; correspondence from and for NSF and the Coast Guard; Coast Guard policies and procedures; design reports for the proposed Arctic research vessel and the planned Coast Guard icebreaker Healy; and data on the use of icebreakers. We interviewed officials from the Coast Guard, NSF, the U.S. Geological Survey, and the U.S. Navy’s Naval Sea Systems Command and Office of Naval Research. We also interviewed officials from the University of Alaska and other universities and research institutions. Finally, we interviewed officials from the Arctic Research Commission, the University National Oceanographic Laboratory System, and the Polar Research Board of the National Academy of Sciences. Appendix II contains a more detailed discussion of our objectives, scope, and methodology. We conducted our review between June and December 1994 in accordance with generally accepted government auditing standards. We will send copies of this report to the Director, National Science Foundation; the Secretary of Transportation; the Commandant of the Coast Guard; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. If you have any questions or need additional information, please contact me at (202) 512-3841. Major contributors to this report are listed in appendix IV. The Ranking Minority Member, Subcommittee on VA, HUD, and Independent Agencies, Senate Committee on Appropriations, asked us to examine the National Science Foundation’s (NSF) analysis of options for buying and leasing the proposed Arctic research vessel. We found that NSF’s analysis closely follows the Office of Management and Budget’s (OMB) guidelines and shows buying as the best option. However, because the analysis is necessarily preliminary, NSF plans to solicit both purchase and lease proposals, should it proceed in acquiring the proposed vessel. As required by OMB Circular A-94, NSF compared the cost to the federal government of two different methods of financing the proposed vessel: (1) full purchase of the vessel and (2) long-term leasing from a private builder/operator, covering its 20-year expected life. This analysis, which took into account both construction and operating costs, found that the federal government would have the least cost if it purchased the proposed vessel. However, because the design phase is preliminary, the cost estimates represent only rough approximations of the proposed vessel’s costs. Moreover, in order to compare the expected costs of leasing and buying, NSF needed to make several simplifying assumptions. While NSF’s analysis conforms reasonably well to the OMB guidelines for lease-purchase comparisons, the analysis is based on preliminary cost estimates and relies on a variety of assumptions for which alternative hypotheses might be reasonable as well. In addition, assumptions also needed to be made for key variables, such as private sector borrowing costs on maritime loans. Moreover, because of the difficulty of determining a unique methodology for analyzing more complex forms of financing, such as a lease with an option to buy, or some cost sharing that might be offered by the state of Alaska, NSF’s analysis does not include all relevant options. The cost advantage of government purchase over long-term leasing of the vessel is related to two factors. First, under a lease arrangement, the costs of private sector financing—which are higher than the government’s borrowing costs—are passed on to the federal government in lease payments, thereby increasing the vessel’s financing costs over what they would be under outright government purchase. Second, NSF assumed that the cost of building the vessel is the same under both the buy and the lease scenarios, but that under the lease arrangement, an additional profit accrues to the lessor for services related to its retained ownership of the vessel. Under the base-case analysis, roughly half of the cost advantage of purchasing over leasing is related to the gap in federal and private sector borrowing costs, and the remainder is related to the assumption of an additional profit stream to the lessor. NSF’s base-case estimates use a 5.8-percent government borrowing rate because that was the federal Treasury rate on 20-year bonds (a time horizon equal to the expected life of the vessel) as of early 1994. The cost of private sector capital was assumed to be 8.5 percent. In this case, NSF found the advantage of purchase over lease to be $55.7 million in present-value terms. NSF also looked at the sensitivity of the advantage of purchase over lease by using alternative interest rates for both the government and private sector borrowing costs. Throughout these analyses, government purchase was favored over leasing, but the range by which purchase was advantageous ranged from $22.9 million to $99.6 million, each in terms of present value. NSF’s decision to delay choosing a method of financing the proposed vessel until after bids are solicited from shipbuilders for any of several financing options is appropriate. After bids are solicited, NSF will need to perform a financial analysis similar to the one it has performed, but it will then have the advantage of performing such an analysis on more detailed data derived from the bid solicitation. To determine whether the proposed vessel has been justified, we reviewed the Arctic Research Policy Act, as amended; other relevant laws and regulations; findings and recommendations of the Arctic Research Commission and the Interagency Arctic Research Policy Committee; the University National Oceanographic Laboratory System (UNOLS) Fleet Improvement Plan Update; and several other publications. We also reviewed the 1984 and 1990 Polar Icebreaker Requirements studies; relevant congressional testimony; correspondence from and for NSF, the Coast Guard, and UNOLS; Coast Guard policies, procedures, and Arctic research cruise reports; design reports for the proposed Arctic Research Vessel and the planned Coast Guard icebreaker Healy; and icebreaker usage and research cost data. We also obtained written statements from NSF and the Coast Guard on the appropriateness of agencies other than the Coast Guard acquiring and operating icebreakers. In addition, we interviewed officials at Coast Guard headquarters in Washington, D.C.; Seattle, Washington; and Alameda, California. We also interviewed NSF officials from the Office of Polar Programs, Oceanographic Centers and Facilities Section, Budget Division, and officials from the U.S. Geological Survey, the U.S. Navy’s Naval Sea Systems Command, and Office of Naval Research. We interviewed officials from the University of Alaska, the University of Washington, Texas A&M University, the Lamont Dougherty Earth Observatory, and companies that conduct Arctic research. In addition, we interviewed officials from the Arctic Research Commission, the University National Oceanographic Laboratory System, and the Polar Research Board of the National Academy of Sciences. In order to evaluate NSF’s analyses of leasing versus buying the proposed vessel, we reviewed OMB Circular A-94 and NSF’s own analysis of the lease-buy option. We did not independently verify and validate the cost data that NSF used in the analyses, but rather, given NSF’s cost estimates for building and operating the vessel, we reviewed the methodology NSF used to compare the costs of leasing with the costs of buying. In addition, we talked with OMB officials. The following are GAO’s comments on the National Science Foundation’s letter dated February 17, 1995, in addition to the comments discussed on page 9 of this report. 1. We have reviewed many relevant studies, including those written by the Interagency Arctic Research Policy Committee, the Arctic Research Commission, the Polar Research Board, the University National Oceanographic Laboratory System, and NSF. As we note on pages 4-5 in the report, these studies do not take into consideration the two existing and one planned icebreaker—each of which possesses some research support capabilities. In fact, the planned Coast Guard vessel Healy was partially justified as a research vessel. In addition, according to the Coast Guard, the Healy will serve primarily as an Arctic research vessel. The observation that the United States does not possess a dedicated Arctic research vessel is insufficient justification for spending $120 million to construct the proposed vessel, as well as committing substantial funds to operate and maintain it. NSF also needs to consider fiscal constraints and the availability of existing and planned U.S. Coast Guard icebreakers in assessing icebreaker needs. 2. We disagree with NSF’s statement that “the report misinterprets the roles of the U.S. Coast Guard and the National Science Foundation with respect to the acquisition and operation of research vessels for use in Arctic settings.” We do not dispute NSF’s authority to acquire or lease icebreakers. In our view, the issue is not whether NSF has the authority to acquire the proposed vessel but whether NSF has demonstrated the need for an additional icebreaker. 3. The proposed vessel is an icebreaker. Special consideration was given to the proposed vessel’s icebreaking capabilities. For example, the icebreaking requirements for the proposed vessel were increased twice between 1990 and 1994. Our report does not imply that any ship capable of breaking through ice can be considered a research vessel. However, we do state that the two existing Coast Guard icebreakers and the planned vessel Healy, while capable of breaking ice, also have been upgraded or were specifically designed to support research. We agree that none of the three Coast Guard vessels represent the ideal research platform. We disagree with NSF’s view that we discuss the proposed vessel and the existing Coast Guard icebreakers as if they were equal research platforms. On page 7, we state that equipment and other facilities necessary to support science have been added and improved. The largely successful 1994 scientific mission to the Arctic confirms that the existing Coast Guard vessels are capable of supporting the accomplishment of a significant body of Arctic research. 4. We disagree that we imply a reduced need for scientific research in the Arctic. Rather, on page 5 we state that funding constraints have contributed to underutilization of existing Coast Guard vessels. 5. As we note on pages 4-5, neither the design of the Healy nor the availability of Coast Guard vessels are explicitly put forth, with supporting analysis, in the various studies NSF cites in this letter as supporting acquisition of the proposed vessel. 6. The 1993 U.S. Arctic Research Plan mentions the Coast Guard role of supporting Arctic research and describes an Arctic research vessel (the proposed vessel) but does not demonstrate a need for the vessel. NSF states in its comments that the planned vessel Healy is not suited for year-round dedicated research. However, the Coast Guard has stated its intent to make the Healy available for Arctic research 144 days a year. We also note that, according to the 1990 Polar Icebreaker Requirements Study, NSF approved the design of the Healy as a member of the Polar Icebreaker Users Council (an interagency group of icebreaker users that includes NSF). With three Coast Guard icebreakers available, it should be easier to schedule two vessels for central Arctic missions. Again, while it might be ideal to have a dedicated vessel available for research in the less hazardous Arctic waters, the acquisition (about $120 million), maintenance, and operations costs (at least $34,000 per day)—coupled with the costs of maintaining underutilized Coast Guard icebreakers in a state of readiness—raise doubts as to the net benefit to the nation of acquiring the proposed vessel. 7. While it appears that NSF has concluded that the proposed vessel is justified, NSF also states that final judgment should be withheld pending the National Academy of Science’s (NAS) study. We believe that our report points to significant issues that must be addressed before any final judgment is made. The report does identify weaknesses in the justifications found in previous studies and will, in our opinion, help to guide the current NAS effort. Accordingly, we are encouraged that the NAS study commissioned by NSF will include an assessment of the roles of NSF and other agencies and the resources available to support Arctic research programs, including evaluations of their operating costs and management options. 8. The 1990 Federal Oceanographic Fleet Coordinating Committee (FOFCC) report that NSF cites is not a study of national icebreaker requirements, of which research is a significant part, as is the 1990 PIRS study we refer to in this report. While NSF criticizes the 1990 Polar Icebreaker Requirements Study (PIRS), NSF, as well as the Departments of Transportation and Defense and OMB, developed that report. The 1990 PIRS study points to a broader scope of national needs and research community needs and not specifically to the Coast Guard vessel. We found the quantitative assessment of icebreaker needs in the 1990 PIRS study persuasive while the 1990 FOFCC study focuses on fleet requirements for a variety of vessel types. 9. Coast Guard officials told us that the agency is opposed to the acquisition of the proposed vessel because of funding constraints that would likely lead to underutilization of existing and planned Coast Guard vessels. 10. We do not dispute the fact that the Coast Guard icebreakers have experienced reliability problems. As we note on page 7, the Coast Guard is continuing efforts to improve the reliability of its two existing icebreakers. 11. As we note on pages 7-8, the Coast Guard surveyed the scientific community and held meetings that included officials from NSF and UNOLS. Although the Healy will primarily be used to support Arctic research, it is a multipurpose vessel. So while significant scientific capabilities were designed into the vessel, it is not surprising that it does not meet every scientific requirement laid out by the scientific community for the proposed vessel. 12. We agree that the ability of Coast Guard icebreakers to support Arctic science is a serious issue and the report treats them as such. Referring to the Healy as a military icebreaker is misleading given the multiple missions for which the vessel was designed and the research for which the Coast Guard states the Healy will be used. The Coast Guard stated that the funding for the Healy is in place, the contract for construction of the Healy has been let, and assembly of component parts has begun in several locations. As noted on page 8, the Coast Guard solicited, and, in some cases, implemented input from the scientific community. Mindi G. Weisenbloom, 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. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the justification for the National Science Foundation's (NSF) proposed procurement of an icebreaking research vessel. GAO found that: (1) NSF and the scientific community have not demonstrated an increase in icebreaker requirements since 1990 to sufficiently justify a fifth icebreaker vessel; (2) the three icebreakers currently in operation are underutilized and no research cruises in the Arctic region are planned for 1995 or 1996; (3) a fourth icebreaker is being built for the Coast Guard to serve as an Arctic research vessel; and (4) many Arctic scientists justify the acquisition of the proposed vessel on the grounds that the Coast Guard is unwilling and unable to provide reliable support to Arctic research activities, although the Coast Guard's commitment to Arctic research has recently improved. |
The national park system has 376 units. These units have, among other things, over 16,000 permanent structures, 8,000 miles of roads, 1,500 bridges and tunnels, 5,000 housing units, about 1,500 water and waste systems, 200 radio systems, and over 400 dams. According to the Park Service, these facilities are valued at over $35 billion. The proper care and maintenance of the national parks and their supporting infrastructure are essential to the continued use and enjoyment of our great national treasures by this and future generations. However, for years Park Service officials have highlighted the agency’s inability to keep up with its maintenance needs. In this connection, Park Service officials and others have often cited a continuing buildup of unmet maintenance needs as evidence of deteriorating conditions throughout the national park system. The accumulation of these unmet needs has become commonly referred to by the Park Service as its “maintenance backlog.” The reported maintenance backlog has increased significantly over the past 10 years—from $1.9 billion in 1987 to about $6.1 billion in 1997. Recently, concerns about the maintenance backlog within the National Park Service, as well as other federal land management agencies, have led the Congress to provide significant new sources of funding. These additional sources of funding are, in part, aimed at helping the agencies address their maintenance problems. For example, it is anticipated that new revenues from the 3-year recreational fee demonstration program will provide the Park Service over $100 million annually. In some cases, the new revenues will as much as double the amount of money available for operating individual park units. In addition, $10 million from a special one-time appropriation from the Land and Water Conservation Fund has been made available for use by the Park Service in fiscal year 1998 to address the maintenance backlog. These new revenue sources are in addition to the $300 million in annual operating appropriations that are used for maintenance activities within the agency. In 1997, the Park Service estimated that its maintenance backlog was about $6.1 billion. Maintenance is generally considered to be work done to keep assets—property, plant, and equipment—in acceptable condition. Maintenance includes normal repairs and the replacement of parts and structural components needed to preserve assets. However, the composition of the maintenance backlog estimate provided by the Park Service includes activities that go beyond what could be considered maintenance. Specifically, the Park Service’s estimate of its maintenance backlog includes not only repair and rehabilitation projects for existing facilities but also projects for the construction of new facilities or upgrades of present facilities. Of the estimated $6.1 billion maintenance backlog, most of it—about $5.6 billion, or about 92 percent—is for construction projects. These projects, such as building roads and utility systems, are relatively large, normally exceed $500,000 each, and involve multiyear planning and construction activities. According to the Park Service, the projects are intended to meet the following objectives: (1) repair and rehabilitation; (2) resource protection, involving such things as constructing or rehabilitating historic structures and trails and erosion protection activities; (3) health and safety, involving such things as upgrading water and sewer systems; (4) new facilities in older existing parks; and (5) new facilities in new and developing parks. Table 1 shows the dollar amounts and percentage of funds pertaining to each of the objectives. The Park Service’s list of projects in the construction portion of the maintenance backlog reveals that over 21 percent, or $1.2 billion, of the $5.6 billion is for new facilities. We visited four parks to review the projects listed in the Park Service’s maintenance backlog and found that the estimates included new construction projects as part of the backlog estimate. For example: Acadia National Park’s estimate included $16.6 million to replace a visitor center and construct a park entrance. Colonial National Historical Park’s estimate included $24 million to build a bicycle and walking trail along the Colonial Parkway. Delaware Water Gap National Recreation Area’s estimate included $19.2 million to build a visitor center and rehabilitate facilities. Rocky Mountain National Park’s estimate included $2.4 million to upgrade entrance facilities. While we do not question the need for any of these facilities, the projects are directed at adding new facilities or modifying and improving existing facilities to meet the objectives that park managers wish to achieve for their parks. These projects are not aimed at addressing the maintenance of existing facilities within the parks. For example, Colonial National Historical Park proposed to construct a new bicycle and walking trail on the 23-mile route along the Colonial Parkway between Jamestown and Yorktown, Virginia. The reason for the trail is to enhance bikers’, joggers’, and walkers’ experience in the park and to increase safety for motorists and nonmotorists. The proposed project to upgrade facilities at Rocky Mountain National Park consists of constructing four new employee housing units and a 5,000-square-foot visitor center to provide information on park facilities and resources. According to the park’s records, half of the 2.8 million visitors to the park enter via Fall River, an entrance road with no established information station or visitor center until visitors reach Fall River Pass, a distance of 21 miles. Including these types of enhancement projects in the maintenance backlog contributes to confusion about the actual maintenance needs of the national park system. While a portion of the projects listed as part of the Park Service’s maintenance backlog are not maintenance items, it is clear from documentation and physical evidence that we noted at the parks that we visited that the Park Service does have a host of maintenance needs. For example, Acadia National Park proposed to spend over $2 million to rehabilitate historic bridges along the carriage road system that have been saturated by water and exhibit cracks, open joints, and waterborne deposits. Also, Rocky Mountain National Park proposed to spend $14.5 million to rehabilitate and replace park roads. On one road, we observed that the road bank was eroding and in need of rocks to rebuild the eroded area. (See fig. 1.) In addition to projects clearly listed as new construction, other projects on the $5.6 billion list that are not identified as new construction, such as the repair and rehabilitation of existing facilities, include amounts for new construction. Our review of the project proposals for the four parks that we visited showed that each of the proposals included large repair and rehabilitation projects containing tasks that would not be considered maintenance. These projects include new construction for adding, expanding, and upgrading facilities. For example, at Colonial National Historical Park, an $18 million project to protect Jamestown Island and other locations from erosion included about $4.7 million primarily for the construction of new items such as buildings, boardwalks, wayside exhibits, and an audio exhibit. Beyond construction items, the remaining part of the $6.1 billion backlog estimate—about 8 percent, or about $500 million—is for smaller maintenance projects, such as rehabilitating campgrounds and trails and repairing bridges, and other items that recur on a cyclic basis, for example reroofing or repainting buildings. The Park Service excluded daily, routine park-based operational maintenance, such as janitorial and custodial services, groundskeeping, and minor repairs, from the maintenance backlog figures. The Park Service has a maintenance management system that park managers can use to plan and manage these routine activities. However, recent Department of the Interior Inspector General report notes that this system is not uniformly used by park managers. The Park Service compiles its maintenance backlog estimates on an ad hoc basis in response to requests from the Congress or others; it does not have a routine, systematic process for determining its maintenance backlog. The January 1997 estimate of the maintenance backlog—the most recent estimate—was based largely on information that was compiled over 4 years ago. This fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributed to an inaccurate and out-of-date estimate. The $6.1 billion estimate, dated January 1997, was for the most part, compiled on the basis of information received from the individual parks in December 1993. A Park Service official said that the 1993 data were updated by headquarters to reflect projects that had been subsequently funded during the intervening years. However, we found that the Service’s most recent maintenance backlog estimate for each of the parks we visited was neither accurate nor current. The four parks’ estimates of their maintenance needs ranged from about $40 million at Rocky Mountain National Park to $120 million at Delaware Water Gap National Recreation Area. Our analysis of these estimates showed that they varied from the headquarters estimates by about $3 million and $21 million, respectively. The differences occurred because the estimates from headquarters were based primarily on 4-year-old data. Officials from the four parks told us that they had not been asked to provide specific updated data to develop the 1997 estimate. The parks’ estimates, which were based on current information, included such things as recent projects, modified scopes, and more up-to-date cost estimates. For example, Acadia’s estimate to replace the visitor center and construct a park entrance has been reduced from $16.6 million to $11.6 million; the Delaware Water Gap’s estimate of $19.2 million to build a visitor center and rehabilitate facilities has been reduced to $8 million; and Rocky Mountain’s $2.4 million project to upgrade an entrance facility is no longer a funding need because it is being paid for through private means. In addition, one of the projects on the headquarters list has been completed. The Park Service has no common definition as to what items should be included in an estimate of the maintenance backlog. As a result, the Park Service oficials that we spoke with in headquarters, two regional offices, and four parks had different interpretations of what should be included in the backlog. In determining the maintenance backlog estimate, some of these officials would exclude new construction; some would include routine, park-based maintenance; and some would include natural and cultural resource management and land acquisition activities. In addition, when headquarters developed the maintenance backlog estimate, it included both new construction and maintenance items. For example, nonmaintenance items, such as adding a bike path to a park where none now exists or building a new visitor center, are included. The net result is that the estimate is not a reliable measure of the maintenance needs of the national park system. In order to begin addressing its maintenance backlog, the Park Service needs (1) an accurate estimate of its total maintenance backlog and (2) a means for tracking progress so that it can determine the extent to which its needs are being met. Currently, the agency has neither of these things. Yet the need for an accurate estimate and a tracking system is more important now than ever before because in fiscal year 1998, over $100 million in additional funding is being made available for the Park Service, which it could use to address its maintenance needs. This additional funding comes from the recreational fee demonstration program and the Land and Water Conservation Fund. Furthermore, the Park Service requested an increase in funding for maintenance activities in fiscal year 1999. Park Service officials told us that they have not developed a precise estimate of the total maintenance backlog because the needs far exceed the funding resources available to address them. In their view, the limited funds available to address the agency’s maintenance backlog dictate that managers focus their attention on identifying only the highest-priority projects on a year-to-year basis. Because the agency does not focus on the total needs but only on priorities for a particular year, it cannot determine whether the maintenance conditions of park facilities are improving or worsening. Furthermore, without information on the total maintenance backlog, it is difficult to measure what progress is being made with available resources. The recent actions by the Congress to provide the Park Service with substantial additional funding, which could be used to address its maintenance backlog, underscore the need to ensure that available funds are being used to address priority needs and to show progress in improving the conditions of the national park system. The Park Service estimates that the recreational fee demonstration program could provide over $100 million a year to address the parks’ maintenance and other operational needs. For some parks, revenues from new and increased fees will as much as double the amount of money that has been previously available for operating individual park units. In addition to the fee demonstration program, the Park Service was allocated $10 million from the Land and Water Conservation Fund appropriations in fiscal year 1998 to help address the maintenance needs of the national park system. Furthermore, additional funds may be available for maintenance if the Congress appropriates the additional $62 million that the Park Service requested for maintenance activities in its fiscal year 1999 budget request. Several new requirements that have been imposed on the Park Service, and other federal agencies, can help the agency to address its maintenance backlog. These new requirements involve (1) changes in federal accounting standards, (2) the Government Performance and Results Act (the Results Act), (3) determining the need for some Park Service employee housing, and (4) a review of the Park Service’s construction practices. In addition, the Department of the Interior and the Park Service are currently taking a number of steps to better manage the maintenance and construction program, including developing a 5-year plan for prioritizing maintenance and construction projects to be funded and evaluating alternative methods for maintaining historic structures. These requirements and actions should, if implemented properly, help the agency to better manage its maintenance backlog. Recent changes in federal accounting standards require federal agencies, including the Park Service, to develop better data on their maintenance needs. The standards define deferred maintenance and require that it be disclosed in agencies’ financial statements beginning with fiscal year 1998. To implement these standards, the Park Service is part of a facilities maintenance study team established within Interior to provide the agency with information on deferred maintenance as well as guidance on standard definitions and methodologies for improving the ongoing accumulation of this information. In addition, as part of this initiative, the Park Service is doing an assessment of its assets to show whether they are in poor, fair, or good condition. This information is essential and will provide the Park Service with better data on its overall maintenance needs and help the Park Service prioritize its maintenance expenditures. Furthermore, it is important to point out that as part of the agency’s financial statements, the Park Service’s estimates of deferred maintenance will be subject to annual audits. As a result, Interior is reporting information on deferred maintenance in its fiscal year 1997 financial statements. This audit scrutiny is particularly important given the long-standing concerns reported by us and others about the validity of the Park Service’s maintenance backlog estimates. The Results Act should also help the Park Service to better address its maintenance backlog. In carrying out the Results Act, the Park Service requires its park managers to measure progress in meeting a number of key goals, including whether and to what degree the condition of park facilities is being improved. In accordance with the Results Act, in February 1998, the Park Service has developed an annual performance plan for fiscal year 1999 that includes a number of goals to address the maintenance and construction backlog. For example, by September 30, 1999, 10 percent of employee housing units, classified as being in poor or fair condition in 1997, will be removed, replaced, or upgraded to good condition. If properly implemented, the Results Act should make the Park Service as a whole, as well as individual park managers, more accountable for how it spends maintenance funds to improve the condition of park facilities. Once in place, this process should permit the Park Service to better demonstrate what is being accomplished with its funding resources. This is an important step in the right direction, since our past work has shown that the Park Service could not hold park managers accountable for their spending decisions because they did not have a good system for tracking progress and measuring results in terms of how money was being spent at the park level. The other two requirements stem from congressional concerns regarding the number of employee housing units that the Park Service maintains as well as the extremely high costs to construct some new facilities. In September 1993 and August 1994, we recommended that the Park Service assess the need to retain all of its existing housing. In line with this and other recommendations, the Congress passed the Omnibus Parks and Public Lands Management Act of 1996, which contains a provision requiring the Park Service to conduct such a study. The Park Service awarded a contract in November 1997 to identify the need for park housing and the condition of the housing and assess the availability and affordability of housing in nearby communities. The study, which is expected to be completed in October 1998, may result in the elimination of some housing units and related maintenance costs. Concerns were expressed in an October 1997 hearing before the Subcommittee on Interior and Related Agencies, House Committee on Appropriations, regarding the high cost of constructing new facilities in light of the Park Service’s $6.1 billion backlog of maintenance needs. Recent projects, such as new housing at Yosemite and Grand Canyon national parks and a high-cost outhouse at the Delaware Water Gap National Recreation Area, raised questions about the reasonableness of costs for construction projects. During the hearing, Interior’s Inspector General testified that private sector construction of housing near Yosemite would be at least $334,000 less than the Park Service’s $584,000 cost per house and at least $158,000 less than the Service’s $390,000 cost per house at the Grand Canyon. Also during the hearing, Subcommittee members raised a number of questions regarding the $330,000 outhouse at the Delaware Water Gap National Recreation Area that cost more than 3 times the average cost of a new 2,000-square-foot home with three bedrooms and two baths in the same area. (See fig. 2.) In light of the above construction costs, the Conference Committee for Interior’s fiscal year 1998 appropriations directed that an independent study of the Park Service’s construction program be conducted. This study is being performed by the National Academy of Public Administration (NAPA). The NAPA study is examining the Park Service’s construction program and practices, with the goal of identifying and recommending a comprehensive remedy for the causes of cost control problems. The study’s tasks include determining the (1) effectiveness of the Park Service’s decision-making process for constructing facilities; (2) adequacy of constraints on the scope and cost of housing and other projects; (3) appropriate role of the Denver Service Center in the design and oversight of construction projects, including repairing and rehabilitating facilities; and (4) potential for cost-saving incentives at the park and Denver Service Center levels. The study is expected to be completed by mid-June 1998. In addition to new requirements being imposed on the Park Service, Interior, including the Park Service, is currently taking a number of initiatives to better manage its maintenance and construction program. These initiatives include (1) developing a 5-year plan to prioritize maintenance and construction projects and (2) evaluating alternative methods for maintaining its historic structures. During recent congressional hearings focusing on maintenance issues within Interior, the Assistant Secretary for Policy, Management, and Budget acknowledged that the Department needs to improve the management and accountability of the maintenance and construction program and outlined a 5-year priority maintenance and construction program for the Park Service and other Interior agencies. The 5-year plan addresses the deferred maintenance, construction, and natural and cultural resource backlogs and will list priority maintenance and construction projects for the fiscal year 2000 budget. The criteria for selecting these projects involve (1) remedying maintenance deficiencies critical to health and safety and (2) pursuing natural and cultural resource protection. According to the Park Service’s fiscal year 1999 annual performance plan, it expects to identify, by September 30, 1999, priority maintenance and construction projects amounting to $500 million and plans to allocate funds to address at least 20 percent of the high-priority needs. The Park Service is currently evaluating alternative methods for maintaining its historic structures. The cost to maintain its historic structures is a significant component of the maintenance backlog estimate. As of December 1997, the Park Service estimated that the cost for maintaining about 20,000 structures was about $1 billion. However, on the basis of identified maintenance, rehabilitation, and development needs, the Park Service recognizes that it does not have and likely never will have enough funds and staff to take care of all of its historic structures. Accordingly, the Park Service identified alternative methods for preserving many of its historic structures, such as public-private partnerships. Specifically, the alternatives include cooperative agreements, leasing, conveyance of historic structures, as well as philanthropic support. These proposed alternatives should help the Park Service reduce its maintenance backlog. The Park Service also classified its inventory of historic structures by level of significance and by whether the structures must, should, or may be preserved or may be disposed of or altered. Such classification can help park officials assess priority maintenance needs and whether some structures should be maintained. At the time of our review, the Park Service had not taken any actions with respect to the alternative methods for maintaining its historic structures. Appendix I provides additional information on the Park Service’s inventory of historic structures. Given the substantial increase in funding that the Park Service will receive to address its maintenance backlog, now more than ever, the agency must be prepared to demonstrate what is being accomplished with these resources. To do so will require the Park Service to develop more accurate data on its maintenance backlog and to track the progress in addressing it. The new requirements being imposed on the Park Service and current initiatives being undertaken by Interior and the Park Service should, if implemented properly, help the agency to better manage this backlog. These efforts should also go a long way in addressing the concerns about the maintenance backlog that have been expressed by the Congress and others over the years. We provided a draft of this report to the Department of the Interior for review and comment. Interior said that it is in general agreement with the report’s conclusion that new requirements and initiatives undertaken by Interior and the National Park Service should help the Service to better define and manage its maintenance backlog. (See app. III.) To respond to your request, we met with officials from the Park Service’s headquarters office and the Philadelphia and Denver Park Service regional offices and from Acadia National Park, Colonial National Historical Park, Delaware Water Gap National Recreation Area, and Rocky Mountain National Park. We also obtained and reviewed pertinent documentation from these officials. Although the particular park units that were selected may not be representative of the entire national park system, the selection covers the various types, sizes, and geographical locations of park units to show problems relating to the maintenance backlog issues. We conducted our review from July 1997 through March 1998 in accordance with generally accepted government auditing standards. Appendix II provides a more detailed discussion of our objectives, scope, and methodology. As arranged with you office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the issue date. At that time, we will send copies of this report to the appropriate Senate and House committees. We will also make copies available to others on request. Please call me at (202) 512-3841 if you have any questions about this report. Major contributors to this report are listed in appendix IV. The National Park Service maintains an inventory of historic structures that is classified by management category and level of significance. These classifications were developed based on a compilation of legislative mandates and policy considerations indicating significance, use, condition, and location of the historic structures. According to the Park Service, this information was developed to reexamine management practices and to provide guidance to headquarters, regional, and park managers on how to set priorities in allocating resources to preserve historic structures. May be disposed of or altered The Park Service defines management category as follows: (1) Structures that must be preserved and maintained include structures that meet any one of the following criteria: preservation is specifically legislated, structure is related to the park’s legislated significance, structure is significant as defined by the National Historic Landmark criteria, structure contributes to the park’s national significance, or is a prehistoric structure. (2) Structures that should be preserved and maintained must meet all of the following criteria: may meet National Register criteria, is not incompatible with the park’s legislated significance, and has a continuing or potential use based upon design and location. (3) Structures that may be preserved or maintained meet either of the following conditions: structure may meet the National Register criteria but because of condition, location, or other factors does not qualify for (2) above; structure does not meet National Register criteria but through the planning process, it is decided to manage the structure as a cultural resource. (4) Structures that may be disposed of or altered meet any one of several criteria: structure is an irreparable hazard to public health and safety; is a physical or visual intrusion on the park’s legislated significance; or has lost its historical integrity. The Park Service defines significance as follows: National: structure is listed in the National Register as nationally significant or possess national significance by act of Congress or executive order. Contributing: structure does not possess national significance on an individual basis but contributes to the national significance of a park or historic district. State: structure qualifies for the National Register and possess significance at the state level. Local: structure qualifies for the National Register and possess significance at the local level. Not evaluated: structure known through direct observation, survey, testing, or inventory but does not have National Register documentation indicating significance. Not significant: structure known not to be significant but is managed as a cultural resource. Unknown: Data element not completed. The objectives of our review were to determine (1) the National Park Service’s estimate of the maintenance backlog and its composition, (2) how the agency determined the maintenance backlog estimate and whether it is reliable, (3) how the agency manages the backlog, and (4) recent requirements that have been placed on the Park Service and other federal agencies that may have a positive impact on what is being done in this area and current initiatives being taken by the Park Service to deal with the backlog issues. To identify the estimate and composition of the maintenance backlog at national parks, we obtained agency reports, press releases, budget documents, and other relevant Park Service data citing unmet maintenance and repair needs. We also interviewed agency headquarters officials responsible for compiling and reporting the backlog estimate. We did not develop an independent overall maintenance backlog estimate but used the estimate and the composition reported by the Park Service. For information on how the Park Service determined its maintenance backlog estimate and on whether it is reliable, we obtained and analyzed the documentation used by the agency to compile the backlog estimate. We also interviewed officials at headquarters and at two Park Service regional offices and met with maintenance and other personnel at four park units—the Acadia National Park, Maine; Colonial National Historical Park, Virginia; Delaware Water Gap National Recreation Area, Pennsylvania; and Rocky Mountain National Park, Colorado. The parks were judgmentally selected to covers the various types, sizes, and geographical locations of park units. The Intermountain Region in Denver and the Northeast Region in Philadelphia were selected because they have jurisdiction over the parks we visited. To determine the reliability of the backlog estimate, we reviewed whether the agency has a common definition of “maintenance backlog” and whether the estimate was current. We did not question the validity of the maintenance needs reported by individual parks or by headquarters. To obtain information on how the Park Service manages its maintenance backlog, we interviewed headquarter officials to determine whether the agency has identified its total maintenance backlog needs and has tracked the progress in meeting those needs. We also reviewed Park Service documents to determine how the agency plans to handle increased funding resources that may be used to reduce the maintenance backlog. Finally, to identify new requirements that affect the reporting of agency maintenance needs, we reviewed (1) changes in federal accounting standards, (2) the Government Performance and Results Act, (3) the Park Service’s study on employee housing needs, and (4) a study of the Park Service’s construction practices. We also interviewed headquarters officials to identify actions currently underway by the Department of the Interior and the Park Service to better manage the maintenance and construction program. We performed our work from May 1997 through March 1998 in accordance with generally accepted government auditing standards. William Temmler The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the National Park Service's (NPS) efforts to identify and manage the maintenance backlog, focusing on: (1) NPS' estimate of the maintenance backlog and its composition; (2) how NPS determined the maintenance backlog estimate and whether it is reliable; (3) how NPS manages the backlog; and (4) what, if any, recent requirements or initiatives are being implemented by the NPS to help address its maintenance backlog problem. GAO noted that: (1) NPS' most recent estimate of its maintenance backlog does not accurately reflect the scope of the maintenance needs of the park system; (2) NPS estimated, as of January 1997, that its maintenance backlog was about $6.1 billion; (3) most of this amount--about $5.6 billion, or about 92 percent--was for construction projects, which, for the most part, are aimed at correcting maintenance problems at existing facilities; (4) however, over 21 percent of the $5.6 billion in construction projects, or $1.2 billion, was for the construction of new facilities, such as $24 million for a bike path at the Colonial National Historical Park in Virginia and $16.6 million to replace a visitor center and construct a park entrance at Acadia National Park in Maine; (5) while GAO does not question the need for these facilities, including these kinds of new construction projects or projects that expand or upgrade park facilities in an estimate of the maintenance backlog is not appropriate because such projects go beyond what could reasonably be viewed as maintenance; (6) including them in the maintenance backlog contributes to confusion about the park system's actual maintenance needs; (7) NPS estimates of its maintenance backlog are compiled on an ad hoc basis in response to requests from Congress or others; the agency does not have a routine, systematic process for determining its maintenance backlog; (8) the most recent estimate, as of January 1997, was based largely on information that was compiled by NPS in 1993 and has not been updated to reflect changing conditions in individual park units; (9) this fact, as well as the absence of a common definition of what should be included in the maintenance backlog, contributed to an inaccurate and out-of-date estimate; (10) NPS does not use the estimated backlog in managing park maintenance operations; (11) as such, it has not specifically identified its total maintenance backlog; (12) because the identified backlog far exceeds the funding resources being made available to address it, NPS has focused its efforts on identifying its highest-priority maintenance needs; (13) however, given that substantial additional funding resources are being made available--over $100 million starting in fiscal year 1998--NPS needs to more accurately determine its total maintenance needs so that it can better track progress in meeting them; and (14) NPS is taking actions to help address the maintenance backlog problem in response to several requirements. |
The 1952 Immigration and Nationality Act (INA), as amended, is the primary body of law governing immigration and visa operations. Among other functions, the INA defines the power given to the Attorney General, the Secretary of State, immigration officers, and consular officers; delineates the categories of and qualifications for nonimmigrant visas; and provides a broad framework of operations through which foreign citizens are allowed to enter the United States. The Homeland Security Act of 2002 establishes the role of the Department of Homeland Security in the visa process, and a subsequent Memorandum of Understanding between the Secretaries of State and Homeland Security further outlines the visa issuance authorities. According to the memorandum, the Department of Homeland Security is responsible for establishing visa policy, reviewing implementation of the policy, and providing additional direction, while the State Department is responsible for managing the visa process and carrying out U.S. foreign policy. The visa adjudication process has several steps (see fig. 1). Visa applicants generally begin the visa process by scheduling a visa interview. On the day of the appointment, a consular officer reviews the application, checks the applicant’s name in the Consular Lookout and Support System (CLASS), and interviews the applicant. Based on the interview and a review of pertinent documents, the consular officer determines if the applicant is eligible for nonimmigrant status under the Immigration and Nationality Act. If the consular officer then determines that the applicant is eligible to receive a visa, the applicant is notified right away and he or she usually receives the visa within 24 hours. In some cases, the consular officer decides that the applicant will need a Security Advisory Opinion (SAO), which provides an opinion or clearance from Washington on whether to issue a visa to the applicant. SAOs are required for a number of reasons, including concerns that a visa applicant may engage in the illegal transfer of sensitive technology. An SAO based on sensitive technology transfer concerns is known as a Visas Mantis and, according to State officials, is the most common type of SAO applied to science applicants. It is also the most common type of SAO sent from most of the posts we visited in China, Russia, and India. In deciding if a Visas Mantis check is needed, the consular officer determines whether the applicant’s background or proposed activity in the United States could involve exposure to technologies on the Technology Alert List (TAL). The list includes science and technology-related fields where, if knowledge gained from research or work in these fields were used against the United States, it could potentially be harmful. If a Visas Mantis is needed, the consular officer generally informs the applicant that his or her visa is being temporarily refused under Section 221(g) of the U.S. Immigration and Nationality Act, pending receipt of security clearance. After a consular officer decides that a Visas Mantis is necessary for an applicant, several steps are taken to resolve the process. The officer drafts a Visas Mantis cable, which contains information from the applicant’s application and interview. The cable is then generally reviewed by a consular section chief or other consular official at post, who then approves the Visas Mantis cable for transmission to Washington for an interagency security check. Once the cable is sent, the State Department’s Bureau of Nonproliferation, the FBI, and other agencies review the information in the cable and provide a response on the applicant to the Consular Affairs section of State headquarters. The Bureau of Nonproliferation and other agencies are given 15 working days to respond to State with any objections. However, State has agreed to wait for a response from the FBI before proceeding with each Visas Mantis case. State’s Bureau of Consular Affairs receives all agency responses pertaining to an applicant, summarizes them, and prepares a response to the consular posts. A cable is then transmitted to the post which indicates that State does or does not have an objection to issuing the visa, or that more information is needed. Generally, a consular official at post reviews the cable and, based on the information from Washington, decides whether to issue the visa to the applicant. The officer then notifies the applicant that the visa has been issued or denied, or that more information is needed. According to consular officials, in the vast majority of the cases the visa is approved. However, even when the visa is issued, the information provided by the consular posts on certain visa applicants is very useful to certain agencies in guarding against illegal technology transfer. As a result, according to the State Department, the Visas Mantis program provides State and other interested agencies with an effective mechanism to screen out those individuals who seek to evade or violate laws governing the export of goods, technology, or sensitive information. This screening, in turn, addresses significant issues of national security. State Department data are not available on the number of visas that were issued or denied to science students and scholars or the length of time it takes to issue visas to these people. Consular Affairs officials told us that State’s systems can track aggregate student or scholar data by F and J visa categories, but they cannot narrow their query search to specifically identify science students or scholars. Table 1 shows the number of visas issued and denied for students and scholars seeking visas by selected nationalities in fiscal year 2003. In addition, State data are not available on the overall number of Visas Mantis cases in fiscal year 2003 or on the Visas Mantis cases by visa category. State’s systems can track the visa process for individual cases but do not allow for aggregate queries of Visas Mantis cases. For example, State does not have data on how many Visas Mantis cases involved student visas. State also lacks data on the number of science students and scholars that undergo a Visas Mantis security check. Furthermore, State did not have aggregate data on the time frame for adjudicating a visa that required a Visas Mantis security check. The length of time for a science student or scholar to obtain a visa is not known, but a key factor in the time frame can be attributed to whether an applicant must undergo a Visas Mantis check. Since State could provide information on individual cases, we conducted our own sample of Visas Mantis cases that we obtained from State for the period between April and June 2003 and found that for these applicants, it took an average of 67 days for the security check to be processed and for State to notify the post of the results. Furthermore, our visits to posts showed that as of October 1, 2003, 410 Visas Mantis cases submitted by 7 posts in fiscal year 2003 were still pending after more than 60 days. We also found that interoperability problems among the systems that State and FBI use contributed to the time taken to process a Visas Mantis check. In addition, officials at posts we visited told us they were unsure whether they were adding to the lengthy waits by not having clear guidance on when to apply the Visas Mantis process and not receiving feedback on the amount of information they provided in their Visas Mantis requests. Aside from the time it takes to process Visas Mantis checks, we found during our fieldwork that an applicant also has to wait for an interview. Post officials and representatives of higher education scientific and governmental organizations indicated that delays in processing visas for science students and scholars could negatively affect U.S. national interests. To obtain visa data on science students and scholars, and to determine how long the visa process takes, we reviewed all Visas Mantis cables received from posts between April and June 2003, which totaled approximately 5,000. Of these cases, 2,888 pertain to science students and scholars, of which approximately 58 percent were sent from China, about 20 percent from Russia, and less than 2 percent from India. Appendix II provides additional information on the number of science student and scholar cases sent from each post. We drew a random sample of 71 cases from the 2,888 science student and scholar visa applications to measure the length of time taken at selected points in the visa process. The sample of 71 cases is a probability sample, and results from the data in this sample project to the universe of the 2,888 science visa applications. We found that visas for science students and scholars took on average 67 days from the date the Visas Mantis cable was submitted from post to the date State sent a response to the post. This is slightly longer than 2 months per application, on average. In the sample, 67 of the visa applications completed processing and approval by December 3, 2003. In addition, 3 of the 67 completed applications had processing times in excess of 180 days. Four of the cases in our sample of 71 remained pending as of December 3, 2003. Of the 4 cases pending, 3 had been pending for more than 150 days and 1 for more than 240 days as of December 3, 2003. In addition to our sample of 71 cases, State provided us with data on two samples it had taken of Visas Mantis case processing times. Data on the first sample was provided on December 11, 2003, and included 40 visa cases taken from August to October 2003. Data on the second sample was provided on February 13, 2004, and included 50 Visas Mantis cases taken from November and December 2003. State indicated that both samples show improvements in processing times compared to earlier periods in 2003. Based on the documentation of how these cases were selected, we were unable to determine whether these were scientifically valid samples and therefore we could not validate that processing times have improved. For the first sample, the data show that 58 percent of the cases were completed within 30 days; for the second sample, the data show that 52 percent were completed within this time frame. In addition, the data for both samples show that lengthy waits remain in some cases. For example, 9 of the 40 cases had been outstanding for more than 60 days as of December 3, 2003, including 3 cases that had been pending for more than 120 days. Also, 9 of the 50 cases were still pending as of February 13, 2004, including 6 that had been outstanding for more than 60 days. State officials commented that most of the outstanding cases from both samples were still being reviewed by the agencies. Moreover, for one case sent in December 2003, the FBI showed no record of the Visas Mantis request. While Consular Affairs officials were not able to query their systems for aggregate Visas Mantis data, we were able to obtain aggregate data from the posts we visited. During our field visits, we found most posts track Visas Mantis cases they send to State. Some posts designate a consular official to track Visas Mantis cases while others had no designated officers for this purpose. Overall, we found that most posts kept a spreadsheet on the Visas Mantis cases, which generally contained Visas Mantis applicant data such as when the cable was sent to State and when a response was received at post. However, we found no standard method for data or tracking. In addition, we found that most posts did not have accurate data on the number of Visas Mantis cases they sent to headquarters in a fiscal year. Posts could provide us with F and J visa category data but could not break down the data by science students and scholars. During our fieldwork at posts in China, India, and Russia, we obtained data indicating that 410 Visas Mantis cases submitted by 7 posts in fiscal year 2003 were still outstanding more than 60 days as of October 1, 2003. In addition, we found numerous cases—including 27 from Shanghai—that were pending more than 120 days as of October 16, 2003. The following are examples of data we collected during our fieldwork regarding the processing of Visas Mantis cases: In September 2003, the three posts we visited in China had approximately 174 security checks for students and exchange visitors that had been pending between 60 and 120 days, and 49 that had been pending for more than 120 days. In Shanghai in fiscal year 2003, it took approximately 47 days for a Visas Mantis case for a student or scholar to be processed from the time a cable was sent from post to the time the visa was issued. Approximately 25 percent of Chennai’s Visas Mantis cases in fiscal year 2003 took between 60 and 120 days to process, and 58 percent took more than 120 days to process from application date to the date a response was received from Washington. Further, the average time for Visas Mantis cases to be processed in Chennai in fiscal year 2003 was approximately 5 months or 144 days. Post officials told us that the processing time has improved; however, the data show there are still lengthy waits in Chennai. For example, of the 6 visa applications submitted in October 2003 that required a Visas Mantis check, 4 were still pending as of January 9, 2004, and the other 2 took an average of 55 days to process. Of the Visas Mantis applications completed in Moscow in fiscal year 2003, approximately 21 percent took between 60 and 120 days, and 10 percent took more than 120 days to process. In September 2003, Moscow had 544 outstanding Visas Mantis cases. Of these cases, about 28 percent had been pending more than 60 days. In addition, in fiscal year 2003, the average time to adjudicate a visa for those requiring a Visas Mantis security check was 53 days. Because many different agencies, bureaus, posts, and field offices are involved in processing Visas Mantis security checks and each has different databases and systems, we found that Visas Mantis cases can get delayed or lost at different points in the process. We found that in fiscal year 2003, some Visas Mantis cases did not always reach their intended recipient and, as a result, some of the security checks were delayed. For example, we followed up with the FBI on 14 outstanding cases from some of the posts we visited in China in September 2003 to see if it had received and processed the cases. FBI officials provided information indicating that they had no record of 3 of the cases, they had responded to State on 8 cases, and they were still reviewing 3 cases. FBI officials stated that the most likely reasons why they did not have a record of the 3 cases from State were due to cable formatting errors and duplicate cases that were rejected from the FBI database. State did not comment on the status of the 14 cases we provided to the FBI for review. However, a Consular Affairs official told us that in fall 2003, there were about 700 Visas Mantis cases sent from Beijing that did not reach the FBI for the security check. The official did not know how the cases got lost but told us that it took Consular Affairs about a month to identify that there was a problem and provide the FBI with the cases. As a result, several hundred visa applications were delayed for another month. Figure 2 illustrates some of the time-consuming factors in the Visas Mantis process for our sample of 71 cases. While the FBI received most of the cases from State within a day, 7 cases took a month or more, most likely because they had been improperly formatted and thus were rejected by the FBI’s system. In more than half of the cases, the FBI was able to complete the clearance process the same day, but some cases took more than 100 days. These cases may have taken longer because (1) the FBI had to investigate the case or request additional information from State; (2) the FBI had to locate files in field offices, because not all of its name check files are electronic; or (3) the case was a duplicate, which the FBI’s name check system also rejects. In most of the cases, the FBI was able to send a response—which it generally does in batches of name checks, not by individual case—to State within a week. The FBI provides the results of name checks for Visas Mantis cases to State on computer compact disks (CDs), which could cause delays. In December 2003, a FBI official told us that these CDs were provided to State twice a week. However, in the past, the CDs were provided to State on a less frequent basis. In addition, it takes time for data to be entered into State’s systems once State receives the information. In the majority of our sample cases, it took State 2 weeks or longer to inform post that it could issue a visa. State officials were unable to explain why it took State this long to respond to post. Officials told us that the time frame could be due to a lack of resources at headquarters or because State was waiting for a response from agencies other than the FBI. However, the data show that only 5 of the 71 cases were pending information from agencies other than the FBI. Appendix IV provides additional information on the distribution of processing time for our sample of Visas Mantis cases. During our fieldwork, some consular officials expressed concern that they could be contributing to the time it takes to process Visas Mantis requests because they lacked clear guidance on determining Visas Mantis cases and feedback on whether they were applying checks appropriately and providing enough data in their Visas Mantis requests. According to the officials, additional information and feedback from Washington regarding these issues could help expedite Visas Mantis cases. Currently, State provides some guidance to posts on Visas Mantis requirements and processing, including how to use the TAL to determine if a visa applicant should undergo a security check. However, consular officers told us that they would like the guidance to be simplified—for example, by expressing some scientific terms in more comprehensible language. Several consular officers also told us they had only a limited understanding of the Visas Mantis process, including how long the process takes. They told us they would like to have better information on how long a Visas Mantis check is taking so that they can more accurately inform the applicant of the expected wait. Since our visits to posts, State has issued additional updated guidance on applying the TAL. However, after receiving the new guidance, consular officials at some posts told us that although it was an improvement, the updated guidance is still confusing to apply, particularly for junior officers without a scientific background. Consular officers at most of the posts we visited also told us they would like more feedback from State on whether the Visas Mantis cases they are sending to Washington are appropriate, particularly whether they are sending too many or too few Visas Mantis requests. They said they would like to know if including more information in the security check request would reduce the time to process an application in Washington. Moreover, consular officers indicated they would like additional information on some of the outstanding Visas Mantis cases, such as where the case is in the process. State confirmed that it has not always responded to posts’ requests for feedback or information on outstanding cases. Officials at State’s Bureau of Consular Affairs told us that their office facilitates the Visas Mantis process but is not in a position to provide feedback to consular posts on the purpose of Visas Mantis or how the information is being used. However, officials from the FBI and State’s Bureau of Nonproliferation told us that Consular Affairs should take the lead in providing feedback to posts because it administers the program and supervises the consular officers. In addition to the time needed for Visas Mantis checks, another contributing factor in the length of time it takes to adjudicate a visa is how long an applicant must wait to get an interview appointment at post. State does not have data or criteria for the length of time applicants at its overseas posts wait for an interview, but at the posts we visited in September 2003, we found that it generally took 2 to 3 weeks. Furthermore, post officials in Chennai, India, told us that the interview wait time was as long as 12 weeks during the summer of 2003 when the demand for visas was greater than the resources available at post to adjudicate a visa. Officials at some of the posts we visited indicated they did not have enough space and staffing resources to handle interview demands and the new visa requirement. Factors such as the time of year an applicant applies for a visa, the appointment requirements, and the staffing situation at posts generally affect how long an applicant will have to wait for an interview. All the posts we visited had high and low seasons in which the visa application volume fluctuated. For example, June was the busiest month in Chennai, India, in 2000, 2001, and 2002, with the average number of visa applicants exceeding 18,000. By contrast, Chennai saw an average of 10,000 visa applicants in October during these same years. During the summer months of 2003, the high demand for visas was compounded by the new visa interview requirement State established in May 2003. The new requirement, which went into effect on August 1, 2003, states that, with a few exceptions, all foreign individuals seeking to visit the United States need to be interviewed prior to receiving a visa. As a result, interview volumes have increased at some posts we visited. For example, in September 2002, consular officials in Chennai interviewed 25 percent of visa applicants, but by August 2003, that number had increased to 75 percent and was projected to continue to rise. In addition, a consular official in Moscow estimated that the volume of interviews increased from about 60 percent before August 2003 to about 90 percent in December 2003. However, the interview requirement did not have a significant effect on posts in China since the posts were already interviewing about 70 percent of the visa applicants. In early summer 2003, Consular Affairs requested that posts give priority to students and exchange visitors when scheduling visa interviews. Below are the wait times at each post we visited and some of the initiatives the posts have taken to accommodate applicants. At the time of our field visit in September 2003, two of the three posts we visited in China had a 2-week wait for an interview. However, applicants at one post were facing waits of about 5 to 6 weeks. The extended waits for interviews were due to an imbalance between demand for visas and the number of consular officers available to interview applicants and staff to answer phone lines. Consular officials told us that to reduce these waits, they were relying on temporary duty help and also planned to request an additional consular officer at post. To facilitate the issuance of visas to students who underwent a Visas Mantis security check, one post in China opened on one weekend to issue hundreds of visas and also allowed students and scholars to fax in requests for expedited interviews. In such cases, interviews were scheduled within a matter of days. During our field visit in September 2003, consular officers in New Delhi and in Chennai told us that the wait for an interview was 2 to 3 weeks at each post. However, during the 2003 summer months, the wait was as long as 12 weeks in Chennai. To help reduce lengthy waits, applicants were allowed to interview at the U.S. Embassy in New Delhi or at the U.S. Consulate in Calcutta. In addition, the posts we visited instituted longer interview hours, as well as overtime for consular staff and the use of temporary staff to conduct interviews to reduce interview wait times for all applicants. According to consular officials in Chennai and New Delhi, some lengthy waits were attributed to staffing shortages. In a May 2003 assessment conducted by Consular Affairs, State officials concurred that staffing levels in Chennai’s consular section are below what is necessary to meet a rapidly increasing workload. Since late summer 2003, the consulate in Chennai has reserved interview appointments on Fridays for students and temporary workers. However, an official at the consulate in Chennai told us that unless students who go through a Visas Mantis security check apply 2 to 3 months in advance, a significant portion of them will start school late. Consular officials in Moscow told us that at the end of September 2003, the wait for an interview was 1 week, while in St. Petersburg the wait averaged 2 to 3 weeks. In Moscow the recent additions of new junior officers and longer interviewing hours have helped officers keep up with current visa demands. Both posts have also arranged for some visa applicant groups, such as business applicants and official delegations, to be interviewed separately. In addition, a consular official in Moscow told us that the post is able to accommodate most requests for students or scholars who need an expedited appointment. In St. Petersburg, approximately 5 to 10 interview slots per day are reserved for students and scholars. Although we did not attempt to measure the impact of the time it takes to adjudicate a visa, consular officials and representatives of several higher education, scientific, and governmental organizations expressed concern that visa delays could be detrimental to the scientific interests of the United States. Although they provided numerous individual examples of the consequences of visa delays, they were unable to measure the total impact of such lengthy waits. Embassy officials in Moscow told us that visa delays are hindering congressionally mandated nonproliferation goals. Department of Energy officials at post explained that former Soviet Union scientists have found it extremely difficult getting to the United States to participate in U.S. government-sponsored conferences and exchanges that are critical to nonproliferation. Furthermore, many officials with whom we spoke cited specific examples where scientific research and collaboration was delayed or prevented due to delays in obtaining a visa. National Aeronautics and Space Administration officials at post also noted that up to 20 percent of their time is spent dealing with visa issues when they should be focusing on program issues. During our field visits, Beijing’s Deputy Chief of Mission and consular officials at the embassy and consulates in China stated that visa delays could have a negative impact on student and scholar exchanges. They told us that the lengthy waits to obtain a visa might lead Chinese students and scholars to pursue studies or research in countries where it is easier to obtain a visa. A consular chief in Chennai, India, agreed, saying that lengthy waits are also causing Indian students to decide to study in countries where it is easier to get a visa and, therefore, the United States could lose out on intellectual knowledge these visa applicants bring to our country. Further, embassy officials in Beijing reported that visa delays in nonproliferation cooperation and scientific exchange could have enormous and lasting consequences. Finally, research organizations and associations of American universities have cited the difficulties their international students and faculty are having in obtaining visas. According to a survey conducted by a national scientific organization, applicants from 26 different countries, most notably Russia and China, have been delayed or prevented from entering the United States. Another survey conducted by a national educational association reported that hundreds of students and scholars experienced delays in receiving a visa or were denied a visa. According to several surveys, scientific research was postponed, jobs were left unstaffed, and conferences and meetings were missed as a result of the delays. FBI and State officials acknowledged that lengthy visa waits have been a problem, but said they are implementing improvements to the process and working to decrease the number of pending Visas Mantis cases. Improvements include implementation of customer service initiatives, coordination between agencies to identify and resolve outstanding cases, and upgrades in information systems. In addition, State and FBI officials told us that the validity of Visas Mantis checks for students and scholars has been extended to 12 months. State, FBI, and consular officials at posts have made customer service improvements related to Visas Mantis checks that allow them to address questions and provide information to people inquiring about a status of a visa case. For example, consular officials at some of the posts we visited told us that they have established inquiry lines at post for visa applicants to check the status of their case and remind consular officials that their case is still pending. This also helps consular officers to monitor cases that have been outstanding. In addition, State set up an inquiry desk at the beginning of 2003, and the FBI set one up during the summer of 2003 to accommodate calls from the public about the status of pending visa applications that have been submitted for Visas Mantis checks. State has set up a separate e-mail address for inquiries from agencies involved in Visas Mantis processing. Consular Affairs officials also told us they have set up an inquiry line where post officials can obtain additional information on outstanding cases. However, some post officials told us that they would still like more information on how long the Visas Mantis check takes. Officials from State’s Consular Affairs and the FBI told us they are coordinating efforts to identify and resolve outstanding Visas Mantis cases. For example, Consular Affairs officials have been working with FBI officials on a case-by-case basis to make sure that cases outstanding for several months to a year are completed. However, State officials said they do not have a target date for completion of all the outstanding cases, which they estimated at 1,000 in November 2003. According to these officials, while about 350 of these outstanding cases required further review or more information, State has not yet begun working to reconcile them. FBI officials also told us that to address some of the delays on their end, such as those that occur due to problems with lost case files or inoperable systems, the FBI has taken several actions to improve its Visas Mantis clearance process. For example, the officials indicated that the FBI is working on automating its files and setting up a common database between the field offices and headquarters. FBI officials also told us that they have set up a tracking system for all SAOs, including Visas Mantis cases. In addition, they said the FBI has established new procedures to deal with name check files the agency cannot locate within a certain amount of time. In a July 2003 letter to State, the FBI said it would notify State after 90 days that it could proceed with visa processing in the event that the FBI could not locate relevant files and there were no security concerns. Consular Affairs officials told us that State has invested about $1 million on a new information management system that it said would reduce the time it takes to process Visas Mantis cases. They described the new system as a mechanism that would help strengthen the accountability of Visas Mantis clearance requests and responses, establish consistency in data collection, and improve data exchange between State and other agencies involved in the clearance process. In addition, officials said the system would allow them to improve overall visa statistical reporting capabilities and data integrity for Visas Mantis cases. The new system will be paperless, which means that the current system of requesting Visas Mantis clearances by cable will be eliminated. Through an intergovernmental network known as the Open Source Information System, the new system will allow most government agencies involved in the Visas Mantis process, such as the FBI, to obtain visa applicant information and coordinate Visas Mantis responses. State officials told us that the system is on schedule for release early this year, and that the portion relating to SAOs will be operational sometime later this year. However, challenges remain. FBI officials told us that the name check component of the FBI’s system would not immediately be interoperable with State’s new system, but that they are actively working with State to seek solutions to this problem. However, FBI and State have not determined how the information will be transmitted in the meantime. We were not able to assess the new system since it was not yet functioning at the time of our review. In addition to improvements to the Visas Mantis process, State officials told us that they are taking some actions to continue to monitor the resource needs at post. To alleviate concerns about staffing, Consular Affairs officials told us that temporary adjudicating officers are sent to the posts as needed. These officials also told us that State added 66 new officers in 2003 and plans to add an additional 80 in 2004. However, the decision to add these new officers was made before the new August 2003 interview requirements were implemented and thus it is unknown if there are enough resources for the task at hand. In addition, post officials told us that State plans to expand some consular sections, such as in Chennai, India, where the consulate is scheduled to undergo an expansion in spring 2004. Agency officials recognize that the process for issuing a visa to a science student or scholar can be an important tool to control the transfer of technology that could put the United States at risk. They also acknowledge that if the process is lengthy, students and scholars with science backgrounds might decide not to come to the United States, and technological advancements that serve U.S. and global interests could be jeopardized. Our analysis of a sample of Visas Mantis cases from April to June 2003 show that some applicants faced lengthy waits. While the State Department and the FBI report improvements in visa processing times, our analysis of data from the posts we visited in September 2003 and our contact with post officials in January 2004 show that there are still some instances of lengthy waits. State’s and FBI’s implementation of the Visas Mantis process still has gaps that are causing lengthy waits for visas. Consular officers believe that if they receive clearer guidance and feedback on Visas Mantis cases, they could help reduce the time it takes for Washington to process applications and provide better information to applicants. Finally, State and FBI do not have interoperable systems that would help complete security checks of visa applicants more quickly. State’s new information management system could improve the Visas Mantis process. Nevertheless, it is unclear whether the new system will address all the current issues with the process. To help improve the process and reduce the length of time it takes for a science student or scholar to obtain a visa, we are recommending that the Secretary of State, in coordination with the Director of the FBI, and the Secretary of Homeland Security, develop and implement a plan to improve the Visas Mantis process. In developing this plan, the Secretary should consider actions to establish milestones to reduce the current number of pending Visas Mantis develop performance goals and measurements for processing Visas Mantis provide additional information through training or other means to consular posts that clarifies guidance on the overall operation of the Visas Mantis program, when Mantis clearances are required, what information consular posts should submit to enable the clearance process to proceed as efficiently as possible, and how long the process takes; and work to achieve interoperable systems and expedite transmittal of data between agencies. We provided a draft of this report to the State Department, the Federal Bureau of Investigation, and the Department of Homeland Security. State’s and FBI’s written comments are presented in appendix V and VI, respectively. The Department of Homeland Security did not provide official written comments, but provided technical comments that we have incorporated in the report where appropriate. The State Department commented that it is committed to providing the best possible visa services while also maintaining security as its first obligation. State indicated that it had taken a number of recent actions to improve the Visas Mantis process that we believe are positive steps in implementing our recommendation. For example, State said that it has started to provide feedback to posts regarding the information contained in Visas Mantis cables and is providing expanded briefings on the Visas Mantis process to new consular officers at the National Foreign Affairs Training Center. State also said that it would study our recommendation to explore possibilities for further improvements to the Visas Mantis security check process. State emphasized the importance of the Visas Mantis clearance process in protecting U.S. national security and acknowledged that in the past some visa applicants have been required to wait long periods to obtain a visa. However, as a result of recent improvements, State claims that most security checks are now being completed within 30 days and therefore our analysis of Visas Mantis cases from April to June 2003 does not represent current processing times. State commented that it had recently conducted two samples of Visas Mantis cases that show improvements in processing times. However, we were unable to independently validate either sample. In addition, the data for both samples show that lengthy waits remain for some cases. Moreover, because State’s sample selection methods were different from ours, and because its samples would have a wide margin of error, its samples cannot demonstrate improvements in processing times. Thus we are not in a position to conclude that the Visas Mantis processing turnaround times have improved. The Federal Bureau of Investigation did not comment on our recommendation. The FBI acknowledged that the visa program was overwhelmed in the summer of 2002. However, the FBI believes that it is now processing the name checks more quickly and today only a few applicants encounter a significant wait for the FBI to complete the security review process. The FBI indicated that it is working closely with State and other agencies to improve the Visas Mantis process. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time we will send copies of this report to interested congressional committees and to the Secretary of State, the Director of the FBI, and the Secretary of Homeland Security. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions concerning this report, please contact me at (202) 512-4128. Additional GAO contacts and staff acknowledgments are listed in appendix VII. To determine (1) how long it takes a science student or scholar from another country to obtain a visa and the factors that contribute to the length of time and (2) what measures are under way to improve the visa issuance process and decrease the number of pending cases, we collected data from agencies in Washington, as well as at U.S. embassies and consulates overseas, and conducted interviews with agency officials. We reviewed the Immigration and Nationality Act and associated legislation, the State Department’s Foreign Affairs Manual, and cables and other related documents from State’s Bureau of Consular Affairs. In addition, we reviewed State’s data on visa applications and issuances worldwide and for selected posts. We also requested data from State to conduct a sample of Visas Mantis cases to help us determine the number of science students and scholars that were undergoing a Visas Mantis security check and how long those applicants waited for a visa. In Washington, we interviewed officials from the Departments of State, Homeland Security, and Justice. At State, we met with officials from the Bureau of Consular Affairs, the Bureau of Nonproliferation, the Office of the Science and Technology Adviser to the Secretary, and the Office of Science and Cooperation in the Bureau of Oceans and International Environmental and Scientific Affairs. At the Department of Homeland Security, we met with officials from the Directorate of Border Transportation and the Office of Policy and Planning. At the Department of Justice, we met with officials from the Federal Bureau of Investigation’s Name Check Unit and country desk officers for China and Russia. We requested meetings with officials from the Central Intelligence Agency and the White House Office of Science and Technology Policy (OSTP), but they declined to meet with us. However, OSTP provided us with written answers to questions pertaining to its involvement in visa policies for science students and scholars. Based on our review of State Department data systems regarding visas, we determined that visa data are collected for students (F visas) and for exchange visitors (J visas), but State’s data systems do not track science applicants within these categories. Thus, data are not available to report how long it takes science applicants to obtain a visa. However, agency officials identified a special security review procedure known as Visas Mantis as the factor most likely to affect the timeliness of science student and scholar applicant visas. Consequently, we focused our review on the length of time it takes an applicant to acquire a visa if he or she must undergo a security review. Using State documents, we were able to compile data on science applicants for this analysis. To obtain data for our sample of Visas Mantis cases, we asked State in July 2003 to provide us all the incoming Visas Mantis cables for the first 6 months of 2003. State indicated that our request would yield approximately 9,000 cables, and that such a large volume would be too time consuming to compile. To address State’s concern, we requested Visas Mantis cables from April 1 through June 30, 2003. We requested these 3 months because they were the most recent months from our initial request and would include some of the summer student visa applicants. Because Consular Affairs did not have electronic, aggregated data on Visas Mantis cases, they provided us with 5,079 hard copy cables submitted during that time period. We reviewed the cables to determine which ones pertained to a science student or scholar or other categories, including business. The science student and research scholar category included applicants studying at universities or conducting research at universities, national laboratories, and medical centers. We included applicants attending conferences, symposiums, workshops, and meetings hosted or sponsored by universities, professional institutes, and other organizations. We did not include in our sample universe business-related cables, cables that were incomplete, and cables that were duplicates. We entered all the data from the cables into an Excel spreadsheet, gave each a GAO number for control and identification purposes, and verified that there were no duplicates. We ended up with 2,888 Visas Mantis entries in the Excel database. From these 2,888 Visas Mantis cases, we took a computer-generated random sample of 124 cases and requested further data on those cases and their time frames from State. State replied that our request was too labor intensive and asked that we modify it. Therefore, we took a smaller subsample of 71 cases from the 124. Of the 71 cases we received from State, 67 were processed by December 3, 2003. Four cases were still pending. The 71 cases yielded an average completion time of 67 days. This estimate is accurate to within plus or minus 17 days at the 95 percent level of confidence. We assessed the reliability of the sample data provided by State by tracing a statistically random sample of data to source documents. We determined that the data was sufficiently reliable for the purposes of this report. State created its own two randomly selected samples of Visas Mantis cases. However, based on the documentation of how these records were selected, GAO was not able to determine whether these were scientifically valid samples whose results project to the entire population of all science student and scholar visa applications. As such, results reported by the agency from these application records should be treated as testimonial information from a judgmental sample rather than data from a probability sample. We conducted fieldwork at seven visa-issuing posts in three countries— China, India, and Russia. We chose these countries because they are leading places of origin for international science students and scholars visiting the United States. We limited our review to nonimmigrant visa applicants. During our visits at all of these posts, we observed visa operations, reviewed selected Visas Mantis data, and interviewed consular staff about visa adjudication procedures. In China, we met with consular officers at the U.S. Embassy in Beijing and the consulates in Shanghai and Guangzhou. We also met with the Deputy Chief of Mission, as well as officers from the Office of Environment, Science, Technology, and Health in Beijing. In India, we visited the U.S. Embassy in New Delhi and the U.S. consulate in Chennai. We met with consular officers at both posts as well as the Consul General in Chennai and officials from the FBI and the Office of Environment, Science, and Technology in New Delhi. In addition, we met with three students who had outstanding visa applications in Chennai; a Honeywell business representative; and administrators, professors, and students at the Bharath Institute of Higher Education and Research in Chennai. In Russia, we visited the U.S. Embassy in Moscow and the U.S. consulate in St. Petersburg and met with consular officials there. While in Moscow, we also met with officials from the economic section of the embassy, Office of Environment, Science, and Technology, the Department of Energy, and the National Aeronautics and Space Administration. In addition, we spoke with a representative of the International Science and Technology Center in Moscow. While in the field, we collected data and reviewed documents pertaining to the visa process for science students and scholars at all posts. Because post tracking and recording of Visas Mantis data varied, we could not make post comparisons of Visas Mantis cases. Finally, to gather information on the visa issues that science students and scholars face, we spoke with representatives from educational organizations, including the National Academies, the Association of International Educators, the American Council on Education, and the Association of American Universities. We also obtained information from the American Physical Society and the International Institute for Education. We conducted our work from May 2003 through January 2004 in accordance with generally accepted government auditing standards. This appendix provides information on the Visas Mantis cables State received from posts between April and June 2003. Table 2 shows the breakdown of the 2,888 Visas Mantis cases we identified pertaining to science students and scholars. In our sample, we identified a total of 57 posts that had sent one or more Visas Mantis cables to Washington. This appendix provides selected visa statistical information for the posts we visited in China, India, and Russia. Table 3 shows the number of visas issued, visa refusal rates, and interview wait times at posts. This appendix provides information on the distribution of processing time for our sample of Visas Mantis cases. The following are GAO’s comments on the State Department’s letter dated February 11, 2004. 1. The report does not assume that all nonimmigrant visa applicants are qualified for a visa as indicated in footnote 6 on page 5 and discussion on pages 5-6. To further clarify that some applicants are eligible for a visa and some are not, we modified our discussion of the visa adjudication process as presented in figure 1. 2. We acknowledge the importance of the Visas Mantis screening process in protecting U.S. national security. We discuss the utility and value of the Visas Mantis process on pages 7-8. In addition, we modified footnote 11 on page 7 to indicate State’s views on the importance of the Visas Mantis process. 3. On December 11, 2003, State provided us with a study of 40 randomly selected Visas Mantis cases that posts submitted in August, September, and October 2003. In addition, on February 13, 2004, State provided us with another random study of 50 cases from November and December 2003. We discuss both samples on pages 11-12 and how the data was developed. 4. We added wording to footnote 22 on page 11 to acknowledge that in some cases the length of time to process a Visas Mantis check is not under the control of State. 5. We modified the chart on the introductory page to clarify that the Visas Mantis processing time begins when the post sends a Visas Mantis cable request to Washington. The chart shows the total length of time it could take an applicant to obtain a visa if a Visas Mantis security clearance is needed. 6. Our data for the 410 Visas Mantis cases pending after more than 60 days is based on information collected at 7 posts. We were not able to determine the total number of Visas Mantis cases sent in fiscal year 2003 from these posts. In addition, at the time of our review State was not able to provide data on the total number of Visas Mantis cases sent from all posts in fiscal year 2003. 7. We modified the text on page 13 of the report to reflect the number of cases pending from Chennai, India. The information was provided by consular officials at post. For our analysis of Visas Mantis processing time frames, we used the date of application, not the date the Visas Mantis request was submitted, as stated in footnote 28. The following are GAO’s comments on the Federal Bureau of Investigation’s letter dated February 5, 2004. 1. Because State’s new system is not currently operational, we did not assess its technology improvements and therefore could not assess whether the information in State’s new database is eliminating delays attributable to format errors. We discuss that FBI is working together with State to achieve interoperability between their systems on page 23 of the report. 2. We modified the draft to reflect that State Department data are not available on how long it takes for a science student or scholar to obtain a visa. 3. We discuss FBI’s improvements to its visa screening process, including cooperation with State on pages 21-23. 4. We modified the text in the footnote on page 14 to reflect that the FBI has no way to ensure that its Visas Mantis security check results are forwarded to the posts. 5. We added a footnote on page 15 to reference the distribution of FBI’s processing times. In addition to the above named individuals, Jeanette Espinola, Heather Barker, Janey Cohen, and Andrea Miller made key contributions to this report. Martin de Alteriis, Carl Barden, Laverne Tharpes, and Mary Moutsos provided technical assistance. | Each year thousands of international science students and scholars apply for visas to enter the United States to participate in education and exchange programs. They offer our country diversity and intellectual knowledge and are an economic resource. At the same time, the United States has important national security interests in screening these individuals when they apply for a visa. At a hearing held by the House Committee on Science on March 26, 2003, witnesses raised concern about the length of time it takes for science students and scholars to obtain a visa and about losing top international students to other countries due to delays in the visa process. GAO reviewed 1) how long it takes a science student or scholar from another country to obtain a visa and the factors contributing to the length of time, and 2) what measures are under way to improve the process and decrease the number of pending cases. State Department (State) data are not available on how long it takes for a science student or scholar to obtain a visa. While State has not set specific criteria or time frames for how long the visa process should take, its goal is to adjudicate visas as quickly as possible, consistent with immigration laws and homeland security objectives. During this review, GAO found that the time it takes to adjudicate a visa depends largely on whether an applicant must undergo a security check known as Visas Mantis, which is designed to protect against sensitive technology transfers. Based on a random sample of Visas Mantis cases for science students and scholars sent from posts between April and June 2003, GAO found it took an average of 67 days for the security check to be processed and for State to notify the post. In addition, GAO's visits to posts in China, India, and Russia in September 2003 showed that many Visas Mantis cases had been pending 60 days or more. GAO also found that the way in which Visas Mantis information was disseminated at headquarters made it difficult to resolve some of these cases expeditiously. Furthermore, consular staff at posts GAO visited said they were unsure whether they were contributing to lengthy waits because they lacked clear guidance on when to apply Visas Mantis checks and did not receive feedback on whether they were providing enough information in their Visas Mantis requests. Another factor that may effect the time taken to adjudicate visas for science students and scholars is the wait for an interview. The wait time at posts GAO visited was generally 2 to 3 weeks but could be longer depending on the time of the year. While State and Federal Bureau of Investigation (FBI) officials acknowledged there have been lengthy waits, they report having measures under way that they believe will improve the process and that they are collaborating to identify and resolve outstanding Visas Mantis cases. In addition, State officials told GAO they have invested about $1 million to upgrade the technology for sending Visas Mantis requests. According to State officials, the new system will help to reduce the time it takes to process Visas Mantis cases. But despite State's plans to improve the Visas Mantis process, challenges remain. For example, the FBI's systems will not immediately be interoperable with State's. GAO was unable to assess State's new system since it was not yet functioning at the time of the review. |
RHS and FHA operate major federal programs that guarantee mortgage loans. The guaranteed loans generally feature attractive interest rates (comparable to those of prime loans), but serve borrowers who may have difficulty qualifying for conventional mortgage credit (that is, mortgage loans without government guarantees). The programs protect the private lender or other mortgage holder, because the federal government commits to pay part or all of a loan’s outstanding principal and interest if the borrower defaults. In exchange, borrowers are required to pay up- front and annual guarantee fees. Both the RHS and FHA single-family programs guarantee 30-year, fixed-rate mortgages for borrower-occupied homes. The mortgage proceeds can be used to buy, build, or refinance homes. The mortgage loans require little or no down payment from borrowers and allow financing of up-front guarantee fees. These terms generally result in high loan-to-value (LTV) ratios (the amount of the loan divided by the value of the home at origination), including LTV ratios greater than 100 percent. As shown in figure 1, both the RHS and FHA loan guarantee programs have requirements and benchmarks that lenders use to assess borrower eligibility and qualifications. For example, to be eligible for an RHS loan, the property must be located in an RHS-eligible area and the borrower’s household income must not exceed 115 percent of the area median income, based on household size (which effectively limits the loan amount). Although FHA does not have income or geographic limits, the amount of the loans it guarantees is limited by statute. Both programs also require lenders to assess the borrower’s willingness and ability to repay the loan. To make this assessment, lenders use information collected during the loan origination process—including a borrower’s credit score, a numeric value ranging from 300 to 850 (calculated based on credit reports from the national credit bureaus) that indicates a borrower’s ability to repay future obligations; payment-to-income (PTI) ratio, the percentage of a borrower’s income that goes toward total mortgage debt payments; and the debt-service-to-income (DTI) ratio, the percentage of a borrower’s income that goes toward all recurring debt payments. RHS and FHA established specific benchmarks lenders use to evaluate the borrower’s qualifications. RHS and FHA also allow lenders to consider loans for approval that differ from these benchmarks by considering compensating factors (such as proof of continuous employment or cash reserves) that demonstrate the borrower’s ability to repay the loan. Both RHS and FHA lenders evaluate the overall creditworthiness of a loan guarantee applicant and determine the associated risk of default using a version of FHA’s automated mortgage score card. Lenders may also review loans manually to assess applicants’ eligibility and qualifications. In 1949 Congress authorized separate housing assistance for rural areas and gave USDA responsibility for administering it. Section 520 of the Housing Act of 1949, as amended, defines certain areas as “rural” for purposes of determining RHS program eligibility (in this report, we generally refer to these as RHS-eligible areas). RHS-eligible areas are largely identified based on population, but also consider other factors, such as proximity to metropolitan areas and access to mortgage credit. USDA is to re-evaluate eligibility determinations upon issuance of a decennial U.S. Census of Population and Housing. The eligible areas were most recently updated in 2014 and 2015 to take into account data from the 2010 Census. In contrast, FHA’s single-family loan guarantee program is not restricted to any geographic location. As noted previously, rurality can be assessed under classification schemes other than statutory definitions. USDA’s Rural-Urban Commuting Area codes classify all census tracts in the United States on a continuum from rural to urban based on daily commuting patterns, urbanization, and population density. The codes can be consolidated into four types of locations. Urban. Adjoining census tracts in built-up areas, with total population of 50,000 or more. These areas correspond to the U.S. Census Bureau’s urbanized areas. Suburban. Areas with high commuting flow to urban areas and all areas where 30-49 percent of the population commute to urban areas for work. Large rural town. Towns with populations between 10,000 and 49,000 and surrounding rural areas where 10 percent or more of the population commutes to the town and 10 percent or more of the population commutes to an urban area for work. Small town and isolated rural area. Towns with populations of less than 10,000 and their surrounding commuter areas and other isolated rural areas that are more than 1 hour driving distance to the nearest city. RHS-eligible areas encompass rural areas (that is, large rural towns and small town and isolated rural areas) as well as areas that are more urban and suburban. As shown in figure 2, in 2015, RHS-eligible areas constituted 97 percent of the land area of the United States. Eligible areas also contained 37 percent of the nation’s population. Using the Rural- Urban Commuting Area codes described earlier, rural areas constituted 67 percent of the land area of the United States in 2015. These rural areas contained 12 percent of the population. Several categories are used to describe the payment status of mortgages: Current. The borrower is meeting scheduled payments. Delinquent. The borrower is behind by 30 or more days on scheduled payments. In the foreclosure process. The borrower generally has been delinquent for more than 90 days (commonly referred to as in default) and the lender has elected to initiate a legal process against the borrower that generally results in the borrower losing the property. The loan is considered active during the foreclosure process. Terminated with a claim. The borrower is delinquent, unable to pay off the loan balance, and loses title to the property. The government pays a claim (provides reimbursement) to a lender that incurs a loss on a guaranteed loan. The loan is no longer considered active. Prepaid. The borrower has paid off the entire loan balance before it is due. Prepayment often occurs as a result of the borrower selling the home or refinancing. A prepaid loan is no longer considered active. As previously noted, in this report we refer to loans that were 90 days or more delinquent, in the foreclosure process, or that terminated with a claim as troubled loans. As we and others have reported previously, certain loan features are often associated with an increase in mortgage defaults and foreclosures. For example, higher LTV ratios are associated with increased risk of default or foreclosure—especially for borrowers in a negative equity position (when mortgage balances exceed the current value of homes). Borrowers then are limited in their ability to sell or refinance their homes in the event they cannot stay current on their mortgage payments. In addition, lower borrower credit scores at loan origination, higher PTI and DTI ratios, and first-time homebuyers are associated with an increased likelihood of mortgage default and foreclosure. As noted previously, our prior work has assessed the extent to which there is overlap between RHS- and FHA-guaranteed loan programs. In particular, our 2012 report found overlap in the products offered, borrower income levels, and geographic areas served by the two programs. Overlap occurs when programs have similar goals, devise similar strategies and activities to achieve those goals, or target similar users. Our prior work has found that overlap can have positive and negative effects on program implementation, outcomes and impact, and cost- effectiveness. Assessing the presence and extent of any overlap and its positive and negative effects can help congressional decision makers and executive branch leaders identify options to reduce or better manage overlap. Among other things, we have found that addressing overlap may require changes in statute, regulation, or guidance to revise or explicitly define agencies’ roles and responsibilities or program consolidation. In past reports, including in our 2012 report, we have suggested that agencies could increase their efficiency and effectiveness by consolidating their management functions, such as information- technology or administrative-support services. Consolidation is beneficial in some situations and not in others. As a result, a case-by- case analysis is needed to evaluate the goals of the consolidation against realistic expectations of how they can be achieved. The mortgages RHS and FHA guaranteed in RHS-eligible areas in 2010– 2014 generally had similar property, borrower, and loan characteristics, underscoring the overlap between the two guarantee programs. But key differences existed in certain characteristics, primarily due to statutory program requirements. Both programs served more than 600,000 borrowers in RHS-eligible areas, although RHS served more borrowers in more rural parts of these areas. In addition, the majority of borrowers in both programs had similar credit profiles, debt burdens, and other demographic characteristics. But consistent with income limits for the RHS program, RHS borrowers generally had lower annual incomes than FHA borrowers. Finally, both RHS and FHA generally guaranteed loans that were less than $150,000 and that had high LTV ratios. In keeping with RHS’s income restrictions, RHS’s loans were smaller than FHA’s, and RHS’s no-down-payment requirement resulted in higher LTV ratios for RHS than for FHA. In 2010–2014, RHS and FHA both guaranteed large numbers of loans to borrowers in RHS-eligible areas, with FHA serving more borrowers overall and RHS serving a higher number and percentage of borrowers in more rural areas (see fig. 3). In this period, FHA guaranteed about 880,000 loans in RHS-eligible areas, compared with about 614,000 loans for RHS, a 36 percent difference. The difference is partly attributable to the larger size of FHA’s program (loans in RHS-eligible areas represent 25 percent of the loans FHA guaranteed in 2010–2014). But in terms of geographic distribution within RHS-eligible areas, RHS served more borrowers than FHA in more rural areas (areas classified as large rural towns or small town and isolated rural areas using USDA’s Rural-Urban Commuting Area classification). Specifically, in more rural areas, RHS guaranteed approximately 170,000 loans (28 percent of its total), while FHA guaranteed approximately 154,000 loans (18 percent of its total). Conversely, about 72 percent of the loans RHS guaranteed and 83 percent of the loans FHA guaranteed in RHS-eligible areas in 2010–2014 were in areas considered more urban or suburban (using USDA’s Rural- Urban Commuting Area classifications). For loans guaranteed during 2010–2014 in RHS-eligible areas, RHS and FHA borrower characteristics, such as credit score and debt burden, were generally similar. While RHS borrowers had lower incomes, the proportion of borrowers who were racial or ethnic minorities was comparable. The distribution of borrower credit scores and PTI ratios for loans RHS and FHA guaranteed in RHS-eligible areas was similar overall, although RHS borrowers generally had lower DTI ratios. We and others have previously found that lower credit scores and higher PTI and DTI ratios were associated with poorer loan performance. Credit score. In RHS-eligible areas, RHS and FHA borrower credit scores at loan origination were generally similar—median scores were 686 for RHS and 683 for FHA. As shown in figure 4, about one-half of RHS and FHA borrowers had credit scores in the 640–699 range. Credit scores also were similar in the higher ranges—41 percent of RHS borrowers and 39 percent of FHA borrowers had scores greater than 700. However, RHS had a smaller proportion of borrowers with scores of less than 640 (9 percent) than FHA did (14 percent). Although FHA’s benchmark for minimum credit score (580 for maximum financing) is lower than RHS’s (640), lenders with whom we spoke noted that many FHA lenders and mortgage investors impose minimum credit score requirements that are higher than the FHA benchmark—typically, 640 or greater—to guard against the increased risk of default associated with lower scores. In addition, FHA policy allows lenders to require borrowers to have a higher credit score (in excess of FHA’s benchmark) when the borrower does not meet the benchmark for another characteristic, such as the PTI or DTI ratio. As a result, several lenders said they expected RHS and FHA borrowers to have similar scores. Payment-to-income ratio. In RHS-eligible areas, RHS and FHA borrowers generally had similar PTI ratios (see fig. 5). Median ratios for both programs were similar—23 percent for RHS and 24 percent for FHA. RHS’s benchmark for PTI ratio is 29 percent and FHA’s is 31 percent. Roughly three-quarters of the borrowers in both programs had PTI ratios of 29 percent or less (78 percent for RHS and 71 percent for FHA), and about 10 percent of the borrowers in each program had PTI ratios of greater than 31 to 35 percent (a less favorable category). Finally, a larger share of FHA borrowers—about 13 percent—had PTI ratios greater than 35 percent, compared with 5 percent of RHS borrowers. Debt-service-to-income ratio. In RHS-eligible areas, RHS borrowers generally had lower (more favorable) DTI ratios than FHA borrowers (see fig. 6). The median DTI ratio for RHS borrowers was 37 percent, which was somewhat lower than the median for FHA borrowers (41 percent). RHS’s benchmark for DTI is 41 and FHA’s is 43. Seventy-one percent of RHS borrowers and 51 percent of FHA borrowers had DTI ratios of 41 percent or less. Although both agencies allow lenders to approve borrowers with DTI ratios that exceed their benchmarks when compensating factors are present, several lenders with whom we spoke said that FHA provided greater flexibility than RHS in this regard. Consistent with this view, the share of FHA borrowers with DTI ratios greater than 43 percent was double the corresponding share of RHS borrowers (40 percent and 20 percent, respectively). In RHS-eligible areas in 2010–2014, most of the borrowers served by each agency had annual incomes of less than $60,000, but RHS borrower incomes were generally lower than those of FHA borrowers. The median income of RHS borrowers was about $44,000, compared with about $57,000 for FHA borrowers—a 28 percent difference. Approximately 42 percent of the loans guaranteed by RHS went to borrowers with annual incomes of less than $40,000 (roughly the median income of all rural households), compared with 26 percent of FHA- guaranteed loans (see fig. 7). RHS also served 13 percent more borrowers in this income category than FHA (about 256,000 RHS borrowers compared with about 226,000 FHA borrowers). In contrast, about 27 percent of FHA borrowers had annual incomes of $80,000 or more, compared with 3 percent of RHS borrowers. These differences are consistent with the RHS program’s statutory income limits (the program is designed to serve low- and moderate-income borrowers). As shown in table 1, in RHS-eligible areas more than three-quarters of both RHS and FHA borrowers identified as white, although the proportion was larger for RHS (86 percent) than for FHA (77 percent). A smaller proportion of RHS borrowers (8 percent) identified their ethnicity as Hispanic or Latino than did FHA borrowers (11 percent). With respect to racial minority groups, about 5 percent of the borrowers served by each program identified as black or African-American, and roughly 1 percent of each program’s borrowers identified as Asian. Historically, federal mortgage guarantee programs have played a particularly large role among first-time homebuyers, due partly to their low or no down-payment requirements. In RHS-eligible areas, RHS and FHA borrowers both tended to be first-time homebuyers, with RHS having a higher proportion of first-time homebuyers (85 percent) than FHA (71 percent). In RHS-eligible areas in 2010–2014, most RHS- and FHA-guaranteed loans were for less than $150,000, but RHS’s loans generally were smaller than FHA’s (see fig. 8). More specifically, the median loan amount for RHS ($124,000) was 17 percent less than the median for FHA ($146,000). Approximately 69 percent of RHS-guaranteed loans were less than $150,000, compared with about 52 percent of FHA-guaranteed loans. RHS and FHA served almost the same number of borrowers with loans of less than $100,000 (about 200,000 loans each), and these smaller loans accounted for about 33 percent of RHS’s loans and about 23 percent of FHA’s loans. In contrast, about 25 percent of FHA’s loans were above $200,000, compared with 10 percent for RHS. RHS’s smaller loan amounts (relative to FHA’s) are consistent with RHS borrowers’ generally lower incomes. At origination, both RHS- and FHA-guaranteed loans in RHS-eligible areas had high LTV ratios (above 90 percent)—a median ratio of 101 percent for RHS and 96.5 percent for FHA. As shown in figure 9, approximately 57 percent of RHS-guaranteed loans had LTV ratios greater than 100 percent, indicating that borrowers were in a negative equity position (owed more on their loans than their homes were worth). Among RHS borrowers with negative equity, 28 percent had LTV ratios from 102 percent to 104 percent (the top of the range for RHS). Although less than 1 percent of FHA-guaranteed loans had LTV ratios of more than 100 percent, FHA loans also had high LTV ratios. Approximately 48 percent of FHA loans had LTV ratios from 96.51 to 100 percent (with 44 percent in the 96.51 to 98.5 percent range), and an additional 35 percent had ratios from 90.01 to 96.5 percent. As previously discussed, higher LTV ratios are generally associated with a higher likelihood of default. The difference between the LTV ratio distributions for RHS and FHA are consistent with differences in the down-payment requirements of the two programs. RHS does not require borrowers to make a down payment, which allows borrowers to borrow up to 100 percent of the principal amount (prior to financing any allowable fees). In contrast, FHA requires borrowers to make a minimum 3.5 percent down payment, which results in an initial maximum LTV (prior to financing any allowable fees) of 96.5 percent. We estimated that at least 36 percent of RHS borrowers with loans guaranteed in 2010–2014 could have met key FHA criteria (credit score, debt burden measured by PTI and DTI ratios, and loan amount) and also had the ability to meet FHA’s down-payment requirement. Similarly, at least 22 percent of FHA borrowers in RHS-eligible areas could have met key RHS criteria (credit score, debt burden ratios, and household income). According to most lenders we spoke with, borrowers who meet the criteria for both RHS- and FHA-guaranteed loans primarily consider the up-front and monthly costs of the loans in deciding between the two loan products. Based on our analysis of data on RHS-guaranteed loans, we estimated that at least 36 percent of RHS borrowers could have met key criteria to receive FHA-guaranteed loans and also potentially could have made a 3.5 percent down payment (see fig. 10). We analyzed data on loans RHS guaranteed in 2010–2014 and estimated how many RHS borrowers could have met key criteria for the FHA program. That is, the borrowers would have had to meet FHA’s benchmarks for credit scores of 580 or above, PTI ratios of 31 percent or less, and DTI ratios of 43 percent or less, and had loan amounts within the limits for the FHA program. We applied FHA’s benchmarks and did not consider any compensating factors that might have allowed borrowers to qualify without meeting those benchmarks. We also estimated how many RHS borrowers could have also made FHA’s required down payment of at least 3.5 percent (based on borrowers’ liquid assets and LTV ratios). When only credit score, PTI and DTI ratios, and loan amount were considered, at least 70 percent of RHS borrowers could have met these four FHA criteria. Although at least an estimated 36 percent of the RHS borrowers had reported liquid assets sufficient to meet FHA’s down-payment and other criteria, the extent to which they would have used their liquid assets for a down payment is unknown. For example, according to a lender and an industry association with whom we spoke, RHS borrowers with liquid assets may choose not to make a down payment because they may want to use the funds to improve the home, cover other expenses, or maintain savings for future use. In addition, for RHS borrowers who could not have met the down-payment requirement, the extent to which they could have obtained funds from other sources to meet the requirement is unknown. Some RHS borrowers might have been able to obtain a third- party gift to make the down payment. In 2010–2014, approximately 26 percent of FHA borrowers in RHS-eligible areas received a gift to help make their down payment. We estimated that a majority of RHS borrowers also could have met individual FHA criteria (see fig. 11). Almost all RHS borrowers could have met FHA’s benchmarks for credit score and loan amount and about 80 percent could have met the benchmarks for PTI and DTI ratios. When only the ability to make FHA’s minimum down payment was considered, we found that at least 51 percent of RHS borrowers could have met this FHA requirement. These results are not unexpected because many RHS borrowers already would have met RHS’s relatively stricter benchmarks for credit score and PTI and DTI ratios. And as previously discussed, loan amounts for RHS- guaranteed loans were generally smaller than for FHA-guaranteed loans. However, some RHS borrowers would not have met every FHA benchmark. As noted previously, borrowers can qualify for a guaranteed mortgage without meeting every benchmark if certain compensating factors are present. Based on our analysis of data on FHA-guaranteed loans, we estimated that at least 22 percent of FHA borrowers in RHS-eligible areas could have met key RHS criteria for credit score, PTI and DTI ratios, and household income (assuming it was equivalent to the borrower’s income) (see fig. 12). We analyzed data on loans FHA guaranteed in 2010–2014 in RHS-eligible areas and estimated how many FHA borrowers could have met key criteria for the RHS program. That is, the borrowers would have had to meet RHS benchmarks for credit scores of 640 or above, PTI ratios of 29 percent or less, and DTI ratios of 41 percent or less. Additionally, the borrower’s household income would have had to be within RHS limits. When only credit score and PTI and DTI ratios were considered, at least an estimated 37 percent of FHA borrowers could have met the RHS criteria. Although RHS’s benchmarks are relatively stricter than FHA’s and RHS has eligibility restrictions related to household income that FHA does not have, many FHA borrowers also could have met individual criteria for RHS-guaranteed loans (see fig. 13). For example, an estimated 72 percent of FHA borrowers in RHS-eligible areas could have met RHS’s household income requirement (which we measured using borrower income). This may reflect FHA’s relatively large concentration of first-time homebuyers (about 71 percent of the FHA borrowers we analyzed were first-time homebuyers), many of whom may have relatively lower incomes. In contrast, fewer FHA borrowers (about 51 percent) could have met RHS’s benchmark for DTI ratio. As previously noted, several lenders with whom we spoke said that FHA provides lenders more flexibility than RHS in considering compensating factors related to DTI ratio, which results in some FHA borrowers with DTI ratios in excess of FHA’s benchmark (and consequently also of RHS’s benchmark). According to most lenders with whom we spoke, borrowers who meet the criteria for both the RHS and FHA programs primarily consider costs in deciding between the two programs. They stated that borrowers typically prefer the RHS-guaranteed loan over the FHA-guaranteed loan because the borrower’s up-front and monthly costs (measured by the amounts borrowers are required to pay) are lower. We asked lenders about other factors borrowers might consider, including how borrowers access the programs and the length of time to obtain the guarantee. They told us that for borrowers who meet the criteria for both programs, differences between the programs—except for cost—were small and had a minimal impact on borrowers. For example, lenders told us that there is little difference in how borrowers access the programs. Specifically, borrowers can access both RHS- and FHA-guaranteed loans through a variety of channels, including nationwide lenders, local banks, and mortgage brokers. Similarly, they explained that RHS’s 2-stage process for issuing guarantees versus FHA’s 1-stage process did not cause borrowers to opt for FHA-guaranteed loans. In addition, a 2016 survey found that up-front and monthly costs were a factor borrowers consider in choosing a home mortgage and that the importance of costs increased for borrowers with lower household incomes. Both RHS and FHA borrowers pay certain up-front and monthly costs for their guaranteed loans. In addition to closing costs and fees such as payments for home inspections and appraisals, RHS and FHA borrowers pay an up-front guarantee fee, any required down payment, and an annual guarantee fee (charged monthly). RHS and FHA charge the up- front and annual guarantee fees to help offset the cost to taxpayers of the loan guarantee programs. The guarantee fee amounts differ, in part because the programs have different requirements and goals for covering their long-term costs. According to RHS officials, since 2010 RHS has had the goal of making each year’s new cohort of guaranteed loans credit-subsidy-neutral. That is, initially the present value of the lifetime estimated revenue (cash inflow) equals the present value of lifetime estimated expenses (cash outflow). In contrast, FHA historically has estimated that its loan guarantee program has a negative subsidy rate for each new cohort. That is, initially the present value of lifetime estimated revenue exceeds the present value of lifetime estimated expenses. FHA’s approach is consistent with the statutory requirement that it maintain a 2 percent reserve for its primary mortgage guarantee fund. FHA’s capital reserve represents the amounts in excess of those needed for estimated claims or other costs and is used to cover unanticipated increases in those estimated costs before FHA draws on funds available through its permanent indefinite budget authority. RHS does not have a similar requirement, and therefore draws directly on its permanent and indefinite budget authority to cover all estimated cost increases. As described in the hypothetical example below, borrower costs (as measured by amounts required at loan closing and paid monthly) would be lower for an RHS-guaranteed loan than for an FHA-guaranteed loan for the same property. On the basis of statements by most of the lenders we spoke with, the example assumes the same interest rate for both loans. As described previously, FHA requires borrowers to make a 3.5 percent down payment, but RHS has no down-payment requirement. Thus, RHS borrowers would not need to bring any cash for a down payment to closing. RHS’s up-front guarantee fee is higher than FHA’s. In 2014, RHS’s fee was 2 percent of the loan amount and FHA’s was 1.75 percent. However, according to lenders with whom we spoke, most RHS and FHA borrowers finance their up-front guarantee fee into the loan amount and therefore do not need to bring cash to closing to cover this payment. Both programs require borrowers to pay an annual guarantee fee (charged monthly) for the life of the loan, which is calculated based on the scheduled outstanding loan balance. In 2014, RHS’s fee was 0.5 percent and FHA’s minimum fee (for loans of $625,000 or less with LTV ratios of 95 percent or more) was 1.2 percent. As shown in figure 14, a hypothetical RHS borrower purchasing a $125,000 home in 2014 (near the median loan amount for home purchases made with RHS-guaranteed loans from 2010–2014) would have had lower up-front costs (based on the required down payment and assuming financing of up-front guarantee fees) than a borrower with an FHA-guaranteed loan. Assuming a 3.75 percent interest rate, the monthly mortgage payments (including the annual guarantee fee) during the first year would have been $50 less, or 7 percent lower, with an RHS- guaranteed loan than with an FHA-guaranteed loan. Over the life of the loan, assuming the borrower made all monthly scheduled payments for 30 years, the RHS borrower would have paid approximately 58 percent less in annual guarantee fees than the FHA borrower (approximately $11,000 for the RHS borrower versus $27,000 for the FHA borrower). While RHS-guaranteed loans have lower up-front and monthly costs, they often have higher LTV ratios than FHA-guaranteed loans, because RHS does not require a down payment. In the hypothetical situation presented in figure 14, the RHS borrower’s LTV ratio at origination is 102 percent (a negative equity position), compared with 98 percent for the FHA borrower. Because RHS borrowers often start off with negative home equity, they may have fewer options than FHA borrowers to avoid default if they experience financial troubles. For example, they may find it more difficult to sell or refinance their homes to relieve unsustainable mortgage payments. Additionally, RHS borrowers may take longer than FHA borrowers to build sufficient home equity to refinance into a conventional loan without needing to pay additional guarantee fees. RHS loans’ higher LTV ratios and lower guarantee fees relative to FHA loans help make loans more affordable. However, these features may also increase financial risks to the federal government from increased loan defaults and less revenue to cover unanticipated costs. Specifically, as discussed further in the next section of this report, higher LTV ratios are associated with a higher probability of troubled loan performance. Furthermore, in setting guarantee fees, RHS does not have to raise sufficient revenue to maintain a capital reserve as FHA does. As a result, RHS’s program is not designed to cover unanticipated cost increases without drawing on its permanent and indefinite budget authority. These trade-offs highlight issues for RHS and FHA to consider in evaluating opportunities to consolidate the programs, as we recommended in 2012 and reaffirm in this report. Our analysis of loans RHS and FHA guaranteed in 2010 and 2011 found some differences in loan performance after 3 years. These differences included RHS’s lower prepayment rates and higher troubled loan rates (the share of loans at least 90 days delinquent, in the foreclosure process, or terminated with a claim) compared with FHA. Our statistical model also estimated that RHS loans would be expected to have higher troubled loan rates than FHA loans, due partly to the higher LTV ratios of RHS borrowers. After 3 years, the performance of comparable loans that RHS and FHA guaranteed in 2010 and 2011 in RHS-eligible areas differed. As shown in figure 15, RHS had a higher troubled loan rate than FHA (about 7 percent for RHS and 6 percent for FHA). When we restricted the analysis to loans for properties in large rural towns and small town and isolated rural areas (using USDA’s Rural-Urban Commuting Area codes), the troubled loan rates were lower for both agencies, but RHS’s rate (6.1 percent) remained higher than FHA’s (5.4 percent). Additionally, across all RHS-eligible areas, RHS had a higher percentage of loans that were current (and not prepaid) than FHA did. Specifically, about 78 percent of RHS-guaranteed loans were current after 3 years, compared with 73 percent of FHA-guaranteed loans. In contrast, RHS had a substantially lower proportion of loans that prepaid relative to FHA. Specifically, about 9 percent of RHS-guaranteed loans and 16 percent of FHA-guaranteed loans prepaid after 3 years of performance. See appendix V for additional information about the performance status of RHS- and FHA-guaranteed loans after 2 and 3 years of performance. According to representatives of some lenders and industry associations with whom we spoke, RHS would be expected to have lower prepayment rates than FHA because of differences in the RHS and FHA programs. As previously noted, prepayments can result from a borrower refinancing into a new loan. The greater initial home equity of FHA borrowers might have allowed them to more quickly reach the level of equity needed to refinance into a conventional loan. A few lenders and an industry association also noted that FHA’s streamline refinance program, available nationwide, allows existing FHA borrowers to refinance into a new FHA- guaranteed loan through a process that involves fewer requirements than FHA’s traditional refinance process. In contrast, RHS had no streamline refinance program available to existing RHS borrowers in 2010 and 2011. We also analyzed the status of comparable RHS- and FHA-guaranteed loans after 2 years of performance. In contrast to the 3-year troubled loan rates, we found that the agencies had almost identical 2-year troubled loan rates, although RHS’s rate was slightly lower (3.8 percent for RHS and 3.9 percent for FHA). However, similar to the 3-year results, we found that RHS had a higher percentage of current loans and a lower percentage of prepaid loans than FHA after 2 years. We developed a statistical model to examine factors that may explain differences between RHS and FHA troubled loan rates (the share of loans at least 90 days delinquent, in the foreclosure process, or terminated with a claim), including the characteristics of their guaranteed portfolios (represented by loan, borrower, and economic variables). For RHS and FHA separately, we analyzed the statistical relationships between the variables and the probability of the guaranteed loans becoming troubled after 3 years (that is, we estimated changes in the troubled loan rate associated with variations in the value of the variables). In general, we found that the statistical relationships between the variables were similar for both agencies. These similarities suggest that the way the agencies and lenders implement the two guarantee loan programs, including methods for evaluating default risk and ensuring compliance with underwriting standards, would be expected to yield similar troubled loan rates for loans with comparable characteristics. Thus, differences in loan performance are likely attributable to differences in portfolio characteristics. To estimate the influence of portfolio characteristics on differences in agency troubled loan rates, we ran our model using a combined set of RHS and FHA loans. Specifically, we simulated troubled loan rates for RHS and FHA based on a set of characteristics representing the average loan for each agency and compared these expected rates. Overall, the model estimated that RHS would be expected to have a somewhat higher 3-year troubled loan rate than FHA when considering all portfolio characteristics. Specifically, RHS’s expected troubled loan rate was 6 percent higher than FHA’s (see fig. 16). RHS’s higher expected rate relative to FHA’s is consistent with the pattern observed in the agencies’ actual troubled loan rates. Additionally, when we isolated the influence of individual portfolio characteristics on expected troubled loan rates, we found that LTV ratio and borrower income were the largest contributors to RHS’s higher expected rate, as follows (see fig. 16): Our model estimated that RHS’s higher LTV ratios relative to FHA’s were associated with an expected troubled loan rate that was about 11 percent higher than FHA’s. Similarly, our model estimated that RHS’s lower borrower incomes relative to FHA’s were associated with an expected troubled loan rate that was about 6 percent higher than FHA’s. RHS would be expected to have relatively riskier characteristics in these areas due to program requirements that are less restrictive than FHA’s for down payment (as reflected in the LTV ratios) and more restrictive for household income. In contrast, the estimated influences of other characteristics were relatively smaller and associated with lower estimated troubled loan rates for RHS, as follows (see fig. 16): RHS's lower DTI ratios and loan amounts were each associated with an expected troubled loan rate that was about 5 percent lower for RHS than for FHA. Similarly, our model estimated borrower credit scores were associated with an expected troubled loan rate that was 3 percent lower for RHS than for FHA. RHS would be expected to have relatively less risky characteristics along these dimensions due to its stricter benchmarks for credit score and DTI ratio and limits on household income (which indirectly affect the loan amounts). In contrast to the 3-year results, our statistical model estimated that RHS would have a slightly lower expected 2-year troubled loan rate than FHA given the characteristics of the two agencies’ guaranteed portfolios. RHS’s marginally lower expected rate is consistent with the pattern observed in the agencies’ actual troubled loan rates after 2 years. The estimated influences of individual portfolio characteristics on expected 2- year troubled loan rates were consistent with our estimates for the 3-year rates in terms of direction but differed in magnitude. For example, in the case of LTV ratio, the model estimated that RHS’s higher LTV ratios relative to FHA were associated with an expected 2-year troubled loan rate that was about 6 percent higher than FHA’s expected rate. By comparison, RHS’s corresponding 3-year rate was 11 percent higher than FHA’s. The change in the estimated influence of LTV ratios may reflect that, as time passes, a borrower’s chances of experiencing events that can make mortgage payments unsustainable (for example, job loss) increase. Borrowers with greater home equity may be better positioned to resolve such situations through refinancing or sale of the home. As previously noted, RHS borrowers often start off with less home equity (as reflected in their higher LTV ratios) than FHA borrowers and may find it more difficult to refinance or sell their homes to avoid default. See appendixes VI and VII for more information on the model and its results. We provided a draft of this report to USDA and HUD for review and comment. USDA provided comments via e-mail from the audit liaison officer in Rural Development’s Financial Management Division. HUD provided technical comments, which we incorporated into the final report as appropriate. In its comments, USDA stated that our comparative analysis of the RHS and FHA programs added to the understanding of the programs’ capabilities and expanded upon our 2012 report, which concluded that overlap existed between federal housing programs. USDA also made several more specific points, as follows: USDA said that the overlap we found between the RHS and FHA programs was minor and that RHS targets a specific underserved segment of the population, which would not attain successful homeownership but for RHS. We maintain that there is significant overlap between the RHS and FHA loan guarantee programs in RHS- eligible areas, as evidenced by the estimated 36 percent of RHS borrowers and 22 percent of FHA borrowers who could have met the criteria for both programs. Furthermore, we found that the majority of RHS borrowers could have met individual FHA eligibility requirements (99 percent for loan amount and 51 percent for down payment) and individual qualifying benchmarks (99 percent for credit score, 85 percent for PTI ratio, and 79 percent for DTI ratio). Regarding our estimate of RHS borrowers with sufficient liquid assets to make a 3.5 percent down payment, USDA noted that many of them would have had little or no savings left to meet the additional expenses associated with homeownership if they had made such a down payment. USDA also said that the greater affordability of RHS loans compared with FHA loans helps families meet other financial needs. Our report discusses differences in RHS and FHA borrower costs, including the down payment and guarantee fees that make RHS loans more affordable. It also recognizes the view that some borrowers may want to use their liquid assets to improve the home, cover other expenses, or maintain savings for future use rather than make a down payment. However, our report also describes important trade-offs associated with these lower costs. For example, because RHS borrowers are not required to make a down payment and can finance their up-front guarantee fee, they often start off with negative home equity (LTV ratios over 100 percent). As we note in our report, they therefore may have fewer options than FHA borrowers to avoid default if they experience financial trouble. Additionally, RHS’s higher LTV ratios and lower guarantee fees relative to FHA also may increase financial risk to the federal government from higher potential loan defaults and less revenue to cover unanticipated costs of the loan guarantees. USDA said that for methodological reasons, it did not believe that the differences we identified between expected RHS and FHA troubled loan rates were meaningful. USDA stated that RHS’s higher expected troubled loan rates were partly attributable to RHS’s higher LTV ratios (often greater than 100 percent) and that our performance analysis did not fully account for differences in LTV ratios between the RHS and FHA portfolios. USDA added that there could be intraregional differences in loan characteristics between RHS and FHA that were not reflected in our analysis. We maintain that the differences between expected troubled loan rates for RHS and FHA are meaningful and that our methodology properly accounted for differences between the RHS and FHA portfolios regarding LTV ratios and geographic areas served. Our statistical model included an LTV variable with four categories, including a category for loans with LTV ratios at or above 100 percent (which accounted for most of RHS’s portfolio) and a category for loans with ratios of 96 to 99.9 percent (which accounted for most of FHA’s portfolio). We used that structure based on our analysis of RHS loans, which found that loans with LTV ratios slightly above 100 percent performed worse than those with ratios slightly below 100 percent. We specifically highlight this issue in appendix VI of our report. This appendix contains discussion and analysis showing the importance of differentiating loans at the high end of the LTV range in modeling expected RHS loan performance and comparing the performance of the RHS and FHA portfolios. In addition, our analysis of expected loan performance took multiple steps to account for the potential impact of geographic differences between the RHS and FHA portfolios on loan performance. Specifically, we (1) restricted FHA loans to those for properties in RHS-eligible areas, (2) differentiated, within RHS-eligible areas, between areas that were more rural and more urbanized, (3) included a set of variables in our model to control for house price appreciation at the state level, and (4) included a set of regional indicator variables (representing the nine census divisions) in our model to help control for factors not directly measured by other explanatory variables but that might differ by region. Finally, USDA said it did not believe that “a single monolithic housing department” would best serve the highly differentiated housing market in rural America and that it was committed to seeking opportunities for intra-agency collaboration to expand mortgage access and improve the quality of housing for rural families. Our report does not state or intend to suggest that a single agency or single program is necessarily the best way to serve rural housing needs. Rather, our report analyzes the extent of overlap between two similar programs and identifies issues that should be considered in assessing opportunities for consolidation. As we note in our report, consolidation may be beneficial in some situations and not in others, but a case-by- case analysis is needed to assess opportunities for improved efficiency and effectiveness and inform congressional decision making. For this reason, we maintain that RHS and FHA should implement our 2012 recommendation to report on and evaluate consolidation opportunities. 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 interested congressional committees, USDA, and HUD. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. This report compares the characteristics and performance of single-family mortgage loans guaranteed by the Department of Agriculture’s (USDA) Rural Housing Service (RHS) and by the Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) in fiscal years 2010–2014. Specifically, this report (1) compares the property, borrower, and loan characteristics of RHS- and FHA- guaranteed loans in statutorily defined RHS-eligible areas (RHS-eligible areas); (2) estimates the number of RHS and FHA borrowers in RHS- eligible areas who could have met key criteria for the other program and describes factors borrowers consider in choosing between the two programs; and (3) compares the performance of RHS- and FHA- guaranteed loans in RHS-eligible areas. To address these three objectives, we obtained and analyzed loan-level data from RHS and FHA for single-family home purchase and refinance mortgages the agencies guaranteed under RHS’s Section 502 program and FHA’s Section 203(b) program from 2010 through 2014 (a time frame which allowed for analysis of loan performance over multiple years). To facilitate comparison of the agencies’ guaranteed portfolios, we restricted our analysis to 30-year, fixed-rate mortgages to owner-occupants and excluded loans for units in condominium and cooperative developments. The final data sets included records for 672,736 RHS-guaranteed loans (644,514 purchase loans and 28,222 refinance loans) and 5,200,250 FHA-guaranteed loans (3,528,256 purchase loans and 1,671,994 refinance loans). Each loan record included data on property characteristics (such as the property’s state and zip code), borrower characteristics (such as credit score and measures of debt burden), and loan characteristics (such as loan amount and loan-to-value ratio) at origination. In addition, approximately 80 percent of the RHS loan records had data on borrowers’ liquid assets (cash or other assets, such as stocks and proceeds from the sale of property, which are readily convertible to cash). The data also included information on mortgage payment status, including number of days (RHS) or months (FHA) delinquent and other performance information (such as in the foreclosure process, prepaid, or terminated with a claim). To assess the reliability of these data, we tested the data for missing values, outliers, and obvious errors and reviewed documentation on the processes RHS and FHA used to collect and ensure the reliability and integrity of their data. We also interviewed RHS and FHA officials to discuss interpretations of various data fields. We concluded that the data we used were sufficiently reliable for purposes of comparing the characteristics and performance of RHS- and FHA-guaranteed loans and estimating the extent to which RHS and FHA borrowers could have met key criteria for the other program. We supplemented the RHS and FHA data with additional information. Specifically, we determined whether each mortgaged property was located in an RHS-eligible area using RHS’s boundary data. The statutory definition of RHS-eligible areas changed in 2014, and some areas that were previously eligible in 2010–2014 were no longer eligible. To identify RHS-guaranteed loans with properties in RHS-eligible areas according to the new definition, we used loan-level data on the property’s location (expressed as latitude and longitude). Of the 672,736 loans, approximately 5 percent or 31,394 loans RHS guaranteed in 2010–2014 were no longer in RHS-eligible areas using the new definition. We excluded these loans from our analysis. As we did not have property addresses for the FHA-guaranteed loans, we used each property’s census tract to determine whether the property was located in an RHS- eligible area. In addition, we assigned a “rurality” code to each loan using USDA’s Rural-Urban Commuting Area codes. Developed by USDA’s Economic Research Service and the U.S. Health Resources and Services Administration, the codes consist of 10 primary and 21 secondary codes for classifying census tracts in the United States on a continuum from rural to urban based on daily commuting patterns and population density. For ease of presentation, we used the Washington State Department of Health’s four-tiered consolidated taxonomy of the codes. The taxonomy classifies all properties as one of the following: Urban. Adjoining census tracts in built-up areas with a total population of 50,000 or more. Suburban. Areas with high commuting flows to urban areas and all areas where 30-49 percent of the population commutes to urban areas for work. Large rural town. Towns with populations of between 10,000 and 49,000 and surrounding rural areas where 10 percent or more of the population commutes to the town and 10 percent or more of the population commutes to an urban area for work. Small town and isolated rural area. Towns with populations of less than 10,000 and their surrounding commuter areas and other isolated rural areas that are more than 1 hour driving distance to the nearest city. This classification system was designed to support descriptive analysis of census tract data by providing information about the general character of an area. Finally, for each RHS- and FHA-guaranteed loan, we also assigned a census region (based on the state where the property was located) and a 10-year Treasury constant maturity rate at the time of origination (using publicly available data from the Board of Governors of the Federal Reserve System). To compare the property, borrower, and loan characteristics of single- family home mortgages RHS and FHA guaranteed in 2010–2014, we reviewed agency documentation on the Section 502 and Section 203(b) programs and analyzed the loan-level data discussed previously. To identify similarities and differences between the two agencies’ guarantee programs, we reviewed relevant statutes and regulations, RHS and FHA policy guidelines, and documentation related to the agencies’ loan-level data. We also reviewed our 2012 report comparing the RHS and FHA single-family loan guarantee programs. We focused our analysis of the loan-level data on purchase loans. However, in appendix III, we present tables showing the characteristics of RHS and FHA refinance loans. Using data in the agency loan records, we compared the characteristics of RHS and FHA purchase loans for properties located in RHS-eligible areas (based on the statutory definition of eligibility). As noted previously, we did not have the property addresses associated with the FHA loans, but we did have the associated census tracts. We used a property’s census tract to determine whether the property was located in an RHS- eligible area. We considered FHA loans for properties in census tracts where 66.7 percent or more of the tract was in an RHS-eligible area to be RHS-eligible (a total of 880,294 loans). We separately analyzed the characteristics of FHA loans for properties not in RHS-eligible areas and present that analysis in appendix IV. We compared the property, borrower, and loan characteristics of RHS and FHA purchase loans by calculating the number and percentage of loans that fell into different categories or ranges of values for each characteristic. To analyze property characteristics, we compared the rurality, state, Census region, and construction type (manufactured or not manufactured home) of properties with RHS- and FHA-guaranteed loans. To analyze borrower characteristics, we compared the credit score, payment-to-income (PTI) and debt-service-to-income (DTI) ratios, annual income, first-time homebuyer status, and borrower-identified race and ethnicity of RHS and FHA borrowers. For borrower race and ethnicity, we used the Home Mortgage Disclosure Act classifications, which place borrowers in one of the following categories: American Indian or Alaska Native, Asian, black or African-American, Native Hawaiian or other Pacific Islander, Hispanic or Latino, white, or borrower did not disclose. To analyze loan characteristics, we compared the loan amount, loan-to-value (LTV) ratio (including any financed up-front guarantee fees), and interest rate spread of RHS- and FHA-guaranteed loans. For refinance loans, RHS provided loan-level data for two refinance programs (refinance of RHS direct loans to guaranteed loans and refinance of existing RHS-guaranteed loans) and FHA provided data on three refinance programs (refinance of conventional loans to FHA- guaranteed loans, refinance of existing FHA-guaranteed loans (not streamlined), and FHA streamline refinance program). Based on our analysis of the program requirements for RHS and FHA refinance loans, we determined that certain aspects of RHS’s and FHA’s program policies made direct comparison of the two programs problematic. For example, FHA allowed for cash-out refinances (where the borrower refinances their mortgage at a higher amount than the loan balance and uses the remaining funds for other purposes), while RHS did not. In addition, less data were available for refinance loans because certain refinance programs do not require collection of information such as LTV ratio and borrower credit score (in the case of streamline refinance loans). As a result, we analyzed the characteristics of each agency’s refinance loans (and present the analysis in app. III) but did not directly compare the results as we did for purchase loans. To estimate the number and percentage of RHS and FHA borrowers in RHS-eligible areas who could have met key criteria for the other agency’s guarantee program in 2010–2014, we compared the characteristics of RHS-guaranteed loans to the requirements and benchmarks for FHA’s program and compared the characteristics of FHA-guaranteed loans to the requirements and benchmarks for RHS’s program. To do this, we first reviewed RHS and FHA program documents and analyzed agency loan-level data. Specifically, we examined statutes and regulations for the RHS and FHA loan guarantee programs and RHS and FHA guidelines and policy documents (such as handbooks, mortgagee letters, and administrative notices) to identify each program’s key eligibility and qualifying criteria, including statutory requirements and underwriting benchmarks (see fig. 17). Statutory requirements included minimum down payments and limits on loan amount and borrower household income. Underwriting benchmarks included target values set by the agencies for borrower credit score and PTI and DTI ratios. Next, we appended information provided by the agencies to the RHS and FHA loan-level data in conjunction with additional data provided by the agencies. As before, we (1) focused on 30-year, fixed-rate mortgage loans guaranteed by RHS and FHA in 2010–2014 for purchasing single- family homes (excluding loans for units in condominium and cooperative developments) and (2) considered FHA loans to be in RHS-eligible locations if the properties were in census tracts where 66.7 percent or more of the tract was located in an RHS-eligible area. As noted previously, data on RHS borrowers’ liquid assets (cash or other assets, such as stocks and proceeds from the sale of property, which are readily convertible to cash) were not available for approximately 20 percent of RHS borrowers. Our analysis assumed no liquid assets for borrowers for whom data were not available. The information we appended to the loan-level data included the following, if applicable: FHA county-level loan limits to each RHS loan record based on the longitude and latitude of the mortgaged property. RHS annual up-front guarantee fee (as a percentage ranging from 2 percent to 3.5 percent) to each RHS loan record based on the loan’s origination year. RHS county-level household income limits to each FHA loan record based on the loan’s origination year and associated census tract (for determining the county in which the mortgaged property was located). RHS’s household income limits were different for one-to-four-person households and five-to-eight-person households. As we did not have any information on the size of FHA borrower households, we assumed that the borrower’s income was the only source of household income and that all households consisted of no more than four people (the more restrictive limit). Using the appended data sets, we calculated the number and percentage of RHS borrowers who could have met FHA’s criteria and the number and percentage of FHA borrowers who could have met RHS’s criteria. To do this, we compared the relevant borrower and loan characteristics of each loan to the applicable requirements and benchmarks for the other agency’s program (as described in more detail below). In applying these benchmarks, we did not consider the presence of compensating factors— that is, borrower strengths that may lead a lender to qualify a borrower who does not meet all benchmarks. For example, RHS and FHA allow lenders to qualify a borrower with a DTI ratio higher than their benchmarks when the borrower has additional cash reserves. As a result, our estimates represent the minimum number of borrowers who might have met criteria for credit score and PTI and DTI ratios for the other program. To assess the extent to which RHS borrowers could have met FHA’s criteria for borrower credit score and PTI and DTI ratios, we compared pertinent information in the RHS loan records with FHA’s benchmarks for these criteria. Similarly, to assess the extent to which RHS borrowers could have met FHA’s criterion for loan amount, we compared the RHS loan amounts to the applicable FHA loan limit based on the year the loan was originated and the county in which the mortgaged property was located. We first determined the number and percentage of RHS borrowers who could have met individual criteria and then determined the number and percentage who could have met all of the criteria simultaneously. To estimate the number and percentage of RHS borrowers who could have met FHA’s criterion for down payment (3.5 percent minimum down payment requirement), we used RHS data on borrowers’ liquid assets, LTV ratios, and up-front guarantee fees (as a percentage of the loan amount). For this analysis, we assumed that any LTV ratio below 100 percent reflected money the borrower had paid towards a down payment and that all RHS borrowers had financed the applicable 2010–2014 RHS up-front guarantee fee into their loans. In addition, for each loan, we used the property’s appraised value to calculate the amount the borrower would have been required to pay to make a 3.5 percent down payment. We then determined the number and percentage of RHS borrowers who had (1) sufficient liquid assets to make at least a 3.5 percent down payment, (2) LTV ratios corresponding to at least the minimum down payment amount, or (3) a combination of liquid assets and LTV ratios corresponding to at least the minimum down payment amount. As previously discussed, RHS did not have data on liquid assets for approximately 20 percent of the borrowers, so we assumed that those borrowers had no liquid assets. In addition, it is unknown how many RHS borrowers could have obtained additional assets from a third party to pay the down payment. Thus, our estimate represents the minimum number of RHS borrowers who could have met FHA’s down-payment requirement. Finally, based on the analysis described above, we estimated the number and percentage of RHS borrowers who could have met FHA criteria for borrower credit score, PTI and DTI ratios, loan amount, and down payment simultaneously. These 36 percent of RHS borrowers represented the group who could have qualified for an FHA-guaranteed home purchase loan. To assess the extent to which FHA borrowers could have met RHS’s criteria for borrower credit score and PTI and DTI ratios, we compared pertinent information in the FHA loan records with RHS’s benchmarks. We first determined the number and percentage of FHA borrowers who could have met the individual RHS criteria and then determined the number and percentage who could have met all of the criteria simultaneously. To estimate the number and percentage of FHA borrowers who could have met RHS’s criterion for household income, we compared the amount of each FHA borrower’s income with the applicable RHS income limit. However, FHA’s loan-level data contained information on borrower income but not on household income or size. FHA does not collect data on household income, so we assumed that FHA borrower and household income were equivalent. Under that assumption, we estimated that 72 percent of FHA borrowers fell within RHS’s income limits. By assuming borrower income was the only source of household income, our analysis potentially overestimated the number of FHA borrowers who could have met RHS’s household income limits. To test the sensitivity of our estimate to that assumption, we recalculated our estimate using an alternative assumption. Some FHA households likely had income from someone other than the borrower that could have pushed the household over the RHS income limit. To account for this possibility, we calculated the median difference between RHS borrower incomes and their household incomes and added that amount ($2,960) to the incomes of all FHA borrowers. Under this assumption, the percentage of FHA borrowers who met RHS’s income limits decreased from 72 percent to 70 percent. Finally, based on the analysis described earlier, we estimated the number and percentage of FHA borrowers who could have met RHS’s criteria for borrower credit score, PTI and DTI ratios, and household income simultaneously. These borrowers represented the group who could have qualified for an RHS-guaranteed home purchase loan. We made the estimates using both income assumptions (the base case of household income equivalent to borrower income and the alternative of household income equivalent to borrower income plus $2,960). The difference between the two estimates was one percentage point (22 percent and 21 percent for the base case and alternative assumptions, respectively). We expanded our analysis of borrowers who could have qualified for the other program by disaggregating the results by location type. Specifically, using USDA’s Rural-Urban Commuting Area classification system, we estimated the number and percentage of RHS and FHA borrowers in urban, suburban, large rural town, and small town and isolated rural area who could have met all of the other program’s key criteria (see table 2). Finally, we analyzed RHS and FHA loan-level data to estimate the number and percentage of RHS and FHA borrowers by loan cohort (2010–2014) who could have met all of the other program’s key criteria (see table 3). To analyze the factors that RHS and FHA borrowers who meet the criteria for both programs consider in choosing between the two, we analyzed data on up-front and monthly costs, interviewed eight lenders and five industry stakeholders, and analyzed a survey published in 2016 of borrower opinions. To describe RHS’s and FHA’s methodologies for calculating up-front and annual costs, we (1) reviewed RHS’s periodic notices and policy guidance on up-front and annual guarantee fees and RHS’s Guarantee Up-front and Annual Fee Calculator and (2) reviewed FHA’s policy handbook and mortgagee letters containing information on up-front and annual costs and FHA’s methodology for calculating guarantee fees. To compare illustrative up-front, monthly, annual, and lifetime costs of RHS- and FHA-guaranteed loans in 2014, we estimated costs for homes with a $125,000 purchase price and a mortgage interest rate of 3.75 percent. To calculate the up-front and annual costs for each program, we assumed that: the appraised value and purchase price of the property were the same; the full up-front guarantee fee was financed; all closing costs and fees (other than the up-front guarantee fee) were paid by the seller (through seller concessions); the interest rates were identical; and the loan payments were made on time for the life of the loan. To calculate the up-front costs of RHS-guaranteed loans, we first calculated the amount of the up-front guarantee fee based on the purchase price of the property and the 2 percent up-front fee percentage RHS charged in 2014. Second, we added the up-front fee to the purchase price to calculate the final loan amount. To calculate the up-front costs for FHA-guaranteed loans, we (1) calculated the amount of the required 3.5 percent down payment based on the appraised value of the property, (2) calculated the base loan amount by subtracting the down payment from the initial purchase price, (3) calculated the amount of the up-front guarantee fee (FHA’s up-front fee was 1.75 percent in 2014) using the base loan amount, and (4) calculated the final loan amount by adding the up-front fee to the base loan amount. For both RHS and FHA loans, we assumed that the amount of cash required at loan closing was equivalent to the amount of the required down payment (3.5 percent for the FHA loan and zero for the RHS loan). To calculate the illustrative monthly, annual, and lifetime costs of RHS- and FHA-guaranteed loans, we calculated: 1. the monthly principal and interest payment based on the final loan amount (including the financed up-front guarantee fee); 2. the amount of the annual guarantee fee by multiplying the annual average outstanding loan balance by the annual guarantee fee percentage (in 2014, the annual guarantee fee was 0.5 percent for RHS loans and 1.2 percent for FHA loans); 3. the monthly cost of the annual guarantee fee by dividing the amount of the annual guarantee fee by 12 (for 12 months); and 4. the total monthly costs by adding the monthly principal and interest payment to the monthly cost of the annual guarantee fee. To test the sensitivity of our up-front, monthly, and annual cost calculations, we also calculated those costs assuming alternative home purchase amounts ($80,000, $100,000, $135,000, and $150,000) and interest rates (6 and 15 percent). We found that for all purchase amounts and interest rates, RHS had lower cash required at closing than FHA because RHS had no down-payment requirement. In addition, we found that as the assumed interest rate increased to 6 and 15 percent, RHS’s monthly costs (principal and interest and annual guarantee fees charged monthly) continued to be lower than FHA’s, although the percentage difference between RHS and FHA monthly costs decreased. To test the sensitivity of our results to the assumption that interest rates for RHS- and FHA-guaranteed loans were identical, we also calculated monthly costs (for a $125,000 home) under scenarios in which the interest rate charged for the RHS loan was higher or lower than the 3.75 percent interest rate charged for the FHA loan. Specifically, we calculated the cost to a hypothetical borrower where the interest rate for the RHS loan was 0.25 percentage points higher (that is, 4.0 percent) and 0.25 percentage points lower (that is, 3.5 percent) than the rate charged for the FHA loan. In both scenarios, the monthly costs of the RHS loan remained lower than the costs of the FHA loan. To obtain the perspective of program participants, we interviewed a nonprobability sample of eight mortgage lenders selected to capture variation in the geographic areas served, volume of guaranteed loans originated, and mix of RHS and FHA business. To identify these lenders, we analyzed data collected under the Home Mortgage Disclosure Act (including the number of RHS- and FHA-guaranteed loan originations by lender in 2012 and the location of each lender) and RHS and FHA loan- level data for 2010–2014 on the number of guaranteed loans originated by each lender. To supplement our lender interviews and gain perspective on mortgage lending in rural areas, we interviewed mortgage industry groups selected to capture a range of stakeholders in the RHS and FHA loan guarantee programs. These groups included the Credit Union National Association, the Independent Community Bankers of America, National Association of Mortgage Brokers, National Association of Realtors, and Mortgage Bankers Association. Additionally, we reviewed the Consumer Financial Protection Bureau and Federal Housing Finance Agency’s survey of recent mortgage borrowers about their experiences in choosing and taking out a mortgage. Among other things, the survey asked a representative sample of borrowers who obtained a mortgage in 2013 how important a variety of mortgage terms or features (such as a low interest rate, low closing fees, low down payment, and low monthly payment) were in their selection of a mortgage. The survey results were reported in the aggregate and by loan and demographic categories, including loan amount and household income. We reviewed the survey methodology and determined that the survey results were sufficiently reliable for purposes of describing the importance of decision factors borrowers consider when selecting a mortgage loan. To compare the performance of RHS- and FHA-guaranteed home purchase loans in RHS-eligible areas, we analyzed the RHS and FHA loan-level data described previously. We focused on loans guaranteed in 2010–2012 and determined their performance status at 12-month intervals (anniversary months) starting from the month the first payment was due until September 30, 2014. For this comparison, we limited the FHA-guaranteed loans to those obtained by borrowers with incomes within the RHS county-level household income limits (using borrower income as a proxy for household income). We restricted the data in this way to account for RHS’s household income limits and FHA’s lack of such limits, which resulted in FHA serving some borrowers with higher incomes than RHS is allowed to serve. We also limited the set of FHA-guaranteed loans to those for properties in census tracts where more than 95 percent or more of the tract was within an RHS-eligible area. Because the analysis focused on the payment status of the loans, we used the first month a loan payment was due (first payment month) as the starting point for measuring performance. The first payment month may be up to 2 months after the month the loan is guaranteed. We classified the performance status of each loan guaranteed by RHS and FHA into one of the following payment status categories: current, prepaid, 30–89 days delinquent, 90 or more days delinquent or in the foreclosure process, or terminated with a claim. Due to the relatively brief period for our analysis of loan performance (2 and 3 years from the month of first payment), we did not isolate and analyze the foreclosure rate of RHS- and FHA- guaranteed loans. According to the Federal Reserve Bank of Minneapolis, on average loans in foreclosure in 2010 took from 15 months to 2 years to complete foreclosure, meaning that relatively few of the loans we analyzed would have had time to complete this process. We also classified loans in the last two categories as troubled and calculated troubled loan rates for each agency. We compared the actual performance of RHS- and FHA-guaranteed loans after 2 and 3 years from the date of first payment. To compare the expected performance of RHS- and FHA-guaranteed loans after 2 and 3 years and to examine factors accounting for differences between RHS and FHA troubled loan rates, we developed a statistical model. The model primarily used FHA and RHS loan-level data including borrower income and credit score, loan amount, loan interest rate, and DTI and LTV ratios at loan origination. The model also used data from other sources, including the Federal Housing Finance Agency House Price Index for state nonmetropolitan areas to estimate changes in the value of each mortgaged property and data on the Treasury 10-year constant maturity rate to determine the interest rate spread (that is, the difference between the interest rate on the loan and the Treasury rate for the same period). Prior research has found that these variables influence loan performance, including troubled loan rates. Other variables for which we lacked data, such as borrower employment status, may also influence troubled loan rates. For RHS and FHA separately, we used logistic regressions to estimate the relationships between relevant loan and borrower characteristics and economic conditions (explanatory variables) and the probability of the loans they guaranteed becoming troubled after 2 and 3 years. That is, we estimated changes in the troubled loan rate associated with variations in the value of the explanatory variables. These relationships are represented by coefficients for each variable. In general, we found that the coefficients were similar for both agencies and consistent with prior research in terms of the direction of the estimated effect. The similarity in the separate RHS and FHA coefficients allowed us to run our model using a data set that included both agencies’ loans in order to estimate coefficients for the combined loan pool. These coefficients represent the statistical relationships between the explanatory variables and loan performance without regard to which agency provided the guarantee. As a result, they provided a common foundation for estimating and comparing how the portfolio characteristics of each agency influenced their troubled loan rates. We used these coefficients to simulate 2- and 3-year troubled loan rates using average values of the explanatory variables. Specifically, we first estimated an overall expected troubled loan rate for RHS’s loan portfolio based on RHS-specific averages for all explanatory variables. Second, to isolate the impact of a particular RHS portfolio characteristic on the expected troubled loan rate, we used the RHS-specific average for the corresponding variable while holding all other variables at their average values for the combined RHS-FHA loan pool. We performed the same two steps for FHA’s loan portfolio and compared the results for RHS and FHA. See appendixes VI and VII for additional information on the statistical model and results. We conducted this performance audit from February 2015 to September 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix describes the results of our analysis comparing the characteristics of single-family home purchase loans guaranteed by the Rural Housing Service (RHS) and the Federal Housing Administration (FHA) in fiscal years 2010–2014 in RHS-eligible areas. We calculated the number and percentage of loans that fell into different categories or ranges of values for each borrower, loan, and property characteristic at loan origination by individual loan cohort and for all loan cohorts collectively. This appendix describes the results of our analysis of the characteristics of single-family refinance loans guaranteed by the Rural Housing Service (RHS) and Federal Housing Authority (FHA) in fiscal years 2010–2014 in RHS-eligible areas. RHS provided loan-level data for two refinance programs: refinancing of RHS direct loans to RHS-guaranteed loans and refinancing of existing RHS-guaranteed loans. FHA provided data for three refinance programs: refinancing of existing FHA-guaranteed loans (not streamlined), refinancing of existing FHA-guaranteed loans (streamlined), and refinancing of conventional loans to FHA-guaranteed loans. For selected borrower and loan characteristics, we calculated the number of loans refinanced under each program, the percentage of loans with missing information for the specified characteristic, and the median value of the characteristic (for the 5-year period collectively). This appendix describes the results of our analysis examining the characteristics of single-family home purchase loans guaranteed by the Federal Housing Administration (FHA) in fiscal years 2010–2014 for properties not in Rural Housing Service (RHS)-eligible areas. Approximately 75 percent (2,646,366) of the home purchase loans FHA guaranteed in 2010–2014 were not located in RHS-eligible areas. We calculated the number and percentage of FHA-guaranteed loans that fell into different categories or ranges of values for each borrower, loan, and property characteristic at loan origination by individual loan cohort and for all loan cohorts collectively. This appendix describes the results of our analysis comparing the performance of single-family home purchase loans guaranteed by the Rural Housing Service (RHS) and the Federal Housing Administration (FHA) in fiscal years 2010–2012 in RHS-eligible areas after 2 and 3 years of performance. We analyzed performance for all loans and by the degree of rurality of the mortgaged property using the Department of Agriculture’s (USDA) Rural-Urban Commuting Areas classification system. This appendix describes the statistical model we developed to analyze how mortgage loans recently guaranteed under the Section 502 single- family loan guarantee program, administered by the Department of Agriculture’s (USDA) Rural Housing Service (RHS), have performed over time and what factors explain performance empirically. We provide a comparison of RHS loan performance to that of single-family loans guaranteed by the Federal Housing Administration (FHA) through its Section 203(b) program. Our fundamental approach was to define an individual loan’s performance in terms of its status as observed in a particular anniversary month. Status is a measure of whether a loan is current at a particular time, or, if not, a measure of its delinquency or an indication of its termination. Given knowledge of a loan’s month of first payment, we can define an anniversary month as the month of any particular scheduled payment, such as the 24th or 36th payment month. A loan’s anniversary status is then simply a snapshot of its status in that month. Given observations of anniversary month status, we developed binary measures of loan performance in that month: troubled (at least 90 days delinquent, in the foreclosure process, or terminated with a claim) on the one hand or nontroubled (current, 30–89 days delinquent, or prepaid) on the other. We then used logistic regressions to estimate the effects of various factors that are understood to influence loan performance on this binary measure. The underlying variation in the values of these explanatory variables across a large set of loans permits us to estimate the effects of these factors on loan performance and to discuss results in terms of changes in expected probabilities of troubled performance. To undertake our analysis, we obtained loan-level data from RHS and FHA. The agencies provided us with information for loans guaranteed in fiscal years 2010–2014. Specifically, we obtained information on 6,181,365 FHA loans and 687,564 RHS loans, although we analyzed only fixed-rate loans with a 30-year term for home purchases and, given the requirements of the anniversary-month approach, could not include every loan record in the statistical analysis. The agencies provided us with two types of information for each loan: static and performance. In general terms, static information describes loan and borrower characteristics at the time of loan origination, such as the loan amount and the borrower’s credit score. Performance, or history, files contain information that includes a loan’s status in each month (for example, current or 30 days delinquent). The performance information for each loan in our data set covers performance from loan origination through September 2014, the last month of fiscal year 2014. Thus, we have approximately 5 years of observed performance for the earliest loans in our data, but only a few months for the most recent loans in our data. The month of first mortgage payment was not itself a variable in the data we received, but both agencies provided us with guidance to identify the month of first payment using information on other related date fields. We included a variety of loan, borrower, and other characteristics as explanatory factors in our statistical analyses of mortgage performance. Because of our focus on comparing RHS and FHA loan performance, we developed a modeling approach that would allow us to estimate the effects of a set of explanatory variables separately for RHS and FHA loans as well as pooled together. To accomplish this, we needed the same set of explanatory factors for RHS and FHA loans. Information describing key loan and borrower characteristics was available in both the RHS and FHA data. Key static information at loan origination includes borrower income, credit score, loan-to-value (LTV) ratio, loan amount, debt-service-to-income (DTI) ratio, mortgage interest rate, and an indicator for whether the borrower was a first-time homebuyer. These characteristics are associated with loan performance, as follows. Borrowers with higher credit scores are less likely to have missed payments than borrowers with lower credit scores. Equity, which is defined as the value of the property minus the balance of the mortgage, is associated with better loan performance. The LTV ratio measures initial equity; larger down payments at loan origination are associated with better loan performance. Larger loan amounts require larger payments, which can put more financial stress on households struggling to fulfill various financial commitments. DTI ratio is a measure of how stretched a household may be to make scheduled mortgage and other debt payments. Higher interest rates are associated with larger payments, and a mortgage rate with a large spread over a reference rate may represent the lender’s assessment that the borrower presents higher risk of troubled loan performance. Rather than incorporating the mortgage interest rate directly, we calculate the spread of the mortgage rate over the constant maturity 10-year Treasury rate in the month of loan origination. First-time homebuyer status can be a risk factor, potentially reflecting a new homeowner’s limited experience with the risks and costs of homeownership. A borrower can build equity over time if housing values appreciate or by paying down their mortgage balance. We used data from a Federal Housing Finance Agency house price index to develop a house price appreciation measure, using state-level indexes of house prices for the nonmetropolitan portions of each state (or a neighboring state in three instances) over the specific interval linking a loan’s origination to a specific payment anniversary. We also included a set of census division dummy variables, a set of first payment quarter dummy variables, and a set of “community type” dummy variables based on USDA’s Rural-Urban Commuting Area code construct. These dummy variables may help control for other factors not directly measured by the other explanatory factors listed, including any that may have varied by region of the country, time of loan origination, or community type. We also included information for RHS borrowers on the amount of liquid assets available to the borrower at loan origination. This permitted us to explore the effects of a financial cushion at the time of loan origination for RHS loans, but not for FHA loans separately or for the model using RHS and FHA data pooled together. To present an appropriate comparison group of FHA loans, we considered other issues related to RHS program features so that we could exclude FHA loans that would not qualify for the RHS program. First, RHS has a rural focus, and its loans are available only in specific mapped (RHS-eligible) areas. FHA loan availability is not restricted by geography. To avoid comparing RHS loans to FHA loans outside of RHS- eligible areas, which may perform differently from loans in RHS-eligible areas, we excluded from our analysis FHA (and RHS) loans in census tracts for which less than 95 percent of the tract’s land area is in an RHS- eligible area. As shown in table 43, this excluded most FHA loans but relatively few RHS loans. Second, to qualify for an RHS loan, a borrower’s household income may not exceed 115 percent of the area median income, a threshold that varies across the country and over time. FHA borrowers are not subject to income restrictions. Thus, there will be FHA borrowers with incomes exceeding the RHS program limits in RHS-eligible areas. To avoid comparing RHS loans to FHA loans that went to higher-income borrowers, we excluded borrowers with incomes that exceeded the RHS program limits. For instance, the borrowers who received the 203,319 FHA loans in table 43 that were made in RHS-eligible areas also had incomes that met the RHS program limits. The number of FHA loans in RHS-eligible areas without regard to borrower income limits was 276,933. We also present results for a subset of loans that are in communities in RHS-eligible areas considered to be the most rural, as defined using the Rural-Urban Commuting Area codes. We faced a trade-off between the number of loans we could include in the statistical analysis and the degree of loan seasoning we could select. September 2014 is the last month for which we could determine status for any loan, and the earliest loans in our data set were originated in the beginning of fiscal year 2010. As a general approximation, no loan originated after fiscal year 2011 will have a 36-month (3-year) anniversary by the end of fiscal year 2014. In contrast, all loans originated before fiscal year 2014 will have a 12-month (1-year) history available by the end of fiscal year 2014. Typically, relatively few loans exhibit troubled performance early in their history (for instance, at their 1-year anniversary). Thus, more seasoned loans are likely to provide a better indicator of the ultimate performance of a group of loans. Figure 18 shows the relationship between the numbers of loans that would be available for our analysis given the selection of alternative anniversary periods. For illustration, the number of loans refers to the number of loans that would have the requisite history given a choice of anniversary month. Performance of these loans is defined in terms of the share of loans that are troubled. Less than 1.5 percent of loans show troubled performance at 1 year, while more than 6 percent of loans show troubled performance by 3 years. We chose to measure status as of the 3-year anniversary period to model loan performance, although we do present some results in which we use the 2-year anniversary period. In terms of functional form, we express each continuous variable as a series of dummy variables that exhaust the continuous variable’s range. For example, the borrower credit score range was split into nine dummies, most containing 20-point portions and others containing 40- point portions of the 850-point credit score range. This permitted flexibility in determining the effects of changes in the value of an explanatory factor on changes in performance, and for comparing the effects as estimated on the set of RHS loans to the effects as estimated on the set of FHA loans. We used this feature to trace the relationship between changes in an explanatory factor across its range and the expected probability of troubled performance. We provide a table of mean values for this specification later, but table 44 presents information on the distribution of these variables in a more conventional form. These values are for the specification using a 3-year anniversary period, loans in the RHS-eligible areas, and borrowers with incomes meeting the RHS program limits. Notably, and as discussed elsewhere in this report, the distributions of some key characteristics are quite similar between the two sets of loans—particularly credit score and interest rate spread values. RHS borrowers had lower incomes, smaller loan amounts, and lower DTI ratios. House price appreciation was slightly more favorable for RHS than for FHA. A greater share of RHS borrowers were first-time homebuyers. Both the RHS and FHA programs feature low or no down payments. However, the programs have different down-payment requirements, which affect the distribution of LTV ratios. FHA loans are concentrated at an LTV value of 96.5 percent, while many RHS loan amounts exceed the value of the property at loan origination—that is, have an LTV ratio exceeding 100 percent. The dummy variable construct helps to model LTV effects given the skewed distribution of values. We developed two sets of dummy variables to capture LTV effects: one with three categories in which the top category includes all loans with LTV values at or above 96, and the second with four categories in which the top category includes all loans with LTV values at or above 100 and the next-to-top category includes LTV values at or above 96 but less than 100. Most loans for both agencies exceed an LTV value of 96, but the three-category model does not distinguish a value of 102 from a value of 98. The four-category model makes this distinction, but given the nature of the two programs, almost all of the loans that have LTV values exceeding 100 are RHS loans. The model includes only fixed-rate loans with 30-year terms for home purchases. In addition, we excluded loans for units in condominiums and cooperative developments; observations with missing or extreme values of explanatory variables; observations for which certain date values seem inappropriate—for example, mortgages that appear to terminate before they originate; and observations for which we could not determine an unambiguous measure of the performance status. We compared the performance of RHS loans to that of FHA loans by first examining agency-specific model results. We present a series of charts that support the view that the two agencies share a similar loan performance model structure. We then used the pooled set of loans to calculate the expected probability of troubled loan performance represented by loans with particular values of the explanatory characteristics. In particular, we compared the predicted performance of a loan with average RHS characteristics to a loan with average FHA characteristics for particular characteristics of interest. Our assumption that loan performance for the two programs could be evaluated using a similar model structure is also supported by the fact that the loan underwriting processes for the two programs share common elements. We present our primary results for a model specification in which we select an anniversary duration of 3 years; classify our binary measure of loan performance so that troubled loans are those with anniversary month status of 90 days delinquent or worse (including loans in foreclosure or terminated with a claim); approximate RHS program income requirements by imposing borrower household income limits; restrict property locations to those in census tracts with at least 95 percent of land area in RHS-eligible areas; and select a four-category LTV ratio dummy variable structure. We also present some alternative specifications to highlight the sensitivity of various factors on the results (see tables 45–49 in app. VII for additional information). In general, our estimates suggest that across all samples and specifications, certain consistent patterns are present for RHS and FHA borrowers. At the same time, there are some differences. For instance, increases in borrower credit scores decrease the expected probability of a loan being troubled by the 3-year anniversary, and there are dramatic declines as credit scores increase from the lower to the higher portions of the credit score range for both RHS and FHA loans (see fig. 19). However, at the lower portions of the range, RHS loans have a higher probability of being troubled, holding other factors constant, than FHA loans. But in both cases these probabilities decrease rapidly throughout the credit score range and converge by the high end of the range. Differences between RHS and FHA estimated coefficients are statistically significant except at the high end of the credit score range, suggesting that loans to RHS borrowers with low credit scores are somewhat more likely to perform worse, other factors held constant, than loans to FHA borrowers with low credit scores. Increases in borrower income were associated with decreased probability of a loan being troubled by the 3-year anniversary (see fig. 20). There were no significant differences between the estimated RHS and FHA coefficients. As shown in figure 21, larger loan amounts were associated with higher probabilities of troubled performance by the 3-year anniversary. There were no significant differences between the estimated RHS and FHA coefficients. As shown in figure 22, increases in the DTI ratio were associated with modest increases in the probability of troubled performance by the 3-year anniversary. The differences in the estimated coefficients in the greater- than-31-to-36 category and the greater-than-46 category were statistically significant (although relatively few RHS borrowers were in the latter category). There were some differences between the agencies in the estimated effects of mortgage rate spread (see fig. 23). For both agencies, higher spreads were associated with higher estimated probabilities of troubled performance by the 3-year anniversary. However, the estimates for RHS exhibit a relatively flat pattern (that is, the probability of troubled performance was not as sensitive to changes in the mortgage rate spread) compared with the FHA estimates. As previously noted, both the RHS and FHA programs have low or no down-payment features, and more than one-half of RHS borrowers had LTV ratios at origination that exceeded 100 percent. However, fewer than 1 percent of FHA loans had LTV ratios exceeding 100 percent, which provides little rationale for modeling FHA loan performance on a stand- alone basis using a four-category LTV specification—that is, using a specification with a separate category for loans with LTVs of 100 percent or more. The four-category specification is more appropriate for modeling RHS loan performance. For both agencies, the expected probability of a loan being troubled by the 3-year anniversary increases with LTV values, with the exception of the top category for FHA loans. Our results show that for RHS loans, moving to the LTV category with values at or exceeding 100 percent was associated with an increase in the probability of a loan being troubled by the anniversary date (see fig. 24). The differences between the RHS and FHA coefficient estimates were not statistically significant. As shown in figure 25, the influence of house price appreciation was modest for RHS and FHA loans, possibly in part because overall rates of house price appreciation were moderate during the period covered by our analysis. The differences between the estimated RHS and FHA coefficients were not statistically significant. The estimated effects of first-time homebuyer status differed in the agency-specific regressions. Both programs are attractive to first-time homebuyers because of the low (or no) down-payment requirements. In our data set, 85 percent of RHS borrowers and 76 percent of FHA borrowers were first-time homebuyers. However, the share of FHA borrowers who were first-time homebuyers was greater in locations that are not eligible for the RHS program. In the FHA regression, the estimated coefficient for first-time homebuyer status is positive (it is associated with a higher expected probability of troubled loan performance) and statistically significant. In the RHS regression, the estimated coefficient is not statistically significant at the 10 percent level. This suggests that non-first-time homebuyer status is not associated with better loan performance. In general, we believe that the performance of RHS and FHA loans is well explained by the model. Additionally, given the similar patterns of association between key explanatory characteristics and the expected probability of troubled loan performance, we believe it is reasonable to use the model and a pooled data set—that is, data from both agencies combined—to investigate how differences between the portfolio characteristics of the two agencies influence loan performance. The presence of a similar underlying model structure is evidenced by the RHS and FHA stand-alone regressions, which showed similar decreasing relationships between borrower credit scores and the expected probability of troubled loan performance (that is, high expected values at low credit scores and steep declines in expected values as scores increase). While the estimates were significantly different across portions of the credit score range, for other important characteristics the similarity of the underlying model structure was confirmed by similarities in the association with troubled loan status and the absence of statistically significant differences between the two agencies. In particular, we observed similar decreasing relationships between borrower income and the expected probability of troubled loan performance and similar increasing relationships between loan amount and expected troubled loan performance. The advantage in assuming a common model structure and using a pooled data set is that we can use the estimated coefficients to calculate the expected probability of a loan with particular characteristic values being in a troubled status by the 36th month anniversary. One comparison is to calculate these probabilities using the mean values for the entire set of explanatory characteristics observed for each agency (agency-specific mean values). Another method of comparison is to calculate these probabilities using the mean values of the pooled characteristics (pooled mean values) to provide a base value, and then to substitute agency-specific mean values for particular characteristics. For example, if RHS borrowers had riskier characteristics than FHA borrowers, then given the set of coefficient estimates for the pooled data, the expected probability of a loan being troubled by the anniversary period would be higher for RHS than for FHA. To the extent that each agency’s borrower characteristics are similar, the expected probabilities for each agency will be similar. To the extent that the characteristics diverge, the probabilities will diverge. Figure 26 shows the expected troubled loan rate for each agency using the pooled coefficients and the pooled or agency-specific mean values for the various characteristics. We estimated four alternative specifications of the model to determine the extent to which our results varied depending on plausible changes in assumptions and to examine the effect of particular factors relevant to RHS program features. First, we estimated a specification in which we did not restrict borrower incomes based on RHS household income limits. This had the effect of including many more FHA observations with relatively higher incomes—improving expected FHA performance—and serves to highlight the importance of borrower income. Second, we also estimated a model specification with three LTV ratio categories instead of four. That is, we combined the top two categories of the range, so that the top category included all LTV ratio values greater than or equal to 96 percent. Given the categorical nature of the way variables are defined, in this specification it becomes impossible to distinguish between LTV ratio values that are slightly less than 100 percent from those that are slightly above. In contrast to the primary specification, this specification predicts better performance for RHS than for FHA for reasons described below. Third, we also chose a specification in which we included only those locations that were the most rural in character (large rural towns and small town and isolated rural areas) on the basis of the Rural-Urban Commuting Area codes. This permitted us to analyze loan performance in the more rural portions of the RHS-eligible areas. This specification produced similar results to the primary specification in terms of the two agencies’ relative loan performance. Finally, we chose a specification that used a 2-year anniversary period. This specification produced almost identical expected performance for both agencies. Under the first alternative model specification, many FHA borrowers within RHS-eligible areas have incomes exceeding RHS income limits. Since higher incomes are associated with a lower risk of a loan being troubled, actual and predicted FHA performance improves when these observations are not excluded from the estimation. Figure 27 shows the results of this first alternative specification. Compared with the results for the primary model specification (see fig. 26 above), the expected probability of a loan becoming troubled by its 3-year anniversary is lower with all characteristics at their pooled mean values. Additionally, the expected probability of troubled loan performance is considerably higher with all characteristics at RHS-specific mean values than it is with all characteristics at FHA-specific mean values. Borrower income is particularly important to this outcome, suggesting that the inclusion of higher-income borrowers in RHS-eligible areas is associated with better FHA performance. Under the second alternative model specification, we examined the importance of the top end of the LTV ratio range. While few FHA loans had an LTV ratio exceeding 100 percent, many RHS loans did. Within the RHS stand-alone regression, moving from an LTV ratio below 100 percent to one above 100 percent has a positive and significant effect on the probability of troubled loan performance. The second alternative specification uses only three categories of LTV ratio (rather than the four categories used in the primary specification), with the highest category starting at 96 percent. Figure 28 shows the results of this second alternative specification. In contrast to the results for the primary specification (see fig. 26 above), the expected probability of troubled loan performance is lower with all characteristics at RHS-specific mean values than it is with all characteristics at FHA-specific mean values. In particular, the contribution of LTV ratio appears to favor rather than disadvantage RHS performance because FHA has a larger proportion of loans than RHS in the highest category (which does not distinguish between LTV ratios of 96 to 99.9 percent and those of 100 percent or more). Taken together, our analyses suggest that for RHS borrowers, beginning homeownership with negative equity is associated with a higher probability of troubled performance than beginning with low but positive equity. Under the third alternative specification, we focused on the possibility that loan performance may be different in the most rural parts of RHS-eligible areas. In this specification, we included only observations corresponding with Rural-Urban Commuting Area codes for locations less integrated into urban areas. Commuting-to-work patterns are an important component of the Rural-Urban Commuting Area classification scheme so that, for example, if a rural area is close enough to an urban area to be attractive to commuters, housing market transactions in those areas may be more standardized than in more rural areas with fewer employment opportunities. There also may be differences in the characteristics of RHS and FHA borrowers in these areas. When we restricted our analysis to observations in large rural towns and small town and isolated rural areas within RHS-eligible areas, we found that the overall incidence of troubled loans was lower in these more rural areas. However, the effects of portfolio characteristics on expected probabilities of troubled loan status were generally similar to those we found in RHS-eligible areas overall (see fig. 29). As a result, figure 29 resembles figure 26 (which does not impose the additional geographic restriction) in many respects. Finally, we estimated a fourth alternative specification that is the same as our primary specification except that it focuses on a 2-year anniversary period. As with the case of the 3-year specification, we believe that stand- alone estimates for each agency suggest a common underlying structure. Fewer loans are troubled after 2 years than after 3 years; however, we were able to increase the number of observations because more loans had 2 years of history available by the end of fiscal year 2014 than had 3 years of history. In contrast to the 3-year actual troubled loan rates, we found that the agencies had almost identical 2-year actual troubled loan rates (3.8 percent for RHS and 3.9 percent for FHA). Using the pooled data set, the effects of particular characteristics after 2 years of performance were similar to those observed in the 3-year case (see fig. 30). In contrast to figure 26 above (which describes the results of our primary 3-year specification), the expected probability of troubled performance is slightly lower with all characteristics at RHS-specific mean values than with all characteristics at FHA-specific mean values. This result is consistent with the fact that the actual RHS troubled loan rate, although quite similar to FHA’s, was slightly lower. However, income and LTV ratio characteristics associated with the RHS portfolio disadvantaged RHS performance. This appendix describes the results of our statistical model comparing the performance of single-family home purchase loans guaranteed by the Rural Housing Service (RHS) and the Federal Housing Administration (FHA) in fiscal years 2010–2012 in RHS-eligible areas after 2 and 3 years of performance. We analyzed performance for RHS and FHA loans separately and for RHS and FHA loans combined using various model specifications. For example, under one specification, we limited the borrowers to those with incomes within the county-level household income limits set by RHS. We restricted the data in this way to account for the absence of FHA limits on borrower household income, which resulted in FHA serving some borrowers with higher incomes than RHS is allowed to serve. Additionally, we analyzed 3-year performance using a specification with four loan-to-value ratio categories and another specification using three loan-to-value ratio categories. As shown in the following tables, we estimated coefficients for the different categories that comprise each explanatory variable. The coefficient for a particular category is an estimate of the effect of being in that category as distinct from the omitted category. The omitted categories are as follows: borrower credit score (760–799); debt-service- to-income ratio (36 percent to less than 41 percent); loan amount ($100,000–$149,999); borrower income ($50,000–$59,999); first-time homebuyer (non-first-time homebuyer); house price appreciation (decrease of greater than 0 to 3.5 percent for the 2-year performance analysis and decrease of greater than 0 to 3 percent for the 3-year performance analysis); mortgage spread over 10-year Treasury rate (greater than 2 percent to 2.25 percent); loan-to-value ratio (96 percent to 99.9 percent); and months of liquid assets (1 or 2 months). Daniel Garcia-Diaz, (202) 512-8678 or [email protected]. In addition to the individual named above, Mathew J. Scirè (Director), Steve Westley (Assistant Director), Patricia MacWilliams (Analyst-in- Charge), Abiud Amaro Diaz, Stephen Brown, William R. Chatlos, Anna Chung, John McGrail, John Mingus, Barbara Roesmann, and Jena Sinkfield made major contributions to this report. Additional support was provided by Melissa Kornblau, Alexandra Martin-Arseneau, and Heneng Yu. | RHS and FHA help borrowers finance homes by guaranteeing single-family mortgage loans made by private lenders, and both operate in rural areas. However, eligibility for RHS guarantees is restricted to RHS-eligible areas and to low- and moderate-income households. A prior GAO report (GAO-12-554) found overlap in the products offered, borrower income levels, and geographic areas served by the two guarantee programs and recommended that RHS and FHA evaluate and report on opportunities for consolidating similar housing programs. GAO was asked to expand on the analysis in its 2012 report. This report compares the characteristics, performance, and borrower costs of RHS- and FHA-guaranteed loans in RHS-eligible areas. GAO analyzed RHS and FHA data for home purchase loans guaranteed in fiscal years 2010–2014 (which allowed for analysis of loan performance over multiple years). GAO also interviewed RHS and FHA officials, eight lenders (selected to capture variation in rural areas served, origination volume, and mix of RHS and FHA business), and industry associations. GAO's comparison of single-family home purchase loans guaranteed by the Rural Housing Service (RHS) and the Federal Housing Administration (FHA) in fiscal years 2010–2014 identified significant overlap and some differences in the borrowers served. Within statutorily defined rural areas (RHS-eligible areas): Both agencies served large numbers of rural borrowers, but FHA served over 35 percent more than RHS, while RHS reached a greater number of borrowers in the more rural parts of RHS-eligible areas. Most of the borrowers served by each agency had annual incomes below $60,000. But consistent with RHS's statutory income limits, the median borrower income for RHS ($44,000) was well below that for FHA ($57,000). RHS and FHA borrowers had similar credit scores (around 685 at the median) and ratios of housing expenses to monthly gross income (23–24 percent at the median). Borrowers in both programs had high loan-to-value (LTV) ratios (loan amount divided by home value). But RHS's no-down-payment requirement and FHA's statutorily required 3.5 percent down payment resulted in higher LTV ratios for RHS than for FHA (medians of 101 and 96.5 percent, respectively). Significant portions of RHS and FHA borrowers could have met the criteria of the other program. For example, at least 36 percent of RHS borrowers could have met FHA's criteria, including the 3.5 percent minimum down payment. In RHS-eligible areas, RHS loans guaranteed in fiscal years 2010–2011 performed worse than corresponding FHA loans after 3 years. Specifically, for borrowers whose incomes fell within RHS limits, RHS's 3-year troubled loan rate (the share of loans 90 or more days late, in foreclosure, or terminated with a claim) was 7 percent, compared with 6 percent for FHA. GAO estimated that RHS's loans would be expected to perform worse than FHA's due partly to RHS borrowers' higher LTV ratios. Borrower costs—at loan closing and paid monthly—were lower for RHS loans than for FHA loans. Due to differences in down-payment requirements, a borrower purchasing a $125,000 home in 2014 would have paid $4,375 more in up-front costs with an FHA loan than with an RHS loan. Also, FHA (which must maintain a capital reserve) charged borrowers a higher annual guarantee fee than RHS, which has no capital requirement. Due largely to the difference in this fee (charged monthly), a borrower's initial monthly payments would have been about 7 percent lower with an RHS loan (assuming a 3.75 percent interest rate). GAO's analysis provides additional evidence of how the programs overlap in terms of income, location, and borrower qualifications. It also highlights issues for RHS and FHA to consider in evaluating opportunities to consolidate these programs, as GAO recommended in 2012. Specifically, differences in the performance and borrower costs of RHS and FHA loans underscore important tradeoffs. Higher LTV ratios and lower guarantee fees help make mortgages more affordable. However, these features also may elevate financial risks to the federal government from increased loan defaults and less revenue to cover unanticipated costs. Agency consideration of these issues would aid congressional decision-making about potential program consolidation. GAO makes no new recommendations in this report but maintains that RHS and FHA should evaluate and report on opportunities to consolidate their similar housing programs. |
Patch management is a critical process used to help alleviate many of the challenges involved with securing computing systems from attack. A component of configuration management, it includes acquiring, testing, applying, and monitoring patches to a computer system. Flaws in software code that could cause a program to malfunction generally result from programming errors that occur during software development. The increasing complexity and size of software programs contribute to the growth in software flaws. For example, Microsoft Windows 2000 reportedly contains about 35 million lines of code, compared with about 15 million lines for Windows 95. As reported by the National Institute of Standards and Technology (NIST), based on various studies of code inspections, most estimates suggest that there are as many as 20 flaws per thousand lines of software code. While most flaws do not create security vulnerabilities, the potential for these errors reflects the difficulty and complexity involved in delivering trustworthy code. From 1995 through 2003, the CERT Coordination Center (CERT/CC) reported just under 13,000 security vulnerabilities that resulted from software flaws. Figure 1 illustrates the dramatic growth in security vulnerabilities over these years. As vulnerabilities are discovered, attackers may attempt to exploit them and can cause significant damage. This damage can range from defacing Web sites to taking control of entire systems and thereby being able to read, modify, or delete sensitive information, destroy systems, disrupt operations, or launch attacks against other organizations’ systems. Attacks can be launched against specific targets or widely distributed through viruses and worms. The sophistication and effectiveness of cyber attacks have steadily advanced. According to security researchers, reverse-engineering patches have become a leading method for exploiting vulnerabilities. Reverse engineering starts by locating the files or code that changed when a patch was installed. Then, by comparing the patched and unpatched versions of those files, a hacker can examine the specific functions that changed, uncover the vulnerability, and exploit it. By using the same tools used by programmers to analyze malicious code and perform vulnerability research, hackers can locate the vulnerable code in unpatched software and build to exploit it. According to NIST, every month skilled hackers post 30 to 40 new attack tools to the Internet for others to download, allowing them to launch attacks. Further, CERT/CC has noted that attacks that once took weeks or months to propagate over the Internet now take just hours, or even minutes. In 2001, security researchers reported that the Code Red worm achieved an infection rate of more than 20,000 systems within 10 minutes, foreshadowing more damaging and devastating attacks. In 2003, the Slammer worm, which successfully attacked at least 75,000 systems, reportedly became the fastest computer worm in history, infecting more than 90 percent of vulnerable systems within 10 minutes. The Witty worm, released on March 19, 2004, reportedly infected as many as 12,000 computers in approximately 45 minutes. During the last week of February 2004, a spate of new mass e-mail worms were released, and more than half a dozen new viruses were unleashed. The worms were variants of the Bagle and Netsky viruses. The Bagle viruses typically include an infected attachment containing the actual virus, and the most recent versions have protected the infected attachment with a password, which prevents antivirus scanners from examining it. The recent Netsky variants attempt to deactivate two earlier worms and, when executed, reportedly play a loud beeping noise. The number of computer security incidents within the past decade has risen in tandem with the dramatic growth in vulnerabilities, as the increased number of vulnerabilities provides more opportunities for exploitation. CERT/CC has reported a significant growth in computer security incidents—from about 9,800 in 1999 to over 82,000 in 2002 and to over 137,500 in 2003. And these are only the reported attacks. The director of CERT/CC has estimated that as much as 80 percent of actual security incidents go unreported, in most cases because (1) there were no indications of penetration or attack, (2) the organization was unable to recognize that its systems had been penetrated, or (3) the organization was reluctant to report the attack. Figure 2 shows the number of incidents reported to the CERT/CC from 1995 through 2003. According to CERT/CC, about 95 percent of all network intrusions could be avoided by keeping systems up to date with appropriate patches; however, such patches are often not quickly or correctly applied. Maintaining current patches is becoming more difficult, as the length of time between the awareness of a vulnerability and the introduction of an exploit is shrinking. For example, the Witty worm was released only a day after the announcement of the vulnerability it exploited. In general, when security vulnerabilities are discovered, a process is initiated to effectively address the situation through appropriate reporting and response—often including the development of a patch. Typically, this process begins when security vulnerabilities are discovered by software vendors, security research groups, users, or other interested parties, including the hacker community. When a virus or worm is reported that exploits a vulnerability, virus-detection software vendors also participate in the process. When a software vendor is made aware of a vulnerability in its product, the vendor typically first validates that the vulnerability indeed exists. If the vulnerability is deemed critical, the vendor may convene a group of experts, including major clients and key incident-response groups such as FedCIRC and CERT/CC, to discuss and plan remediation and response efforts. In addition, FedCIRC may conduct teleconferences with agency Chief Information Officers (CIO) to coordinate remediation and OMB, through FedCIRC, may request the status of agencies’ remediation activities for selected vulnerabilities. After a vulnerability is validated, the software vendor develops and tests a patch or workaround. A workaround may entail blocking access to or disabling vulnerable programs. Following the development of a patch or workaround, the incident response groups and the vendor typically prepare a detailed public advisory to be released at a set time. The advisory often contains a description of the vulnerability, including its level of criticality; systems that are affected; potential impact if exploited; recommendations for workarounds; and Web site links from which a patch (if publicly available) can be downloaded. Incident-response groups as well as software vendors may continue to issue updates as new information about the vulnerability is discovered. Although the economic impact of a cyber attack is difficult to measure, a recent Congressional Research Service study cites members of the computer security industry as estimating that worldwide major virus attacks in 2003 cost $12.5 billion. They further project that economic damage from all forms of digital attacks in 2004 will exceed $250 billion. Following are examples of significant damage caused by worms that could have been prevented had the available patches been effectively installed: In September 2001 the Nimda worm appeared, reportedly infecting hundreds of thousands of computers around the world, using some of the most significant attack methods of Code Red II and 1999’s Melissa virus that allowed it to spread widely in a short amount of time. A patch had been made publicly available the previous month. Reported cost estimates of Nimda range between about $700 million and $1.5 billion. On January 25, 2003, Slammer reportedly triggered a global Internet slowdown and caused considerable harm through network outages and other unforeseen consequences. As discussed in our April 2003 testimony, the worm reportedly shut down a 911 emergency call center, canceled airline flights, and caused automated teller machine failures. According to media reports, First USA Inc., an Internet service provider, experienced network performance problems after an attack by the Slammer worm due to a failure to patch three of its systems. Additionally, the Nuclear Regulatory Commission reported that Slammer also infected a nuclear power plant’s network, resulting in the inability of its computers to communicate with each other, disrupting two important systems at the facility. In July 2002, Microsoft had released a patch for its software vulnerability that was exploited by Slammer. Nevertheless, according to media reports, Slammer infected some of Microsoft’s own systems. Reported cost estimates of Slammer range between $1.05 and $1.25 billion. On August 11, 2003, the Blaster worm was launched to exploit a vulnerability in a number of Microsoft Windows operating systems. When successfully executed, it caused the operating system to fail. Although the security community had received advisories from CERT/CC and other organizations to patch this critical vulnerability, Blaster reportedly infected more than 120,000 unpatched computers in the first 36 hours. By the following day, reports began to state that many users were experiencing slowness and disruptions to their Internet service, such as the need to frequently reboot. The Maryland Motor Vehicle Administration was forced to shut down, and systems in both national and international arenas were also affected. Experts consider Blaster, which affected a range of systems, to be one of the worst exploits of 2003. Microsoft reported that that at least 8 million Windows computers have been infected by the Blaster worm since last August. On May 1 of this year, a new worm, referred to as Sasser, was reported, which exploits a vulnerability in the Windows Local Security Authority Subsystem Service component. This worm can compromise systems by allowing a remote attacker to execute arbitrary code with system privileges. According to the United States Computer Emergency Readiness Team (US-CERT), systems infected by this worm may suffer significant performance degradation. Sasser, like last year's Blaster, exploits a recent vulnerability in a component of Windows by scanning for vulnerable systems. Estimates by Internet Security Systems, Inc. place the Sasser infections at 500,000 to 1 million machines. Microsoft has reported that 9.5 million patches for the vulnerability were downloaded from its Web site in just 5 days. The federal government has taken several steps to address security vulnerabilities that affect agency systems, including efforts to improve patch management. Specific actions include (1) requiring agencies to annually report on their patch management practices as part of their implementation of FISMA, (2) identifying vulnerability remediation as a critical area of focus in the President’s National Strategy to Secure Cyberspace, and (3) creating US–CERT. FISMA permanently authorized and strengthened the information security program, evaluation, and reporting requirements established for federal agencies in prior legislation. In accordance with OMB’s reporting instructions for FISMA implementation, maintaining up-to-date patches is part of FISMA’s system configuration management requirements. The 2003 FISMA reporting instructions that specifically address patch management practices include agencies’ status on (1) developing an inventory of major IT systems, (2) confirming that patches have been tested and installed in a timely manner, (3) subscribing to a now-discontinued governmentwide patch notification service, and (4) addressing patching of security vulnerabilities in configuration requirements. The President’s National Strategy to Secure Cyberspace was issued on February 14, 2003, to identify priorities, actions, and responsibilities for the federal government as well as for state and local governments and the private sector, with specific recommendations for action to DHS. This strategy identifies the reduction and remediation of software vulnerabilities as a critical area of focus. Specifically, the strategy identifies the need for a better-defined approach on disclosing vulnerabilities, to reduce their usefulness to hackers in launching an attack; creating common test beds for applications widely used among federal establishing best practices for vulnerability remediation in areas such as training, use of automated tools, and patch management implementation processes. In June 2003 DHS created the National Cyber Security Division (NCSD) to build upon the existing capabilities transferred to DHS from the former Critical Infrastructure Assurance Office, the National Infrastructure Protection Center, FedCIRC, and the National Communications System. The mission of NCSD includes patch management-related activities, among them analyzing cyber vulnerabilities and coordinating incident response. Last September, DHS’s NCSD—in conjunction with CERT/CC and the private sector—established a new service, US-CERT, as the center for coordinating computer security preparedness and response to cyber attacks and incidents. Specifically, US-CERT is intended to aggregate and disseminate cybersecurity information to improve warning and response to incidents, increase coordination of response information, reduce vulnerabilities, and enhance prevention and protection. This free service— which includes notification of software vulnerabilities and sources for applicable patches—is available to the public, including home users and both government and nongovernment entities. US-CERT also provides a service through its National Cyber Alert System to identify, analyze, prioritize, and disseminate information on emerging vulnerabilities and threats. This alert system was designed to provide subscribers with reliable, timely, and actionable information via e-mail by issuing security alerts, tips, and bulletins containing information on vulnerabilities, exploits, and available patches or workarounds. It also provides computer security best practice tips, including a discussion of software patches. This free service is available to all. In addition to vulnerability analysis and reporting centers such as US-CERT and CERT/CC, a variety of other resources are also available to provide information related to vulnerabilities and their exploits. NIST’s Special Publication 800-40, Procedures for Handling Security Patches, provides a systematic approach for identifying and installing necessary patches or mitigating the risk of a vulnerability, including steps such as creating and implementing a patch process, identifying vulnerabilities and applicable patches, and patching procedures, among others. Another resource is NIST’s ICAT, which offers a searchable index leading users to vulnerability resources and patch information. ICAT links users to publicly available vulnerability databases and patch sites, thus enabling them to find and fix vulnerabilities existing on their systems. It is based on common vulnerabilities and exposures (commonly referred to as CVE) naming standards. These are standardized names for vulnerabilities and other information security exposures, compiled in an effort to make it easier to share data across separate vulnerability databases and tools. CVE compatibility is increasingly being incorporated into various security products. In addition, a variety of Internet mailing lists provides a database of vulnerabilities and serves as a forum for announcing and discussing vulnerabilities, including information on how to fix them. For example, one vendor-provided list monitors thousands of products to maintain a vulnerability database and also provides security alerts. The SysAdmin, Audit, Network, Security (SANS) Institute maintains lists of the top 20 most critical Internet security vulnerabilities, commonly known as the SANS Top Twenty, which includes step-by-step instructions and references to additional information on how to remediate vulnerabilities. In March of this year, the Open Source Vulnerability Database (OSVDB)— a vendor-neutral database operated by security industry volunteers and supported by Digital Defense, Inc., and Winterforce—was made available at no cost to the public. This database aims to be a comprehensive, single source for providing detailed, current, and accurate information for all known vulnerabilities. As of June 1, this database contained information on about 3,000 reported and reviewed vulnerabilities. In addition, vendors such as Microsoft and Cisco provide software updates on their products, including notices of known vulnerabilities and their corresponding patches; they also provide software options for automatically downloading and installing patches. Finally, vendors of patch management tools and services, discussed later, offer central databases of the latest patches, incidents, and methods for mitigating risks before a patch can be deployed or has been released. According to FedCIRC officials, the federal government has on occasion taken additional steps to assist agencies in mitigating known vulnerabilities through patch management. Such steps include issuing security advisories, issuing data calls to obtain status information on agencies’ patching efforts, and initiating teleconferences with vendors. As discussed in our September 2003 testimony, the following are examples of the collaborative efforts by the federal government and private sector security community to respond through patch management to the threat of potential attacks for two critical vulnerabilities identified last July: Cisco’s Internet Operation System and Microsoft’s Windows Distributed Component Object Model Remote Procedure Call. Cisco Systems, Inc., which controls about 82 percent of the worldwide share of the Internet router market, discovered a critical vulnerability in its IOS software that could allow an intruder to effectively shut down unpatched routers, blocking network traffic. Cisco had informed the federal government of the vulnerability prior to public disclosure and worked with different security organizations and government organizations to encourage prompt patching. Specifically, on July 16, Cisco issued a security bulletin to publicly announce the critical vulnerability in its IOS software and provide workaround instructions and a patch. In addition, FedCIRC issued advisories to federal agencies and DHS advised private- sector entities of the vulnerability. Over the next 2 days, OMB requested that federal agencies report to CERT/CC on the status of their actions to patch the vulnerability, and DHS issued an advisory update in response to an exploit that was posted online. That same week, FedCIRC, OMB, and DHS’s NCSD held a number of teleconferences with representatives from the executive branch. The federal government also worked collaboratively with Microsoft when the Blaster worm was launched last summer. The federal government’s response to this vulnerability included coordination with the private sector to mitigate the effects of the worm. FedCIRC issued the first advisory to encourage federal agencies to patch the vulnerability, followed by several similar advisories from DHS. The following week, DHS issued its first advisory to heighten public awareness of the potential impact of an exploit of this vulnerability. Four days later, on behalf of OMB, FedCIRC requested that federal agencies report on the status of their actions to patch the vulnerability. NCSD also hosted several teleconferences with federal agencies, CERT/CC, and Microsoft. Common patch management practices—such as establishing and enforcing standardized patch management policies and procedures and developing and maintaining a current technology inventory—can help agencies establish an effective patch management program and, more generally, assist in improving an agency’s overall security posture. Survey results show that the 24 agencies are implementing some common practices for effective patch management. Specifically, all report that they have some level of senior executive involvement in the patch management process, perform a systems inventory, and provide information security training. However, agencies face a number of patch management challenges—as discussed later—and are inconsistent in their development of patch management policies and procedures, patch testing, systems monitoring, and performance of risk assessments. Without consistent implementation of patch management practices, agencies are at increased risk to attacks that exploit software vulnerabilities in their systems. Information on key aspects of agencies’ patch management practices could provide data that could better enable an assessment of the effectiveness of an agency’s patch management processes. In our September 2003 testimony, we discussed common practices for effective patch management identified in security-related literature from several groups, including NIST, Microsoft, patch management software vendors, and other computer security experts. Common elements of effective patch management identified by these groups include centralized patch management support, standardized patch management policies and procedures, monitoring through network and host vulnerability scanning. NIST guidance advocates creating a centralized group in charge of handling patches and vulnerabilities that support the patching efforts of local system administrators. A systematic, comprehensive, and documented patching process can improve an agency’s ability to respond to the large number of software patches. Agencies’ centralization of common practices for effective patch management varies. While some agencies centralize their patch management processes, others use a decentralized approach, and still others a combination of both approaches. For example, the responsibility for distributing and notifying the agency’s component levels of critical patches can be centralized, while the responsibility for testing and applying patches to specific systems may be decentralized to reside at the component level. Specifically, of the 24 agencies surveyed, 7 report using a centralized approach, 8 are decentralized, and 9 use a combination of both. Management’s recognition of information security risk and its interest in taking steps to manage and understand risks is important to successfully implementing any information security-related process. Additionally, ensuring that appropriate resources are applied and that appropriate patches are deployed is important. FISMA establishes information security roles and responsibilities for certain agency executives, including the agency head, CIO, and senior agency information security officer, sometimes called the chief information security officer (CISO). Under FISMA, the agency head is responsible for providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access to, use, disclosure, disruption, modification, or destruction of information. FISMA further states that the agency head shall delegate to the CIO the authority to ensure compliance with its requirements and develop and maintain an agencywide information security program, security policies, procedures, and control techniques. Additionally, the CIO is responsible for designating a senior agency information security officer or CISO. This CISO must possess appropriate professional qualifications to administer the functions described in FISMA, have information security duties as the primary duty, and head an office with the mission and resources to assist in ensuring agency compliance with FISMA. All 24 agencies indicated that the CISO is the individual most involved in patch management activities. Specifically, the CISO is involved in managing risk, ensuring that appropriate resources are dedicated, training computer security staff, complying with policies and procedures, and monitoring the status of patching activities. Agencies reported that the CIO also has a significant level of involvement in these activities. Further, most agencies reported that their agency head was involved in patch management efforts to some degree. Standardized policies and procedures are necessary for effective patch management. Typical policies include elements such as assigning roles and responsibilities, performing risk assessments, and testing patches. Procedures outline the specific steps for carrying out these policies. Without standardized policies and procedures, patch management can be an ad-hoc process—potentially allowing each subgroup within an entity to implement patch management inconsistently or not at all. Survey results indicate that not all agencies have established patch management policies and procedures. Two-thirds (16 of 24) report having agencywide patch management policies, while 8 have no policies. Regarding patch management procedures, 14 of the 24 agencies reported affirmatively, while 10 do not have procedures in place. FISMA requires agencies to provide security awareness training to inform personnel, including contractors and other users of information systems that support the operations and assets of the agency, of information security risks associated with their activities, and of their responsibilities in complying with agency policies and procedures designed to reduce these risks. In addition, agencies are required to provide training on information security to personnel with significant security responsibilities. Further, NIST recommends that individuals involved in patch management have the skills and knowledge needed to perform their responsibilities and that system administrators be trained in identifying new patches and vulnerabilities. Most of the 24 agencies reported that they provide both on-the-job and classroom training in computer security, including patch management, to system owners, administrators, and IT security staff. Survey results also indicated that some of the 24 agencies are providing security awareness training, as well as developing Web-based training curricula. A complete and updated inventory assists agencies in determining the number of systems that are vulnerable and require remediation, as well as in locating the systems and identifying their owners. FISMA requires that the head of each agency maintain and develop an inventory of major information systems. Further, NIST’s Special Publication 800-40, Procedures for Handling Security Patches, identifies a systems inventory requirement as a key priority for effective patch management. Without a complete inventory, it is more difficult to implement effective agencywide patch management and maintaining current patches can be riskier, less consistent, and more expensive. In our September 2003 testimony, we reported that an important element of patch management is the creation and maintenance of a current inventory of hardware equipment, software packages, services, and other technologies installed and used by an organization. We noted that in their 2003 FISMA reports, 13 agencies reported that an inventory of major systems was developed, and 6 reported that the development was in progress. Agencies’ inspectors general also assessed the status of agency efforts to develop an inventory of major IT systems. Their FISMA reports indicated that only 8 had developed an inventory and 9 agencies had started—but not yet completed—one. All 24 agencies reported that they develop and maintain an inventory of major information systems as required by FISMA. Agencies do so by using a manual process, an automated tool, or an automated service. The majority of agencies maintain this inventory at both the agencywide and component level. Specifically, 9 of the 24 agencies maintain their inventories at the agencywide level only, 14 maintain their inventories at both levels, and 1 agency at the component level only. Risk is the negative impact of a vulnerability’s being exploited, considering both the probability and the impact of occurrence. A risk assessment can be used to determine the extent of the potential threat and the risk associated with it. Performing a patch-focused risk assessment evaluates each system for threats, vulnerabilities, and the criticality of a system to an agency’s mission. It can also measure the level of risk associated with the adverse impact resulting from a vulnerability being exploited. By not performing a risk assessment, agencies may deploy patches that disrupt critical systems or applications that support an agency’s operations. When a vulnerability is discovered and a related patch and/or alternative workaround is released, the agency should consider the importance of the vulnerable system to operations, the criticality of the vulnerability, and the risk of applying the patch. Because some patches can cause unexpected disruption to agencies’ systems, organizations may choose not to apply every patch. NIST recommends that a risk assessment be performed to determine the prioritization of the systems to be patched. Just under half of the 24 agencies said they perform a documented risk assessment of all major systems to determine whether to apply a patch or an alternative workaround. Agencies that do not perform a documented risk assessment reported that they consider which patches to deploy based on factors such as the risk of deploying the patch, the level of system criticality to agency operations, the level of criticality of the vulnerability, or other criteria, such as the adverse impact on applications. Another critical step is to test each patch against the various agency system configurations in a test environment to determine any impact on the network before deploying the patch to the affected systems. Patches can easily produce unintended consequences; a patch may change the system behavior such that it causes other programs to crash or otherwise fail. For instance, certain security patches have been recalled—as recently as April of this year—because they caused systems to fail or are too large for a computer’s capacity. Other examples of unintended consequences include patches that force other applications to shut down and patches that undo the effects of previously applied patches. Predeployment testing helps determine whether the patch functions as intended and its potential for adversely affecting the agency’s systems. In addition to identifying the potential for unintended consequences, the testing of patches can ensure that agencies have addressed the vulnerability as intended. Testing may also identify other critical vulnerabilities not made public by vendors. For example, one federal agency’s testing revealed that a vendor’s patch notification did not identify vulnerabilities in the underlying operating system. The agency’s testing results prompted an advisory informing all federal agencies to patch all machines using that operating system. Survey results showed that although all 24 agencies test some patches against their various systems configurations before deployment, only 10 agencies reported testing all patches, 11 test more than half but not all patches, 2 test half or fewer, and 1 agency did not know. While all surveyed agencies reported that they test patches to some extent, most agencies do not have testing policies in place. Survey results show that only 7 agencies have testing policies for all patches, and 2 have policies for only testing critical patches. The remaining 15 agencies reported that they do not have any testing policies in place. Agencies indicated several reasons for not testing all patches, including a determination that the urgency or criticality of a vulnerability required immediate patching and that a patch was anticipated to have a minimal impact on their systems. Some agencies also stated that in most cases they do not test patches issued routinely by Microsoft. In addition to testing, it is important to regularly monitor the status of patches once they are deployed. Networks can be scanned on a regular basis to assess the network environment and determine whether patches have been effectively applied. By doing so, agencies can ensure that patches are installed correctly and can help maintain a stable computing environment and determine the integrity of a patch. In addition, monitoring helps ensure that a patched system continues to be in compliance with the agency’s network configuration requirements. Survey results show that most agencies do not regularly monitor all systems. Only 4 agencies indicated that they monitor all of their systems on a regular basis. However, the remaining agencies surveyed indicated that they perform some monitoring activities. All 24 agencies reported scanning networks and hosts to oversee the deployment of patches and noted that the extent to which systems are monitored and the frequency with which they are monitored varies. Agencies indicated that the frequency of system monitoring is based on two factors— (1) the criticality of the vulnerability and (2) the criticality of the computer system. Five agencies stated that they monitor based on the criticality of the vulnerability; 14 reported that the frequency depends on both the criticality of the vulnerability and the criticality of the computer system. Five agencies indicated that the frequency of monitoring does not vary based on either of these factors. Although OMB and federal agencies recognize that implementing common practices for effective patch management can help agencies mitigate the risk of attack and improve their overall security posture, the results of our survey indicate that agencies are not consistently performing these common practices. More refined information on key aspects of agencies’ patch management practices—such as their documentation of patch management policies and procedures, their testing of new patches in their specific computing environments prior to installation, and the frequency with which systems are monitored to ensure that patches are installed— could provide OMB, Congress, and agencies themselves with data that could better enable an assessment of the effectiveness of an agency’s patch management processes. Several automated tools and services are available to assist agencies with patch management. A patch management tool is an application that automates a patch management function, such as scanning a network and deploying patches. Patch management services are third-party resources that provide services such as notification, consulting, and vulnerability scanning. Tools and services can make the patch management process more efficient by automating otherwise time-consuming tasks, such as manually keeping up with the continuous flow of new patches. Patch management tools can be either scanner-based (nonagent) or agent– based. Scanner-based tools can scan a network, check for missing patches, and allow a system administrator to patch multiple computers. These tools are well suited for smaller organizations due to their inability to serve a large number of users without breaking down or requiring major changes in procedure. Agent-based products place small programs, or agents, on each computer, to periodically poll a patch database—a server on the network— for new updates, giving the system administrator the option of applying the patch. Agent-based products require up-front work to integrate agents into the workstations and in the server deployment process, but are better suited to large organizations due to their ability to generate less network traffic and provide a real-time network view. Finally, some patch management tools are hybrids—allowing the user to utilize agents or not. Agencies can also contract with third parties to develop and maintain their patch management processes. Commercially available tools and services typically include, among others, methods to inventory computers and the software applications and patches identify relevant patches and workarounds and gather them in one group systems by departments, machine types, or other logical scan a network to determine the status of patches and other corrections made to network machines (hosts and/or clients); assess machines against set criteria, including required system access a database of patches; report information to various levels of management about the status of the network. In our September 2003 testimony, we reported on FedCIRC’s Patch Authentication and Dissemination Capability (PADC), a service initiated in February 2003 to provide users with a method of obtaining information on security patches relevant to their enterprise and access to patches that had been tested in a laboratory environment. This service was offered to federal civilian agencies at no cost. Twenty of the 24 agencies we surveyed reported that they had subscribed to the service. Subscribers obtained an account license that allowed them to receive notifications and log into the secure Web site to download patches. They received notification of threats, vulnerabilities, and the availability of patches on the basis of profiles they had created that defined the technologies they used. They were notified by e-mail or pager message when a vulnerability or patch that affected one or all of their systems had been posted to the secure Web site. Last year, OMB reported that while many agencies had established PADC accounts, actual usage of those accounts was extremely low. A FedCIRC official also stated that there was a general lack of interest from agencies in using PADC, and that although agencies were provided with access to the tool, they did not activate available accounts. Many agencies only used the service as a tool to obtain notification of patches—a service that is provided at no cost from vendors such as Microsoft. In an effort to improve the implementation and usefulness of PADC, FedCIRC officials held meetings with contractor and user groups, visited agencies, and provided Web-based training. Interest in improving the service was expressed. For example, one of the surveyed agencies’ officials stated that PADC could improve its value by establishing an independent patch test laboratory, which could then advise agencies of test results and provide recommendations. However, officials indicated that such upgraded services would incur significant costs. According to agency officials, there were limitations to the PADC service. Although free to agencies, only about 2,000 licenses or accounts were available because of monetary constraints. According to FedCIRC officials, this constraint required them to work closely with participating agencies to balance the number of licenses that a single agency required with the need to allow multiple agencies to participate. For example, the National Aeronautics and Space Administration initially requested more than 3,000 licenses—one for each system administrator. Other limitations of the service cited by the agencies include that it did not support all platforms or technologies within an agency, that notification of patches was not timely, and that the level of services provided was minimal. According to FedCIRC officials, PADC was terminated on February 21, 2004, because of low levels of usage, the cost to upgrade services, and negative agency feedback on the usefulness of the service. They also noted that there are no immediate plans for another contractual service. However, discussions with federal agencies on addressing patch management issues remain ongoing through the recently formed Chief Information Security Officers forum, sponsored by DHS. In the absence of PADC, agencies are left to independently perform all components of effective patch management, including functions that may be common across the federal government. A centralized resource that incorporates lessons learned from PADC’s limitations could provide standardized services, such as the testing of patches, a patch management training curriculum, and development of criteria for patch management tools and services. In fact, a FedCIRC official stated that the organization is considering providing agencies with a clearinghouse of information on commercially available patch management tools and services. A governmentwide service could lower costs to—and resource requirements of—individual agencies, while facilitating their implementation of selected patch management practices. In addition to resources discussed earlier, such as vulnerability databases and analysis and warning centers, agencies can use other tools and methods to assist in their patch management activities. For example, they can maintain a database of the versions and latest patches for each server and each client in their network and track the security alerts and patches manually. This method is, however, labor-intensive. Agencies can also employ systems management tools with patch-updating capabilities to deploy the patches. This method requires that agencies monitor for the latest security alerts and patches. One agency reported that it developed a program in house to download patches, upgrades, and antivirus files, while another agency reported that it created a tool to apply settings and vendor patches, validate and maintain compliance, and report system status. One agency indicated that it uses the maintenance contract with its vendors to receive notification of applicable vulnerabilities. Further, software vendors may provide automated tools with customized features to alert system administrators and users of the need to patch and, if desired, to automatically apply patches. For example, Microsoft currently provides Software Update Services, a free service for automating the downloading and deployment of patches. Several agencies indicated that they subscribe to this service for tasks such as receiving notification of known vulnerabilities and obtaining and deploying patches. Survey results show that such tools and services play a large part in the patching practices of federal agencies. Twenty-three of 24 agencies use commercially available patch management tools. Twenty of 24 agencies use commercially available services, 3 do not, and 1 agency did not know the status of services used there. Table 1 summarizes agencies’ methods of performing specific patch management functions as reported by the 24 agencies. According to security experts and agency officials, the federal government faces several challenges to implementing effective patch management practices. Our work identified several additional steps that can be taken to address the risks associated with software vulnerabilities. Agencies face a number of common patch management obstacles, including (1) quickly installing patches while implementing effective patch management practices, (2) patching heterogeneous systems, (3) ensuring that mobile systems receive the latest patches, (4) avoiding unacceptable downtime when patching high-availability systems, and (5) dedicating sufficient resources toward patch management. Several of the agencies we surveyed indicated that the sheer quantity and frequency of needed patches posed a challenge to the implementation of the recommended patch management practices—including performing patch-based risk assessments and testing patches to ensure against any adverse effects. Timely patching is critical to maintaining the operational availability, confidentiality, and integrity of agencies’ IT systems. As increasingly virulent computer worms have demonstrated, agencies need to keep systems updated with the latest security patches. However, security experts have noted that malicious code writers have shortened the length of time between disclosure of a vulnerability and the release of an exploit to just a few days. As previously discussed, the Witty worm began to spread the day after the applications’ vulnerability was publicized and has been reported to represent the shortest interval between vulnerability disclosure and worm release. Due to the devastating consequences of an attacker’s exploiting an unpatched vulnerability, agencies are pressured to install patches as quickly as they are received. The urgency in patching a security vulnerability can limit or delay implementation of common practices for effective patch management. For example, NIST has noted that there is at best minimal time (hours to days) to test patches before implementing them, because attacks attempting to exploit these vulnerabilities are likely to occur as soon as the vulnerability is discovered or publicized. Testing of patches requires significant time; according to CERT/CC, some financial institutions require 6 weeks of regression testing before a patch is deployed. In addition, third-party vendors often take months after a patch is released to certify that installing it will not break their systems. In response to our survey, several agencies indicated that the heterogeneity of their systems—variations in platforms, configurations, and deployed applications—complicates their patching processes. Agencies noted that their mixture of legacy systems and commercial-off-the-shelf applications has led to instances in which patches were not applied to all computers due to concerns over their impact on operations. Further, their unique IT infrastructures can make it challenging for agencies to determine which systems are affected by a software vulnerability. For example, it was widely reported that the Slammer worm exploited a vulnerability found in two specific Microsoft SQL Server database applications. However, because those 2 vulnerable applications are utilized in more than 25 of Microsoft’s other database and desktop applications—and reportedly in about 130 third-party applications, agencies could not easily determine which applications were affected on their networks. Several agencies reported challenges in ensuring that their mobile computers—such as laptops, digital tablets, and personal digital assistants—receive the most current patches as soon as users connect to the network. Mobile computers can be used at physical locations outside an agency’s defined network security perimeter. Consequently, they may not be on the network at the right time to receive appropriate patches that an agency deploys and are at significant risk of not being patched. For example, one private-sector entity stated that its network first became affected by the Microsoft RPC vulnerability when remote users plugged their laptops into the network after being exposed to the vulnerability from other sources. Also, users of mobile systems may utilize a remote connection to download the patch file. Depending on the size of the package to be distributed and the bandwidth available to the machine, patches may be improperly downloaded and installed. When users then physically connect their mobile computers to the agency network, they may introduce a vulnerable system into the network. However, tools are available to automatically scan and patch mobile systems when they connect to an agency’s network. Some critical systems are required to be continuously available, and an agency’s ability to fulfill its mission could be significantly affected by the downtime required to install patches. Reacting to new security patches as they are introduced can interrupt normal and planned IT activities, and any downtime incurred during the patching cycle interferes with business continuity. When redundant systems are used, patches can be alternately applied to each system. However, redundant systems may not be technologically or economically feasible. For example, critical high-availability systems include control systems, commercial satellite systems, and certain financial systems. Control systems are computer-based systems that are used within many of our nation’s infrastructures and industries to monitor and control sensitive processes and physical functions. These systems are increasingly based on standardized technologies that are vulnerable to cyber attack. However, because they can be used to perform complex functions, like managing most activities in a municipal water system or even a nuclear power plant, they have high-availability requirements. Frequent downtime is also considered unacceptable for commercial satellite systems, which are also vulnerable to cyber attack. Federal contracts with commercial satellite service providers specify high availability and reliability levels to emphasize the importance of continuous service. Certain financial systems are also required to be continuously available, such as the Fedwire funds transfer system that routes and settles Federal Reserve Banks’ payment orders. The Fedwire system is expected to be available 99.85 percent of the time and therefore cannot easily be taken off line to install patches. For example, a Fedwire system outage that lasts 2 minutes is considered by the Federal Reserve to be a “major outage.” Thirteen of the 24 agencies that responded to our survey indicated that dedicating sufficient resources was a significant challenge they faced in implementing an effective patch management process. Despite the growing market of patch management tools and services that can track machines that need patches and automate patch downloads from vendor sites, agencies noted that effective patch management is a time-consuming process that requires dedicated staff to assess vulnerabilities and test and deploy patches. Further, once a patch is deployed, additional efforts are required to ensure that all vulnerable computers have been effectively fixed. Agencies recognized the need to devote time and funding to the patch management process, as well as to the training of skilled system administrators. For this reason, they may benefit from a shared patch management resource that provides centralized and dedicated functions such as testing and training. We identified a number of steps that can be taken to address the risk associated with software vulnerabilities and patch management challenges, including (1) reducing the number of potential vulnerabilities through better software engineering, (2) incorporating a defense-in-depth strategy into agencies’ IT infrastructures, (3) improving currently available tools, (4) researching and developing new security technologies, and (5) leveraging the federal government’s buying power to demand more secure products. DHS has begun efforts to implement additional steps through the establishment of collaborative task forces. More rigorous engineering practices, which include a formal development process, developer training on secure coding practice, and code reviews, can be employed when designing, implementing, and testing software products to reduce the number of potential vulnerabilities and thus minimize the need for patching. It is much less costly and more secure to identify defects during software development than to patch vulnerabilities after the product has been distributed. However, CERT/CC has reported that because software developers do not devote enough effort to applying lessons learned about the causes of vulnerabilities, the same types of vulnerabilities identified in earlier versions continue to appear in newer versions of products. Buffer overflows, for example, which may allow an attacker to gain control of a machine or mount a denial of service attack, represent a significant proportion of all overall software security vulnerabilities. For example, the Blaster and Sasser worms both exploited buffer overflow vulnerabilities in Microsoft products. Vendors that are proactive and adopt known effective software engineering practices can drastically reduce the number of flaws in their software products. For example, as part of its Trustworthy Computing Initiative, Microsoft is planning to undertake several steps to strengthen the software development process. According to Microsoft officials, creating secure software starts with a formal design process that verifies the security properties of the software at each well-defined stage of construction. The need to consider security “from the ground up” is a fundamental tenet of secure systems development. Such a process is intended to minimize the number of security vulnerabilities injected into the design, code, and documentation in the first place and to detect and remove those vulnerabilities as early in the development life cycle as possible. From inception to release, a development team, along with a central security team, makes plans to evaluate the security of the software. According to security experts, a best practice for protecting systems against cyber attacks is for agencies to build successive layers of defense mechanisms at strategic points in their IT infrastructures. This approach, commonly referred to as defense-in-depth, entails implementing a series of protective mechanisms such that if one mechanism fails to thwart an attack, another will provide a backup defense. Software vulnerabilities can exist at each of the components of an agency’s IT infrastructure, and no single technical solution can successfully protect against all attacks that exploit these vulnerabilities. By utilizing the strategy of defense-in-depth, agencies can reduce the risk of a successful cyber attack. A layered approach to security can be taken by deploying both similar and diverse cybersecurity technologies at multiple layers of the IT infrastructure. Defense-in-depth also entails implementing an appropriate network configuration, which in turn can affect the selection and implementation of cybersecurity technologies—including automated patch management tools and services. FISMA requires each agency to develop specific system configuration requirements that meet its own needs and ensure compliance with them, including maintaining up-to-date patches. In addition, industry best practices and federal guidance recognize the importance of configuration management when developing and maintaining a system or network to ensure that additions, deletions, or other changes to a system do not compromise the system’s ability to perform as intended. Several agencies emphasized the need for a centralized entity within the agency that is responsible for the administration and control of the entire configuration management process, which includes patch management. In addition to ensuring a uniform and consistent implementation of all patches and updates on a timely basis, a centralized entity can help foster good communication between agency components and ensure implementation of necessary patches. Through effective configuration management, agencies can define and track the composition of a system to ensure that an unauthorized change is not introduced. FISMA also requires that agencies’ information security programs include plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Contingency plans provide specific instructions for restoring critical systems, including such elements as arrangements for alternative processing facilities, in case usual facilities are significantly damaged or cannot be accessed due to unexpected events such as temporary power failure, an accidental loss of files, or a major disaster. It is important that these plans be clearly documented, communicated to affected staff, and updated to reflect current operations. Security experts have noted the need for improving currently available patch management tools. Several patch management vendors have been working to do just that. For example, Microsoft has plans to improve its patching capabilities. Microsoft’s newest version of Software Update Service is to be renamed Windows Update Services (WUS). WUS will be a server-based application for downloading and deploying patches. However, WUS has a limited scope and will support only specific applications. The release of WUS has been delayed from this spring to later this year. Other patch management vendors have plans to expand their product capabilities and to support additional operating systems such as Linux, Unix, and Apache. Plans have also been discussed to save bandwidth by deploying patches from local repositories. Software security vulnerabilities can also be addressed through the research and development of automated tools to uncover hard-to-see security flaws in software code during the development phase. The code base of large commercial software products can literally be millions of lines. Microsoft Windows 2000 reportedly contains as many as 35 million lines. Moreover, because large products under development have changes to the code base every day, even during the final phase of development, code needs to be reviewed regularly. There are currently few automated tools that can be used during the code development phase to find the types of flaws that introduce overall security vulnerabilities to products. Research and development in a wide range of other areas could also lead to more effective technologies to prevent, detect, and recover from attacks, as well as identify their perpetrators. These include more sophisticated firewalls to keep serious attackers out, better intrusion-detection systems that can distinguish serious attacks from nuisance probes and scans, systems that can isolate compromised areas and reconfigure while continuing to operate, and techniques to identify individuals responsible for specific incidents. The federal government can use its substantial purchasing power to demand higher quality software that would hold vendors more accountable for security defects in released products and provide incentives for vendors that supply low-defect products and products that are highly resistant to viruses. The Corporate Information Security Working Group (CISWG), a group of representatives from IT trade and security organizations established last November by Representative Adam Putnam to develop a private-sector plan for improving cybersecurity in corporate America, recommends that federal agencies use their massive buying power to force IT vendors to build more secure products. In addition, CISWG recommends that insurers base the cost of cyber-risk insurance policies on a company’s security posture to encourage adoption of best practices. The federal government has already started to use its purchasing power to influence software vendors to deliver more secure systems. In September 2003, the Department of Energy—along with four other federal agencies and the Center for Internet Security—signed a contract with Oracle that requires the vendor to deliver the database to agencies with the security configurations installed. The contract could serve as a model to other federal agencies for leveraging their buying power with software vendors to require them to better secure their products. The federal government—in collaboration with representatives from the private sector—have begun efforts in various components of patch management. In December 2003, NCSD and the National Cyber Security Partnership, a coalition of leading industry associations, established five task forces that include representatives from academia, trade associations, nonprofit organizations, companies, and federal government employees. Two of the task forces addressed patch management-related issues in their reports, including the need for better software engineering to reduce vulnerabilities, research and development of new technologies to improve software coding, and leveraging the federal government’s buying power to promote higher quality software. In April, the Security Across the Software Development Life Cycle Task Force issued a report with recommendations for improving software security. The task force recommended that software providers improve the development process by adopting practices for developing secure software. It also recommended that providers adhere to best practices that include thoroughly testing patches to confirm that errors are not introduced and to identify any dependencies on previously released patches, updates, or maintenance releases. Moreover, it recommended that providers make patches small, easy to install, and reversible, and that patches not introduce new product features or require reboots. The taskforce also developed a set of patch management guiding principles that include such criteria as establishing policies and procedures, defining a responsible person to monitor and enforce policy compliance, and adopting new technologies. In April, The Technical Standards and Common Criteria Task Force also issued a recommendations report. In the report, the task force’s Research Working Group advised the federal government to fund research into the development of better code-scanning tools that can identify software defects. According to the task force, the tools to be developed should be able to operate on code developed in a variety of programming languages; handle millions of lines of code daily; support the development of large, complex applications; and run on many operating systems to support multiple development environments. Furthermore, the tools must also be suitable for products ranging from IT infrastructure to business applications, as well as for security products themselves. In addition, the working group recommended that the federal government require vulnerability analysis of products as a prerequisite to procuring software. An ever-increasing number of software vulnerabilities resulting from flaws in commercial software products place federal operations and assets at considerable—and growing—risk. Patch management is an important element in mitigating these risks, as part of overall network configuration management and information security programs. Agencies have implemented common effective patch management practices inconsistently. Automated tools and services are available to facilitate agencies’ implementation of selected patch management practices. However, a number of common patch management obstacles remain. Additional steps can be taken by vendors, the security community, and the federal government to address the risk associated with software vulnerabilities and patch management challenges. More refined agency reporting on key aspects of agencies’ patch management practices could provide management and oversight organizations with better information for measuring the quality of agencies’ patch management effectiveness. This reporting could facilitate agencies’ progress in mitigating the risks caused by software vulnerabilities. Further, centralized services could provide a valuable resource for performing effective patch management practices as well as a venue for agencies to share information relevant to the various functionalities provided by different tools, IT infrastructures served, cost, effectiveness, and implementation issues and constraints. We recommend that the Director of OMB take the following two actions. First, we recommend that the OMB Director provide guidance for agencies to report on key aspects of their patch management practices in their annual FISMA reports. This guidance could address measures relating to agencies’ implementation of common patch management practices, such as documented policies and procedures, their testing of new patches in their specific computing environments prior to installation, and the frequency with which systems are monitored to ensure that patches are installed. We also recommend that the OMB Director determine the feasibility of providing selected centralized patch management services to federal civilian agencies. OMB should coordinate with DHS to build on lessons learned regarding PADC’s limitations and weigh the costs against potential benefits. These services could potentially provide patch management functions such as centralized access to available tools and services, testing capabilities, and development of training. We received oral comments on a draft of our report from representatives of OMB's Office of Information and Regulatory Affairs and Office of General Counsel. These representatives generally agreed with our findings and recommendations. They plan to address key patch management practices in their FISMA reporting guidance to agencies, and believe sound configuration management is fundamental to successful patch management. In addition, they acknowledge the potential benefits of centralized patch management services and will consider the feasibility of providing such services to federal agencies. Finally, they noted that, whether or not centralized patch management services are provided, ultimately it remains each agency and system owner's responsibility to maintain the security of their systems including ensuring timely patch updates. As agreed with your offices, unless you publicly announce the contents of the 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 Ranking Minority Members of the Committee on Government Reform and the Subcommittee on Technology, Information Policy, Intergovernmental Relations and the Census and other interested parties. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-3317 or Elizabeth Johnston, Assistant Director, at (202) 512-6345. We can also be reached by e-mail at [email protected] and [email protected], respectively. Key contributors to this report are listed in appendix II. Our objectives were to determine the (1) reported status of 23 of the agencies under the CFO Act and DHS in performing effective patch management practices, (2) tools and services available to federal agencies to perform patch management, (3) challenges to performing patch management, and (4) additional steps that can be taken to mitigate the risks created by software vulnerabilities. To determine the selected agencies’ status in performing these practices, we first determined effective patch management practices by conducting an extensive search of professional IT security literature. We also reviewed research studies and reports about cybersecurity-related vulnerabilities to update information provided in our previous testimony and consulted our prior reports and testimonies on information security. In addition, we interviewed private-sector and federal officials about their patch management experiences and practices. We then developed a series of questions that were incorporated into a Web-based survey instrument. We pretested our survey instrument at one federal department, one component agency, and internally at GAO through our Chief Information Officer’s office. We also corresponded with OMB to obtain and discuss the process for their data call of the Microsoft RPC and Cisco IOS vulnerabilities. For each agency to be surveyed, we identified the CIO office and notified each of our work and distributed a link to access the web-based survey instrument to each via e-mail. In addition, we discussed the purpose and content of the survey instrument with agency officials when requested. All 24 agencies responded to our survey. We did not verify the accuracy of the agencies’ responses; however, we reviewed supporting documentation that agencies provided to validate their responses. We contacted agency officials when necessary for follow up. We then analyzed agency responses to determine the extent to which agencies were performing patch management practices. Although this was not a sample survey and, therefore, there were no sampling errors, 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 survey instrument, the data collection, and the data analysis to minimize these nonsampling errors. For example, a survey specialist designed the survey instrument in collaboration with GAO staff with subject-matter expertise. Then, as stated earlier, it was pretested 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. Because this was a Web-based survey, respondents entered their answers directly into the electronic questionnaire. This eliminated the need to have the data keyed into a database, thus removing an additional potential source of error. To determine the tools and services available to federal agencies to perform patch management, we interviewed patch management software and service vendors as well as computer-security experts to discuss and examine their products’ functions and capabilities. We also conducted literature searches and reviewed available documentation. We interviewed FedCIRC officials to discuss their experiences with PADC and other tools and services available to agencies. In addition, questions regarding patch management tools and services were included in the survey we sent to the 23 CFO agencies and to DHS. Finally, we discussed with agencies the capabilities and limitations of the specific tools and services they utilized. Finally, to determine the challenges to performing patch management and the additional steps that can be taken to mitigate the risks created by software vulnerabilities, we reviewed professional information technology security literature, examined available commercial software patch management tools and services, and solicited agencies’ input on patch management challenges in our survey. We also interviewed relevant federal and private-sector officials and computer security experts. Finally, we reviewed reports prepared by the National Cyber Security Partnership subgroups tasked with identifying patch management challenges and developing recommendations. We conducted our work in Washington, D.C., Charlotte, N.C., and Schaumburg, Ill., from September 2003 through May 2004, in accordance with generally accepted government auditing standards. Key contributors to this report were Michael Fruitman, Elizabeth Johnston, Stuart Kaufman, Anjalique Lawrence, Min Lee, David Noone, and Tracy Pierson. 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. | Flaws in software code can introduce vulnerabilities that may be exploited to cause significant damage to federal information systems. Such risks continue to grow with the increasing speed, sophistication, and volume of reported attacks, as well as the decreasing period of the time from vulnerability announcement to attempted exploits. The process of applying software patches to fix flaws, referred to as patch management, is a critical process to help secure systems from attacks. The Chairmen of the House Committee on Government Reform and its Subcommittee on Technology, Information Policy, Intergovernmental Relations and the Census requested that GAO assess the (1) reported status of 24 selected agencies in performing effective patch management practices, (2) patch management tools and services available to federal agencies, (3) challenges to performing patch management, and (4) additional steps that can be taken to mitigate the risks created by software vulnerabilities. Based on agency-reported data, agencies generally are implementing important common practices for effective patch management, such as performing systems inventories and providing information security training. However, they are not consistently performing others, such as risk assessments and testing all patches before deployment. Additional information on key aspects of agencies' patch management practices--such as their documentation of patch management policies and procedures and the frequency with which systems are monitored to ensure that patches are installed--could provide OMB, Congress, and agencies themselves with consistent data that could better enable an assessment of the effectiveness of an agency's patch management processes. Several automated tools and services are available to assist agencies in performing patch management. These tools and services typically include a wide range of functionality, including methods to inventory computers, identify relevant patches and workarounds, test patches, and report network status information to various levels of management. A centralized resource could provide agencies with selected services such as the testing of patches, a patch management training curriculum, and development of criteria for patch management tools and services. A governmentwide service could lower costs to--and resource requirements of--individual agencies, while facilitating their implementation of selected patch management practices. Agencies face several challenges to implement effective patch management practices, including (1) quickly installing patches while implementing effective patch management practices, (2) patching heterogeneous systems, (3) ensuring that mobile systems receive the latest patches, (4) avoiding unacceptable downtime when patching high-availability systems, and (5) dedicating sufficient resources toward patch management. Agency officials and computer security experts identified a number of additional steps that can be taken by vendors, the security community, and the federal government to assist agencies in mitigating the risks created by software vulnerabilities. For example, more rigorous software engineering practices by software vendors could reduce the number of software vulnerabilities and the need for patches. In addition, the research and development of more capable technologies could help secure information systems against cyber attacks. Also, the federal government could use its substantial purchasing power to influence software vendors to deliver more secure systems. |
All international mail and packages entering the United States through the U.S. Postal Service and private carriers are subject to potential CBP inspection at the 13 International Mail Branches (IMBs) located at U.S. Postal Service international mail facilities and 29 express consignment carrier facilities operated by private carriers located around the country. CBP inspectors can target certain packages for inspection or randomly select packages for inspection. CBP inspects for, among other things, illegally imported controlled substances, contraband, and items—like personal shipments of prescription drugs—that may be inadmissible. CBP inspections can include examining the outer envelope of the package, using x-ray detectors, or opening the package to physically inspect the contents. Each year the IMBs and carrier facilities process hundreds of millions of pieces of mail and packages. Among these items are prescription drugs ordered by consumers over the Internet, the importation of which is prohibited under current law, with few exceptions. Two acts—the Federal Food, Drug, and Cosmetic Act and the Controlled Substances Import and Export Act—specifically regulate the importation of prescription drugs into the United States. Under the Federal Food, Drug, and Cosmetic Act, as amended, FDA is responsible for ensuring the safety, effectiveness, and quality of domestic and imported drugs and may refuse to admit into the United States, any drug that appears to be adulterated, misbranded, or unapproved for the U.S. market as defined in the act. Under the act and implementing regulations, this includes foreign versions of FDA-approved drugs because, for example, neither the foreign manufacturing facility nor the manufacturing methods and controls were reviewed by FDA for compliance with U.S. statutory and regulatory standards. The act also prohibits reimportation of a prescription drug manufactured in the United States by anyone other than the original manufacturer of that drug. According to FDA, prescription drugs imported by individual consumers typically fall into one of these prohibited categories. However, FDA has established a policy that allows local FDA officials to use their discretion to permit personal importation of prescription drugs that do not contain controlled substances under specified circumstances, such as importing for treatment of a serious condition a small quantity, generally not more than a 90-day supply, of a drug not available domestically. The importation of unapproved foreign versions of prescription drugs like Viagra (an erectile dysfunction drug) or Propecia (a hair loss drug), for example, would not qualify under the personal importation policy because approved versions are readily available in the United States. In addition, the Controlled Substances Import and Export Act, among other things, generally prohibits personal importation of those prescription drugs that are also controlled substances, such as Valium or codeine. (See app. II for general description of controlled substances.) Under the act, the importation of controlled substances is prohibited unless the importer is registered with DEA, and such registration is generally not available for importation for personal use. The act and implementing regulations permit an individual traveler under certain circumstances to carry a personal use quantity of a controlled substance (except a substance in Schedule I) across the U.S. border, but they do not make a similar exception for importation by mail or private carrier. CBP inspects packages for prescription drugs on behalf of DEA and FDA. Upon inspection, CBP is to seize illegally imported controlled substances on behalf of DEA. CBP may take steps to destroy the seized and forfeited substance or turn the seized substance over to other federal law enforcement agencies for further investigation. CBP is to turn over packages suspected of containing prescription drugs that are not controlled substances to FDA. FDA investigators may inspect such packages and hold those that appear to be adulterated, misbranded, or unapproved, but must notify the addressee and allow that individual the opportunity to present evidence as to why the drug should be admitted into the United States. If the addressee does not provide evidence that overcomes the appearance of inadmissibility, then the item is refused admission. Figure 1 illustrates the two acts that specifically govern the importation of prescription drugs into the United States. It also presents the roles of FDA, DEA, and CBP in implementing those acts. CBP and FDA officials said that the volume of unapproved prescription drugs illegally imported through the IMBs or carrier facilities is large and steadily increasing. However, complete data do not exist to document this observation. During special operations, CBP and FDA have attempted to determine the volume of imported prescription drugs entering through selected IMBs. Generally, these were one-time, targeted efforts to identify and tally all of the packages containing prescription drugs at certain time periods. The limited data collected have shown wide variations in volume. For example, CBP officials at one IMB estimated that approximately 3,300 packages containing prescription drugs entered the facility in one week. In 2004, CBP officials at another IMB determined that 4,300 packages containing prescription drugs entered the facility in one day. While these data may provide estimates regarding the volume entering selected IMBs for certain time periods, the data may not be representative of other time periods or projectable to other locations. FDA officials have stated that they cannot provide assurance to the public regarding the safety and quality of drugs purchased from foreign sources, which are largely outside of their regulatory system. Additionally, FDA officials indicated that consumers who purchase prescription drugs from foreign-based Internet pharmacies are at risk of not fully knowing the safety or quality of what they are importing. FDA officials also have stated that while some consumers may purchase genuine products, others may unknowingly purchase counterfeit products, expired drugs, or drugs that were improperly manufactured. CBP and FDA have conducted special operations to do limited assessments of the nature of some imported prescription drugs, and these operations have raised questions about the safety of some of the drugs analyzed. For example, during an operation undertaken in 2003 at four IMBs, CBP and FDA inspected 1,153 packages that contained prescription drugs. According to a CBP report, 1,019, or 88 percent, of the drug products were violative because they were prohibited for import, including Lipitor (a cholesterol-lowering drug), Viagra, and Propecia. A CBP laboratory analyzed 180 drug samples. This analysis showed that the majority of the drugs were never approved by FDA. Furthermore, the operation showed that many of the unapproved drugs could pose safety risks. The samples included drugs that were withdrawn from the U.S. market for safety reasons; animal drugs not approved for human use; and drugs that carry risks because they require careful dosing, initial screening, or periodic patient monitoring. In addition, other drugs tested were found to contain controlled substances prohibited for import, and some of the drugs contained no active ingredients. Figure 2 illustrates the results of the CBP laboratory analysis. In a recent report and testimony before this Subcommittee, we found that prescription drugs ordered from some foreign-based Internet pharmacies posed safety risks for consumers. Specifically, we identified several problems associated with the handling, FDA approval status, and authenticity of 21 prescription drugs samples purchased from Internet pharmacies located in several foreign countries—Argentina, Costa Rica, Fiji, Mexico, India, Pakistan, Philippines, Spain, Thailand, and Turkey. Our work showed that most of these drug samples, all of which we received via consignment carrier shipment or the U.S. mail, were unapproved for the U.S. market because, for example, the labeling or the foreign manufacturing facility, methods, and controls were not reviewed by FDA. Of the 21 samples: None included dispensing pharmacy labels that provided instructions for use, and only about one-third included warning information. Thirteen displayed problems associated with the handling of the drug; three samples that should have been shipped in a temperature- controlled environment arrived in envelopes without insulation; and five samples contained tablets enclosed in punctured blister packs, potentially exposing them to damaging light or moisture. Two were found to be counterfeit versions of the products we ordered, and two had a significantly different chemical composition than that of the product we had ordered. We found fewer problems among 47 samples purchased from U.S. and Canadian Internet pharmacies. Although most of the drugs obtained from Canada were of the same chemical composition as that of their U.S. counterparts, most were unapproved for the U.S. market. We stated that it was notable that we identified numerous problems among the samples received despite the relatively small number of drugs we purchased, consistent with problems recently identified by state and federal regulatory agencies. Our work thus far shows that while CBP and FDA interdicted some packages that contain prescription drugs, other similar packages were released—either not inspected and released or released after inspection. CBP officials told us that certain packages were targeted for inspection. However, packages that were not targeted typically bypass inspection and are released to the addressee without an assessment of their contents or admissibility. Many packages that were held by CBP officials for FDA at the IMBs were also subsequently released to the addressee. FDA has acknowledged that tens of thousands of packages have been released, although they may contain drug products that violate current laws and pose health risks to consumers. FDA officials at the IMBs said that the packages were released to the addressee because FDA investigators were unable to process the volume of packages turned over to them. FDA headquarters officials told us that this occurred because of limited available resources relative to the volume of unapproved prescription drugs entering the country. According to CBP and FDA officials at the IMBs we visited, CBP and FDA use various approaches to target certain incoming international mail packages for inspection. These include targeting packages from certain countries and/or packages suspected of containing certain prescription drugs. For example, at one IMB we visited, FDA provided CBP with a list of targeted countries—the composition of which changed periodically. A recent list targeted seven countries and specific areas in one other country. FDA officials asked that CBP hold the packages they suspected of containing prescription drugs that were from the targeted countries. Typically, CBP officials told us that when packages containing prescription drugs were detected, but were not from one of the targeted countries, they were released to the addressee without an assessment of their admissibility. Accordingly, CBP officials stated that packages containing prescription drugs unapproved for import were released daily without FDA review. According to CBP and FDA officials at the carrier facilities we visited, packages containing prescription drugs sent through these facilities may also be released without inspection. Unlike packages at IMBs, packages arriving at carrier facilities we visited were preceded by advance manifest information, which included the shipper’s declaration describing the contents and its value. CBP and FDA officials review the manifest information to target packages for inspection before their arrival. Agency officials at two carrier facilities we visited told us that FDA officials were not typically on-site and electronically reviewed the manifests and targeted incoming packages declared as prescription drugs. FDA officials noted that packages containing prescription drugs could potentially avoid their review if the manifest information was not accurate. CBP and FDA officials told us there were no assurances that the shipper’s declarations were accurate. For example, CBP and FDA officials at the carrier facility found eight packages containing a human growth hormone—unapproved for import—that were inaccurately manifested as glassware. FDA officials said that some packages that were inspected and determined to contain prescription drugs at the IMBs were released because they could not process them. For example, at one IMB, CBP officials held 16 bins containing roughly 3,000 packages for FDA investigators on a weekly basis. However, the FDA officials estimated that in one week, they could open and fully inspect about 140 packages. In making the decision regarding what to inspect, two FDA investigators considered whether the packages contained prescription drugs considered to be an enforcement priority, including injectable drugs and certain controlled substances, such as steroids. The FDA officials told us that they typically released packages that did not contain a priority drug, even though the packages were believed to contain other prescription drugs that were not approved for import. Figure 3 shows bins containing packages of suspected prescription drugs being held for FDA review and possible inspection. At another IMB, CBP officials said that they usually released packages containing prescription drugs that appeared to be a 90-day supply or less— in line with one of the criteria in FDA’s personal importation policy. For example, after viewing an x-ray image of a package, CBP performed a visual inspection of the outer container of a medication, labeled as a treatment for ulcers, determined that it appeared to contain 90 pills, and released it. At this same facility, FDA officials told us that every week CBP turned over to FDA hundreds of packages. CBP told us that these packages contained quantities of prescription drugs that appeared to be more than a 90-day supply. However, the FDA officials stated that they were able to process a total of approximately 20 packages per day. As a result, the FDA officials told us they returned many of the packages to CBP, citing an inability to process every package. The CBP officials said that most of the returned packages were released to the addressees. For example, CBP officials told us that several packages suspected of containing generic Viagra, unapproved for import, were returned by FDA and were released. FDA officials told us that for packages found to contain prescription drugs, processing requirements are time-consuming and can hamper their ability to process all of the packages that are detained by CBP. FDA processing requirements include identifying the drugs, measuring the volume, entering this information into a FDA database, taking pictures of the drugs, preparing the drugs for temporary storage, and sending notification to the addressees to provide evidence regarding the admissibility of the drug. Processing time varies depending on the quantity and variety of drugs in the package. In addition, processing time increases if research is required to determine the drug type. For example, FDA officials at one IMB stated that some prescription drugs are not immediately identifiable, particularly when shipped without labels or with labels in a foreign language. Figure 4 illustrates an example of drugs that was sent without labeling. FDA officials at the IMBs we visited stated that considering these many factors, processing a single package can take anywhere from a few minutes to several hours. FDA officials who are responsible for reviewing manifest information for drugs shipped through the private carriers stated that it can take several days to process a package, particularly if they need to obtain additional information regarding the shipment. FDA headquarters officials said that packages that contain prescription drugs that appear to be unapproved for import cannot be automatically refused and returned because of the statutory requirement that FDA hold the package and give the addressee the opportunity to provide evidence of admissibility. Officials said that this requirement applies to all drug imports with few exceptions. According to FDA investigators, in most instances, the addressees did not present evidence to support the drugs’ admissibility, and the drugs were ultimately provided to CBP or the U.S. Postal Service for return to sender. CBP officials at two IMBs told us that they could not turn over all packages they suspected of containing prescription drugs because FDA officials were not able to process all of the packages. FDA officials at one IMB stated that the processing time affected the number of packages they could inspect and was the reason many of the packages that were held up by CBP were ultimately released to the addressee without inspection. A FDA headquarters official stated that considerable storage space is needed to hold the detained packages, while the notice, opportunity to respond, and the agency’s decision are pending. For example, one FDA IMB official told us that space limitations have affected the number of packages they are able to store, including those packages held on-site awaiting a response from the addressee. Figure 5 shows drugs stored at one IMB as they pass through FDA’s process, including those awaiting addressees’ responses. Processing requirements for controlled substances can also be burdensome if an IMB receives a high volume of controlled substances in the mail. According to CBP officials, the seizure process requires that CBP inspectors record the contents of each package—including the type of drugs and the number of pills or vials in each package—before it is turned over to seized property staff for possible investigation by Immigration and Customs Enforcement, forfeiture, and eventual destruction. CBP officials at one IMB told us that in recent months they have observed substantial increases in the volume of prescription drugs containing controlled substances being sent through the international mail because, in their view, of the increased incidence of consumers ordering drugs over the Internet. Although CBP officials had been seizing substantially more of these drugs in recent months, they had also accumulated a sizable backlog of controlled substances awaiting seizure because, according to officials, they did not have the resources to begin the seizure process. By June 2004, CBP at this IMB had accumulated 123 bins of mail, containing over 40,700 packages of Schedule IV controlled substances—including the tranquilizer Valium, antidepressants, and painkillers. Figure 6 shows some of the bins of controlled substances that were being held awaiting formal seizure, as of May 14, 2004. According to CBP officials at this facility, as the controlled substances continued to accumulate, they became concerned that they would not be able resolve the backlog. In June, a CPB official said that CBP IMB officials asked CBP headquarters for permission to send the products back to the senders as an alternative to seizure, and to keep these drugs from entering U.S. commerce. According to this official, CBP’s headquarters office granted them permission to send most of the drugs back to the sender because the backlog would have taken months to resolve. One CBP official said that the ability to return the controlled substances enabled CBP to clear the backlog in two to three weeks rather than the one to two years they projected it would have taken had CBP been required to begin seizure proceedings for each item. Officials at the facility said that they are now seizing controlled substances as they arrive at the facility. Our preliminary work revealed a number of efforts, including interagency initiatives that are being undertaken in response to concerns raised about the importation of prescription drugs. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed the Secretary of Health and Human Services, in consultation with appropriate government agencies, to conduct a study of the importation of drugs into the United States and submit a report to Congress (P.L. 108- 173). The conference report (House Report 108-391) enumerated questions to be addressed in this study including, among other things: assessing the scope, volume, and safety of unapproved drugs, including controlled substances, entering the United States via mail shipment; and estimating agency resources, including additional field personnel, needed to adequately inspect the current amount of pharmaceuticals entering the country. In February 2004, the Secretary of Health and Human Services appointed a task force, chaired by the Surgeon General, on drug importation. It included members representing the department, CBP, DEA, Department of Justice trial attorneys, and the Office of Management and Budget. Between March and May, the task force held public hearings to gather information to address the questions posed by Congress. According to an FDA official, as of July 2004, the task force staff was reviewing the testimony from the public hearings and the comments sent to the Federal Register docket to answer the questions posed in the conference report. The official said that the task force report is expected to be completed by this fall so that the Secretary of Health and Human Services can meet his December 2004 deadline for reporting to Congress. In addition, a CBP official told us that CBP is leading an interagency pharmaceutical task force, established in January 2004 to address various law enforcement issues related to the importation of prescription drugs and miscellaneous pharmaceuticals. The task force, which includes managers and senior managers from CBP, FDA, DEA, the Office of National Drug Control Policy, U.S. Immigration and Customs Enforcement, as well as legal counsel from the Department of Justice and other agencies, meets every two months. According to the CBP official, the task force has established five interagency working groups designed to tackle specific issues identified by the task force. The working groups, which meet more frequently, are focused on improving information sharing and law enforcement targeting criteria, increasing public awareness of potential dangers of imported pharmaceuticals, reviewing and enhancing mail and express mail consignment procedures, working cooperatively with industry, and legal issues. The groups report the results of their enforcement efforts to the task force, which makes suggestions for future efforts. Our preliminary discussions with CBP about the activities of the working groups revealed initiatives currently under way by two of the groups. In one instance, the working group on mail and express mail consignment procedures has been involved in recent interagency enforcement operations at selected international mail facilities. During these operations, the interagency group targeted and found mail containing nonscheduled prescription drugs as well as controlled substances. According to the CBP official, these operations resulted in investigations of commercial shipments of the prescription drugs by agents from the task force and working group and helped the law enforcement agencies identify Internet addresses for purposes of future investigations. The CBP official told us that, in another instance, the working group focused on increasing public awareness of the potential dangers of imported pharmaceuticals had developed public service announcements that are to be posted on the Internet. Appendix III shows one of these announcements that was recently posted on the CBP web site. Individual agencies are also taking steps to enhance their ability to deal with inspection and interdiction issues associated with imported prescription drugs. As discussed earlier, during our visits to the three IMBs, we noted that CBP and FDA officials at those facilities had adopted different approaches for targeting and interdicting prescription drugs. FDA headquarters officials also recognized this and in response indicated that a more uniform approach was needed. According to these officials, FDA has drafted a set of standard operating procedures that will apply to the handling of imported prescription drugs consistently across the 13 International Mail Branches. FDA officials said that these procedures have been developed to apply to the handling of prescription drugs nationwide, but will also give officials at individual facilities some flexibility to adopt procedures that address uniquely local conditions. FDA headquarters officials told us they have begun implementing the procedures at selected IMBs and plan to implement them at more locations. FDA officials also said that they were developing a similar set of standard operating procedures that would apply to the inspection and interdiction of imported prescription drugs at the consignment carrier facilities. CBP officials told us that CBP expects that these guidelines will also discuss CBP responsibilities for handling imported prescription drugs. In closing, Mr. Chairman, it has been discussed in the media and elsewhere that American consumers are purchasing prescription drugs for importation in increasing numbers. Our preliminary observations indicate that CBP and FDA face considerable challenges inspecting and interdicting these drugs to help ensure compliance with current law. Currently data are unavailable to estimate the volume of prescription drugs entering the country, and the overall health and safety risks of these drugs are unknown. CBP and FDA are inspecting and interdicting some of the unapproved prescription drugs that are entering the country, but others bypass inspection and are sent to consumers who purchased them, often because, according to CBP and FDA officials, time-consuming processing requirements and staffing constraints limit their ability to perform more inspections. Although agencies like CBP, FDA, and DEA have begun initiatives to deal with various aspects of the drug importation issue, it is too early to tell whether these efforts will adequately address every dimension of the law enforcement and safety issues associated with the importation of prescription drugs. This concludes my prepared statement. In the next several weeks we plan to follow up with CBP and FDA officials on their plans to enhance their enforcement activities. I would be pleased to answer any questions you and the Subcommittee members may have. For further information about this testimony, please contact Richard Stana, Director, Homeland Security and Justice Issues, on (202) 512-8777 or at [email protected]. Major contributors to this testimony included John Mortin, Yelena Harden, Barbara Stolz, Frances Cook, and James Russell. To understand importation restrictions and enforcement requirements, we reviewed current federal laws on the importation of prescription drugs and controlled substances. We reviewed current CBP and FDA policies, procedures, and guidance related to prescription drugs and controlled substance importation. We reviewed applicable importation and interdiction data from CBP and FDA. We conducted interviews with officials at CBP, FDA, U.S. Postal Service, U.S. Immigration and Customs Enforcement, and DEA. To understand inspection procedures, we visited three IMBs in Chicago, Los Angeles, and New York and two carrier facilities in Cincinnati (for the DHL Corporation) and in Memphis, (for the FedEx Corporation). We judgmentally selected these facilities based on the overall number of packages processed at the facilities and their geographic dispersion. At these locations, we observed inspection and interdiction practices; met with CBP and FDA management, inspectors, and investigators to discuss issues related to inspection, manifest reviews, and pharmaceutical importation volume; and reviewed relevant documents on inspection and interdiction procedures. At the IMBs we also met with officials from the U.S. Postal Service regarding mail handling and processing procedures. We did the work reflected in this statement from March to July 2004 in accordance with generally accepted government auditing standards. The drugs and drug products that come under the Controlled Substances Act are divided into five schedules. A general description and examples of the substances in each schedule are outlined below in table 1. 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. | American consumers are increasingly drawn to the convenience, privacy, and cost advantages that might be accrued by purchasing prescription drugs over the Internet. However, there is growing concern about the safety of the drugs and the lawfulness of shipping the drugs into the United States through international mail and private carriers. Under current law, the importation of prescription drugs for personal use is illegal, with few exceptions. All prescription drugs offered for import must meet the requirements of the Federal Food, Drug, and Cosmetic Act, and those that are controlled substances also must meet the requirements of the Controlled Substances Import and Export Act. According to the agencies responsible for enforcing these laws, prescription drugs imported for personal use generally do not meet these requirements. The Department of Homeland Security's U.S. Customs and Border Protection (CBP) and the Department of Health and Human Service's Food and Drug Administration (FDA) are responsible for inspecting and interdicting unapproved prescription drugs that are being illegally imported via the U.S. mail or private carrier. This testimony reflects our preliminary observations from ongoing work to assess federal efforts to enforce the prohibitions on personal importation of prescription drugs. CBP and FDA officials said that the volume of imported adulterated, misbranded, or unapproved prescription drugs is large and increasing, but complete data do not exist to document these observations. FDA officials said that they cannot assure the public of the safety and quality of drugs purchased from foreign sources that are largely outside the U.S. regulatory system. GAO's recent report on a sample of drugs purchased from Internet pharmacies echoed these concerns. CBP and FDA officials at mail and private carrier facilities inspect and interdict some packages that contain prescription drugs. However, according to officials, because of resource constraints, many other packages containing prescriptions drugs are either not inspected and are released to addressees or are released after an inspection. CBP and FDA target certain packages for inspection based on the packages' countries of origin and whether the packages are suspected of containing certain prescription drugs. However, packages that are not targeted typically bypass inspection and are released to addressees without an assessment of their contents or admissibility. FDA officials have acknowledged that tens of thousands of packages, containing drug products that may violate current laws and pose health risks to consumers, have been released. They said that time-consuming processing requirements and resource constraints limit their ability to perform more inspections. Agency efforts to deal with imported prescription drugs are evolving. Two interagency task forces were established to study prescription drug importation and address related law enforcement issues, respectively. Also, to overcome differences in the way officials target and interdict shipments of unapproved prescription drugs at various mail and private carrier facilities, FDA has begun implementing new procedures to promote more uniformity across facilities. It is too soon to tell if these efforts are sufficient to address various health, safety, and law enforcement issues associated with the importation of prescription drugs. |
Design standards, building codes, and voluntary certifications provide guidelines for the construction of infrastructure. Standards-developing organizations are the primary source of the standards, codes, and certifications that federal, state, local, and private-sector infrastructure planners follow. Standards-developing organizations typically develop standards, codes, and certifications through a formal, consensus-based process, and federal law and policies govern the participation of agency officials in their development. Design standards, building codes, and voluntary certifications play a role in the federal fiscal exposure to the effects of climate change. Design standards, building codes, and voluntary certifications provide guidelines for the construction of infrastructure, specifically: Design Standards. OMB Circular A-119—which establishes policies on the federal government’s role in development and use of standards—defines “standards” to include the common and repeated use of rules, conditions, guidelines, or characteristics for products or related processes and production methods. For example, the American Society of Civil Engineers issued a design standard that specifies minimum structural load requirements under various types of conditions, taking into accounts factors such as soil type and potential for floods, snow, rain, ice, and wind. Building Codes. Building codes are minimum safeguards to ensure the public health, safety, and general welfare of the occupants of new and existing buildings and structures, according to the International Code Council, a standards-developing organization. For example, building codes may ensure that exterior walls and roofs are resistant to the weather, such as by including flashing and drainage. Building codes may reference one or more design standards. Voluntary Certifications. Voluntary certifications assess infrastructure across a spectrum of key criteria, including environmental performance, and recognize those that go beyond minimum code compliance. For example, the U.S. Green Building Council developed the Leadership in Energy and Environmental Design (LEED) certification, which offers four ratings levels—certified, silver, gold, and platinum—depending on how many points a project earns in various categories. In addition to design standards, building codes, and voluntary certifications, broader considerations, such as planning ordinances and asset management, may govern the construction of infrastructure. For example, planning ordinances may specify where to site new residential or commercial buildings and place conditions on their design, such as building height. Further, asset management—a decision-making approach for providing the best level of service to customers at the lowest appropriate cost—can guide what to build. For example, builders and owners may use an asset management framework to decide whether to repair or replace a building or another physical asset. In this report, we focus on the use of climate information in standards, model codes, and certifications, although climate information may also be relevant to broader planning processes and asset management decisions. In the United States, standards-developing organizations are the primary source of design standards, building codes, and voluntary certifications that federal, state, local, and private-sector infrastructure planners follow. For example, a 2015 report by the National Institute of Building Sciences’ Consultative Council on the priorities of the building industry stated that standards-developing organizations develop and maintain standards and codes, while state and local governments adapt, adopt, and enforce them. In April 2013, we found that federal agencies rely on professional associations in adopting design standards. In 2015, we found that federal agencies and the private sector use voluntary certifications that third-party organizations—such as standards-developing organizations— develop. A variety of organizations, including professional societies and trade associations such as the American Society of Civil Engineers and the International Association of Plumbing & Mechanical Officials, develop design standards, building codes, and voluntary certifications. Members of these organizations can include academics; professionals, such as architects, engineers, and planners; and federal, state, and local government officials. Various federal laws and regulations govern the use of design standards, building codes, and voluntary certifications that standards-developing organizations issue, including the following: The National Technology Transfer and Advancement Act of 1995, as amended (NTTAA), codified the OMB Circular A-119 directive for federal agencies to use voluntary consensus standards in lieu of government-unique standards except where inconsistent with law or otherwise impractical. Federal Highway Administration (FHWA) regulations incorporate, by reference, certain design standards that the American Association of State Highway and Transportation Officials develops, thereby requiring their use for projects in the National Highway System. The Public Buildings Amendments of 1988 requires that each building constructed or altered by GSA or any other federal agency, to the maximum extent feasible, comply with one of the nationally recognized model building and other applicable codes. The Cranston-Gonzalez National Affordable Housing Act, as amended, requires the Secretaries of Agriculture and HUD to establish by regulation energy efficiency standards for certain housing (i.e., public housing and homes whose mortgages are insured by HUD’s Federal Housing Administration) that meet or exceed the requirements of specified design standards and building codes and, in certain circumstances, to amend the regulation when the standards or codes are revised. The Energy Conservation and Production Act, as amended, requires the Secretary of Energy to determine whether each revision of certain model energy codes for residential and commercial buildings would improve energy efficiency. If the Secretary makes an affirmative determination, states have 2 years to certify that they have determined whether it was appropriate to revise their residential building energy code to meet or exceed the revised model code and updated their commercial building energy code to meet or exceed the revised model codes. If a federal agency chooses to use a green building voluntary certification for a covered new building or major renovation, it must meet the certification standards in DOE’s regulations. The regulations require that the system used to certify the building be developed by an organization that provides an opportunity for developing the system through a consensus-based process and subject to periodic evaluation and assessment of the environmental and energy benefits that result, among other things. Standards-developing organizations follow similar, formal, consensus- based processes in the development of American National Standards— which include design standards, building codes, and voluntary certifications. The American National Standards Institute, an organization that accredits standards-developing organizations, established requirements for due process that standards-developing organizations must follow when developing American National Standards. In 2000, NIST and the American National Standards Institute signed a memorandum of understanding to, among other things, improve communication and coordination among the private and public sector on voluntary standards issues. This memorandum recognizes NIST’s responsibility to coordinate standards activities with responsible federal agencies to use voluntary consensus standards to the extent practicable, participate appropriately in their development, and ensure that they meet federal agency needs. It recognizes the American National Standards Institute’s role of accrediting standards developers and approving proposed standards as American National Standards. Standards- developing organizations that plan to develop an American National Standard use a process that may differ in some of the details, such as how to determine consensus, but must follow the principles of due process, including openness; balance of interests; and consensus and the same basic steps, as seen in figure 1. 1. Initiate standards-developing activity. Members of standards- developing organizations and, in some cases, members of the public may propose to initiate standards activity. Proposals may include information about the need for and anticipated benefits to the public of the new or revised standard, as well as potential costs. The standards-developing organization determines whether to draft a new standard or revise an existing standard. If the standards-developing organization agrees to draft a new standard or revise the existing one, it directs a committee to undertake the activity. The committee may include members of the organization as well as nonmembers—i.e., representatives of companies and nonprofit organizations and government officials with subject-matter expertise who serve on a voluntary basis. 2. Draft new or revised standard. The committee drafts the new or revised standard and seeks public input by notifying members of the standards-developing organization, the American National Standards Institute, and other interested parties. 3. Review draft standard. The committee considers public comments and the views of all interested parties and revises the draft standard. 4. Finalize draft standard. The committee uses a consensus-based process to vote on whether to approve the draft standard. For example, to approve a draft standard, some standards-developing organizations require a supermajority—at least two-thirds—of the members who cast ballots as well as resolution of any negative comments. The standards-developing organization must provide an appeals process for procedural decisions, including whether a technical issue was afforded due process. 5. Issue new or revised standard. If the draft standard is approved, the standards-developing organization issues the new or revised standard and notifies the American National Standards Institute. The committee establishes a schedule for review, generally at least every 5 years. At that time, the standards-developing organization may reaffirm, revise, or withdraw the standard. Federal law requires agencies to participate in the development of standards when it is in the public interest and is compatible with agency mission, authority, priorities, and budget resources. In addition, NIST is authorized to cooperate with other departments and agencies of the federal government, state and local governments, and private organizations, among other entities, in establishing voluntary consensus standards and codes. The Energy Policy Act of 1992 requires DOE to support the upgrading of model building energy codes for new buildings and periodically review their technical and economic basis. OMB Circular A-119 encourages federal representatives to participate actively and on an equal basis with other members, consistent with the procedures of the standards bodies, in the standards organization, including in developing and adopting new standards by being fully involved in discussions and technical debates, registering opinions, and serving in leadership positions if selected. OMB Circular A-119 notes that agency representatives should avoid the practice or the appearance of undue influence relating to their participation in standards bodies and activities. The Secretary of Commerce, through NIST, coordinates and fosters the implementation of OMB Circular A-119. In our prior work, we found that decisions regarding how to account for climate change in the design of infrastructure—such as those in design standards, building codes, and voluntary certifications—could affect the federal fiscal exposure. In our February 2015 high-risk update, we noted that, among other things, governmentwide improvement is needed to reduce federal fiscal exposure, since climate change may affect the federal government in various ways, such as through its role as a provider of aid in response to disasters. In our past work, we have found that infrastructure is typically designed to operate within past climate conditions. For example, in April 2013, we found that changes in the climate may reduce the useable lifespan of infrastructure like bridges that are expected to last as long as 50 to 100 years because historical weather patterns—in particular, those related to extreme weather—no longer provide reliable predictions for planning purposes. Also in our April 2013 report, we found that taking actions to adapt to the effects of climate change—such as raising river or coastal dikes to protect infrastructure from sea level rise, building higher bridges, or increasing the capacity of stormwater systems—may be costly, but that there is a growing recognition that the cost of inaction could be greater. As a result of the increasing costs of natural disasters, such as Hurricane Sandy, federal agencies, state and local officials, and private-sector entities have begun to acknowledge the role of design standards, building codes, and voluntary certifications in managing the fiscal exposure to extreme weather events and the potential long-term effects of climate change, according to reports and our prior work. For example, in 2013, the Hurricane Sandy Rebuilding Strategy—which identified actions that federal agencies can take to enhance resilient rebuilding—noted that investments now will last for decades, so current construction must be completed to standards that anticipate future conditions and risks. In July 2015, we found that some state and city officials in areas affected by Hurricane Sandy have strengthened their building codes to enhance the resilience—the ability to adapt to changing conditions and withstand and rapidly recover from disruption—of communities to future disasters. In October 2014, we found that, according to a representative of an insurance industry group, more resilient building codes would help reduce exposure to weather-related risks, including hurricanes, floods, wildfires, hail, and wind storms, which are associated with climate change. Further, in May 2014, we found that Department of Defense (DOD) installation planners are unlikely to go beyond current building codes, which could limit their ability to consider climate change in their facility investment decisions. Standards-developing organizations generally have not used forward- looking climate information in design standards, building codes, and voluntary certifications and instead have relied on historical observations, according to our analysis, reports we reviewed, and representatives of standards-developing organizations we interviewed. Specifically, according to our analysis of documents that standards-developing organizations provided to us, standards, codes, and certifications do not use forward-looking climate information. Reports and representatives of standards-developing organizations stated that such standards, codes, and certifications were generally based on climate information from historical observations. For example, a 2014 report by the National Institute of Building Sciences’ Consultative Council on the priorities of the building industry stated that standards and codes are based on the science and experience of the past. In a 2011 report, authors from the University of Michigan and the U.S. Green Building Council stated that climate-related decisions for the design of infrastructure are based on historic climate data and past trends. In addition, representatives of standards-developing organizations told us they use climate information based on historical observations in standards, codes, and certifications. Further, standards-developing organizations vary in whether they update the climate information in design standards, building codes, and voluntary certifications on a regular basis, according to our analysis. Some standards-developing organizations periodically update the climate information they use. For example, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers uses climate information— including average monthly temperatures and various measures of humidity—based on historical data that it updates periodically to balance both long-term and recent climate change trends and incorporate changes in climate as they occur. However, other organizations do not regularly update the climate information they use. For example, the International Code Council uses climate zones based on observations of annual precipitation and average temperatures from 1961 through 1990 to specify insulation levels for condensation control and has not updated these observations in 26 years. Moreover, the International Association of Plumbing & Mechanical Officials uses rainfall rates from a 1961 federal technical paper for the sizing of stormwater drainage pipes. Representatives from the International Code Council told us that the organization may not be updating this information because being able to do so would depend on whether federal agency officials or other participants provide more recent information during the standards- developing process. Some standards-developing organizations have taken preliminary steps, such as issuing guidance and statements, that may lead to the use of forward-looking climate information in standards, codes, and certifications. For example, in 2015 the American Society of Civil Engineers issued a white paper about adapting engineering practices to a changing climate that recommended, among other things, that engineers work with scientists to better understand future climate extremes to improve the planning and design of infrastructure. The American Association of State Highway and Transportation Officials provides guidance on its website to better prepare transportation design managers and engineers for changing climate trends. Further, the American Institute of Architects and the National Institute of Building Sciences worked with 19 organizations, including standards-developing organizations, to issue a statement indicating their commitment to, among other things, improving the resilience of infrastructure. In a progress report on this statement, signatories made initial commitments to develop design standards that are informed by climate data. In addition, the American Association of State Highway and Transportation Officials is funding a Transportation Research Board project to develop tools that hydraulic engineers could use to account for climate change in their designs. Some standards-developing organizations also encourage the use of forward-looking climate information on a more limited basis. For example, the U.S. Green Building Council has offered an optional pilot credit for its voluntary certification that encouraged the use of forward-looking climate information. The U.S. Green Building Council suggested various sources for forward-looking climate information, including (1) local climate change studies, if available; (2) consultation with climate scientists; or (3) U.S. regional predictions based on information available from EPA, NOAA, FEMA, and the USGCRP. In addition, the Green Building Initiative, a different standards-developing organization, includes the EPA National Stormwater Calculator as a possible information source for its voluntary certification. The calculator allows users to consider future climate change scenarios to demonstrate performance for the voluntary certification. Further, representatives from the Green Building Initiative told us that they may add references to forward-looking climate information in their voluntary certification to address the Council on Environmental Quality’s recently updated Guiding Principles. Standards-developing organizations face institutional and technical challenges to using the best available forward-looking climate information in design standards, building codes, and voluntary certifications, according to reports we reviewed and representatives of these organizations and federal officials we interviewed. Institutional challenges to using forward-looking climate information in design standards, building codes, and voluntary certifications include a standards-developing process that (1) must balance various interests and (2) can be decentralized and slow to change, according to reports we reviewed and representatives of standards-developing organizations we interviewed. First, with regard to the challenge of balancing various interests, as stated in GSA’s 2014 climate change risk-management plan, it is unlikely that building codes will meet the needs for site-specific climate resistant design of buildings in a timely way because of the rapidly changing climate and the divergent motivations and beliefs of stakeholders that participate in the code development process. Representatives of some standards-developing organizations told us that the various interests of their members drive their process. For example, representatives of one standards-developing organization told us that their members have not expressed interest in standards that use forward- looking climate information because it would require increased upfront construction costs. Representatives of two other standards-developing organizations noted that in some cases their standards are for equipment with a relatively short life-cycle—as little as 10 to 15 years—so they would not realize appreciable benefits from increased resilience. Second, design standards and building codes can be slow to change, as stated in a 2015 report on adapting infrastructure to climate change by the American Society of Civil Engineers. Representatives of some standards-developing organizations told us that the process they follow to develop their standards is decentralized and can be slow to change. For example, they stated that they cannot use forward-looking climate information unless someone submits a proposal that includes forward- looking climate information and their members reach consensus to approve the proposal. Further, representatives of two standards- developing organizations told us they reference climate information from other standards-developing organizations in their standards, so it would be difficult for them to unilaterally begin to use forward-looking climate information. In addition, representatives of other standards-developing organizations told us that standards and codes are by their nature stable and slow to change. For example, representatives of one standards- developing organization stated that code development is a conservative process and does not accept change easily, and representatives from another standards-developing organization stated that following the consensus process takes time. Technical challenges to using forward-looking climate information include difficulty (1) identifying the best available forward-looking climate information and (2) incorporating it into design standards, building codes, and voluntary certifications, according to reports, federal officials, and representatives of standards-developing organizations. First, with respect to identifying the best available forward-looking climate information, authors from the University of Michigan and the U.S. Green Building Council noted a lack of connection between climate change research and the design of infrastructure in their 2011 report. Further, participants in our July 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. Representatives of some standards-developing organizations told us they had difficulties identifying the best available forward-looking climate information models. For example, representatives of one standards- developing organization stated that they are not aware of updated tools— such as interactive web-based projections of flood hazards for particular locations—or forward-looking climate information from the last 4 or 5 years. In addition, representatives of some standards-developing organizations told us that they could not identify forward-looking climate information with sufficient specificity. For example, representatives of one standards-developing organization stated that they need forward-looking climate information for a site-specific project area rather than at the country or state level, which is what is available from climate models. Representatives of another standards-developing organization stated that they needed additional detailed information, such as whether any projected increased precipitation would occur evenly throughout the year or in concentrated bursts. Second, it can be difficult to incorporate forward-looking climate information into planning decisions, such as those involved in developing design standards, building codes, and voluntary certifications, according to reports, including the Third National Climate Assessment, and USGCRP officials. For example, in 2014, the Transportation Research Board found that climate models do not generally provide climate information that is directly usable in design—they require some translation or derivation—because, for example, they do not account for seasonal or spatial variability. USGCRP officials told us that it may be difficult for standards-developing organizations to move from using historical observations, such as average summer heating degree days, to model projections on the basis of a variety of assumptions. Representatives of one standards-developing organization told us that climate models provide a wide range of possible temperatures that is difficult to use in their standards because the technical committee does not know how to reflect this variability. In addition, representatives of some standards-developing organizations told us that it is difficult to reconcile the dynamic nature of climate change with the stable framework of infrastructure design. Moreover, representatives of some standards- developing organizations stated that they do not have such expertise in- house and would have to rely on outside experts to provide forward- looking climate information during the standards-developing process. Representatives of another organization stated that using forward-looking climate information would increase the complexity of their voluntary certification and could deter potential users. Federal agencies have initiated some actions to help standards- developing organizations address institutional and technical challenges to using forward-looking climate information. Moreover, according to reports we reviewed, our prior work, and representatives of some standards- developing organizations and agency officials we interviewed, agencies have opportunities to take additional actions. These sources also indicated that taking further actions to address these challenges could present an additional benefit by reducing the federal fiscal exposure. Federal agencies have initiated some actions that could help standards- developing organizations address institutional and technical challenges to using forward-looking climate information. Officials from USGCRP and from some federal agencies, including DOT and NOAA, told us they have initiated efforts to coordinate with other federal agencies to provide the best available forward-looking climate information to standards- developing organizations. For example, DOT and NOAA officials told us that they participate in the Mitigation Framework Leadership Group (MitFLG), which, since 2013, has coordinated federal, state, and local government efforts to mitigate the impact of hazards, including natural disasters. Further, officials from NOAA told us they provided information on their Digital Coast tools, including the Sea Level Rise Viewer, to a standards-developing organization at its request, and that they generally make these and other tools publicly available. Officials from EPA stated that they consulted with a standards-developing organization to develop a tool that provides forward-looking climate information to water utility owners and operators and helps them assess the related climate risks at their individual utilities, but that they have not directly provided this information to standards-developing organizations. Officials from FEMA and NIST told us they have taken actions to help make design standards, building codes, and voluntary certifications more resilient to natural disasters. For example, in response to a proposal from FEMA, the 2015 International Code Council residential building code increased the minimum required building elevation above the 100-year flood plain by 1 foot. FEMA officials told us that they proposed this change because they determined it would be cost-effective under current climate conditions. Furthermore, in November 2015, MitFLG—which FEMA chairs—issued a draft implementation strategy that seeks to encourage federal support for more resilient standards and codes, but the strategy does not specifically focus on using forward-looking climate information. In 2015, NIST convened the Community Resilience Panel for Buildings and Infrastructure Systems, which seeks to, among other things, identifys gaps in standards and codes to make infrastructure more resilient to extreme weather and other risks. The President’s 2013 Climate Action Plan recognized the panel’s role in helping to improve the resilience of infrastructure, although NIST officials told us that the panel does not currently focus on addressing potential climate change effects. According to reports we reviewed, our prior work, and representatives of some standards-developing organizations and federal agency officials we interviewed, opportunities exist for agencies to take additional actions that may help address the challenges standards-developing organizations face to using forward-looking climate information. Specifically, according to these sources, federal agencies with a role in coordinating, developing, and adopting standards, codes, and certifications or assessing and responding to climate-related issues could help address the challenges standards-developing organizations face by taking two types of actions. First, agencies could improve interagency coordination to address institutional challenges. Second, agencies could provide the best available forward-looking climate information to standards-developing organizations to help address their technical challenges. In addition, helping standards-developing organizations address these challenges could present opportunities to reduce federal fiscal exposure to the effects of climate change, according to federal agency officials, our prior work, and reports we reviewed. Improving Interagency Coordination to Help Address Institutional Challenges Federal agencies with a role in coordinating, developing, and adopting standards, codes, and certifications or assessing and responding to climate-related issues could improve interagency coordination to help address the institutional challenges standards-developing organizations face, according to reports we reviewed, our prior work, and representatives of standards-developing organizations and federal agency officials we interviewed. For example, a 2015 report from the National Institute of Building Sciences’ Consultative Council on the priorities of the building industry found that efforts to improve resilience, such as incorporating anticipated climate change effects into design standards and building codes, would benefit from a coordinated effort among federal agencies that address climate-related issues. Further, a 2012 National Academies report found that the roles and responsibilities for improving the resilience of buildings are not coordinated by the federal government, either through a single agency or authority, or through a unified vision. This report stated that a national vision could be a more effective approach to encouraging resilience. Also, in November 2015, we found that providing 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. In that report we found that agency climate programs were created to meet individual agency missions and are not necessarily focused on the needs of other decision makers. Both representatives of standards-developing organizations and federal agency officials we interviewed recognized the need for improved coordination to address institutional challenges to using climate information in design standards, building codes, and voluntary certifications. Representatives of several standards-developing organizations stated that improved coordination among federal agencies could help increase the legitimacy and visibility of efforts to use forward- looking climate information in standards, codes, and certifications. GSA’s March 2016 standards for government-owned and -leased buildings noted that federal leadership is essential—especially for buildings that are vulnerable to climate change and critical to the public good—because building codes do not consider climate change. Emphasizing the key role for the federal government, OMB officials stated that standards and codes are critically important to planning for climate change and that proactive federal engagement with standards-developing organizations is necessary. In addition, USGCRP officials stated that there is a need for conversations among a coordinated group of federal agencies and standards-developing organizations to help address the institutional challenges these organizations face. Federal policy directs agency standards executives—senior-level officials who coordinate agency participation in standards organizations—to coordinate their views on matters of paramount importance when they participate in the same standards activities. The President has also established a council to, among other things, coordinate interagency efforts on priority federal government actions related to climate preparedness and resilience. First, OMB Circular A-119 directs agency standards executives to coordinate their views on matters of paramount importance when they participate in the same standards activities so as to present, whenever feasible, a single, unified position, and where not feasible, a mutual recognition of differences. OMB Circular A-119 also directs the Secretary of Commerce, who has delegated this responsibility to NIST, to coordinate and foster executive branch implementation of the Circular, which addresses federal participation in the development and use of voluntary consensus standards, and to sponsor, support, and chair the Interagency Committee on Standards Policy (ICSP). According to the ICSP charter, the objective of the ICSP is to help foster cooperative participation by the federal government, among others, in standards activities. The ICSP coordinates with a view to encouraging more effective federal participation in the development of standards, among other things. Second, acknowledging that the management of climate change risks requires deliberate preparation, close cooperation, and coordinated planning by the federal government, Executive Order 13653 established the interagency Council on Climate Preparedness and Resilience. The Council is to, among other things, (1) coordinate interagency efforts on priority federal government actions related to climate preparedness and resilience and (2) facilitate the integration of climate science in policies and planning of government agencies and the private sector. In 2016, the Council issued a report, noting that with respect to integrating climate resilience into agencies’ missions, operations, and culture, strong coordination across the federal government creates the best outcomes. Officials from the Executive Office of the President and federal agencies told us that they have not specifically coordinated efforts to help standards-developing organizations use the best available forward- looking climate information. Officials from USGCRP and the Office of Science and Technology Policy also stated that interagency coordination is unlikely to produce new climate analyses that depart from agency missions. NIST officials stated that they coordinate other governmentwide activities related to standards, codes, and certifications—for example, the ICSP serves as a forum for federal agencies to share best practices. NIST officials also told us that they coordinate the federal use of standards but they do not have the authority to coordinate federal agencies’ participation in the standards-developing process. However, as we noted above, OMB Circular A-119 directs the Secretary of Commerce to coordinate and foster executive branch implementation of the Circular, which addresses federal participation in the development of voluntary consensus standards, among other things. Moreover, NIST is authorized to cooperate with other federal agencies, among other entities, in establishing voluntary consensus standards and codes. Providing the Best Available Forward-Looking Climate Information to Help Address Technical Challenges Federal agencies that participate in the standards-developing process and respond to climate-related issues could help address technical challenges by providing the best available forward-looking climate information for consideration in the standards-developing process, according to reports we reviewed, our prior work, and representatives of some standards-developing organizations and federal agency officials we interviewed. For example, in November 2014, the State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience reported 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. The Task Force also recommended that the federal government help establish standards for climate resilience in infrastructure, thus encouraging their adoption by the private sector, other levels of government, and nongovernmental organizations. Similarly, we found in November 2015 that federal technical assistance could help decision makers access, translate, and use climate information. In April 2013, we found that the federal government plays a critical role in producing the information needed to facilitate a more informed response to the effects of climate change. However, in this report we stated that this information exists in an uncoordinated confederation of networks and is not easily accessible. Representatives of some standards-developing organizations told us that federal agencies have the expertise and resources to identify and help incorporate the best available forward- looking climate information in standards, codes, and certifications. For example, representatives of some standards-developing organizations we interviewed stated that USGCRP agencies could work with standards- developing organizations to provide forward-looking climate information. Representatives of one standards-developing organization stated that federal agencies could provide, for example, projections of snow levels, minimum and maximum temperatures, storm surges, and coastal wind speeds. OMB officials and representatives of some standards-developing organizations stated that federal efforts would be more effective if agencies worked directly with standards-developing organizations rather than making information and tools publicly available. Federal law requires federal agencies to participate in the standards- developing process under certain circumstances. As required by the NTTAA and consistent with OMB Circular A-119, federal agencies must consult with standards-developing organizations and participate in the development of technical standards when such participation is in the public interest and compatible with the agencies’ missions, authorities, priorities, and budget resources. Federal policies also direct agencies to mitigate the effects of natural disasters, including by communicating and using the best available localized climate projections, and to help translate climate science for risk-management decision making. Specifically, the National Mitigation Framework states, among other things, that reducing long-term vulnerability can include adopting and enforcing hazard-resistant design standards and building codes. It identifies as a critical task for improving community resiliency the communication and use of the best available localized climate projections so that the public and private sectors can make informed decisions. In addition, OMB Circular A-11, which provides guidance on the preparation and execution of the President’s budget, directs agency proposals for construction of federal facilities to comply with relevant guidance on climate change. Further, USGCRP’s 2012 strategic plan calls on USGCRP to assist in the translation of science for societal benefit and related risk-management decision making. It also notes that it will be critical for USGCRP to build new partnerships with engineers, architects, and planners and their supporting federal agencies because of the vulnerability of infrastructure to the effects of climate change. Officials from some federal agencies, including FEMA, and USGCRP told us that they have provided forward-looking climate information to standards-developing organizations to a limited extent because they do not have clear direction to do so. FEMA officials told us that although MitFLG has coordinated federal, state, and local government hazard mitigation efforts, it does not have any measures that focus on providing forward-looking climate information to standards-developing organizations. Officials from USGCRP told us that they need to improve their understanding of the information needs of standards-developing organizations in order to take them into account for USGCRP research and product development. Further, officials from USGCRP told us that they are beginning to engage the civil engineering community, including standards-developing organizations, in this discussion. Such engagement is consistent with USGCRP’s strategic plan, which notes that it will be critical for USGCRP to build new partnerships with engineers, architects, and planners because of the vulnerability of infrastructure to the effects of climate change. However, officials also noted that USGCRP assists many users and sectors and does not have the practical or financial capacity to provide detailed, tailored analyses for each sector. NIST officials told us that they have not provided forward-looking climate information to standards-developing organizations for various reasons, including because they have not conducted research on the way climate change may impact design standards. These officials stated that their research focuses on improving the resilience of communities to a variety of disruptive events but leaves it to the communities to decide for themselves what the appropriate levels of risk, mitigation, and response should be, given their local resources. However, by consulting with MitFLG and USGCRP, NIST could help coordinate a governmentwide effort to provide the best available forward-looking climate information to standards-developing organizations for consideration in the development of design standards, building codes, and voluntary certifications. Helping Standards-Developing Organizations Address Challenges Presents a Benefit by Reducing the Federal Fiscal Exposure to the Effects of Climate Change Helping standards-developing organizations consider forward-looking climate information in the development of voluntary consensus standards that promote the safety, reliability, productivity, and efficiency of infrastructure presents an additional benefit by reducing the federal fiscal exposure, according to federal agency officials, our prior work, and reports we reviewed. First, helping standards-developing organizations could help increase the efficiency and consistency of federal efforts to mitigate the risk that climate change poses to federal facilities. For example, GSA officials told us that the use of forward-looking climate information in developing standards and codes would help mitigate much of the climate risk to their facilities (i.e., government-owned and -leased buildings), lessening the need for the resource-intensive screenings that GSA currently conducts. Specifically, GSA officials stated that they are screening fiscal year 2017 capital building projects for climate risk in an effort to reduce or eliminate emergency response costs over the lifespan of the new buildings. GSA’s climate risk screen uses forward-looking climate information from the Third National Climate Assessment to consider—for each new building—the importance of the project to the mission of the agency, expected service life, historic or cultural status, and whether the building is vulnerable to projected changes in the climate. Second, as previously noted, federal, state, local, and private- sector decision makers use the design standards, model building codes, and voluntary certifications that standards-developing organizations issue to plan and construct infrastructure that may be paid for with federal funds, insured by federal programs, or eligible for federal disaster assistance—key aspects of federal fiscal exposure to climate change. For example, in 2015, the National Institute of Building Sciences’ Consultative Council reported that communities need standards and codes that can help them recognize the risks associated with a changing climate and prevent disruptive hazards from becoming disasters. Similarly, in 2014, the State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience reported that anticipating and planning for climate change impacts now—including through the standards and codes that communities adopt—can reduce harm and long-term costs. Extreme weather costs the federal government billions of dollars each year and poses a significant risk to infrastructure, such as buildings, roads, and power lines that provides essential services to the American public. Ongoing and future changes to the climate have the potential to compound these risks and increase federal fiscal exposure. Design standards, building codes, and voluntary certifications play a role in ensuring the resilience of federal and nonfederal infrastructure to the effects of natural disasters and extreme weather but generally use climate information based on historical observations. We have previously found that using the best available climate information, including forward-looking projections, can be a part of a risk-management strategy for federal, state, local, and private-sector decisions and investments. However, standards-developing organizations, not federal agencies, are the primary source for standards, codes, and certifications that specify how weather and climate information is considered in infrastructure planning. These organizations face institutional and technical challenges to using forward- looking climate information, and federal agencies have initiated actions that could help them address these challenges. For example, NIST convened a panel to, among other things, identify gaps in standards and codes to make infrastructure more resilient to extreme weather and other risks. Various reports we reviewed and representatives of standards- developing organizations and agency officials we interviewed identified additional actions federal agencies could take to help standards- developing organizations use forward-looking climate information. Some agencies, such as GSA, are beginning to consider the risk climate change poses to their infrastructure, but these efforts are done on a case-by-case basis. Taking a coordinated, governmentwide approach could present an additional benefit by reducing federal fiscal exposure. Given NIST’s statutory authority and role in coordinating implementation of OMB Circular A-119, it is well-positioned to convene federal agencies for such an effort. To help reduce federal fiscal exposure by enhancing the resilience of infrastructure to extreme weather, we recommend that the Secretary of Commerce, through the Director of NIST, in consultation with MitFLG and USGCRP, convene federal agencies for an ongoing governmentwide effort to provide the best available forward-looking climate information to standards-developing organizations for their consideration in the development of design standards, building codes, and voluntary certifications. We provided the Department of Commerce, DHS, and the Office of Science and Technology Policy with a draft of this report for comment. The Department of Commerce neither agreed nor disagreed with our recommendation and provided written comments, which are summarized below and reproduced in appendix II. DHS did not provide written comments. The Office of Science and Technology Policy did not provide official written comments, but, along with OMB and USGCRP, provided technical comments, which we incorporated as appropriate. In its response, the Department of Commerce stated that it strongly supports efforts to foster greater and more effective participation by federal agencies in the development of consensus standards for climate resilience in infrastructure and other areas. However, the Department of Commerce stated that GAO’s recommendation that NIST coordinate a governmentwide effort to deliver the best available climate change information to standards-developing organizations is inconsistent with NIST's well-established role in the voluntary consensus standards- developing process. Specifically, it noted that NIST does not have the necessary expertise to play the role of arbiter of what climate information is “best.” We agree that NIST should not play the role of arbiter of what climate information is “best,” which is why we recommended that NIST coordinate the governmentwide effort to provide the best available forward-looking climate information to standards-developing organizations in consultation with MitFLG and USGCRP. As we found in our 2015 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. That 2015 report also found that the federal government has a key role in providing authoritative climate information to meet the needs of federal, state, local, and private-sector decision makers. USGCRP, in particular, is well-positioned to perform this role and has the necessary expertise to identify the best available forward-looking climate information because, as we noted in our report, it coordinates global change research across 13 federal agencies. The Department of Commerce further noted that NIST could—consistent with its mission and authority—convene stakeholders, including federal agencies, to discuss forward-looking climate information for potential use by the standards community. Our recommendation reflected that NIST is the entity responsible for coordinating executive branch implementation of OMB Circular A-119, which governs federal participation in the development and use of voluntary consensus standards. However, in response to the Department of Commerce’s comments, we clarified our recommendation to better reflect its views of NIST’s mission and authority. The Department of Commerce 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 appropriate congressional committees; the Secretary of Commerce; the Secretary of Homeland Security; the Director of the Office of Science and Technology Policy; and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. Our objectives were to examine (1) what is known about the use of forward-looking climate information in design standards, building codes, and voluntary certifications; (2) challenges, if any, that reports and representatives of standards-developing organizations identified to using forward-looking climate information; and (3) any actions that federal agencies have taken to help address these challenges and additional actions, if any, that reports, representatives of standards-developing organizations, and agency officials identified. To address our audit objectives, we reviewed reports by selected standards-developing organizations, federal agencies, and experts in the development and use of standards and climate change that we identified through scoping interviews and prior work. We also conducted interviews with representatives of standards-developing organizations and agency officials. We focused on standards-developing organizations that develop design standards, building codes, and voluntary certifications in four infrastructure sectors: energy, government facilities, transportation systems, and water and wastewater systems. These sectors provide cities, neighborhoods, and buildings with essential services; permit movement and connection; and are components of critical infrastructure, according to the Department of Homeland Security’s 2013 National Infrastructure Protection Plan. We identified standards-developing organizations through interviews with academics, subject-matter experts, and representatives of professional societies, as well as through our prior work. We selected 17 organizations that develop such standards, codes, and certifications for which climate information is relevant. For example, they incorporate or reference information about the intensity, duration, and frequency of precipitation, average daily temperatures, or flood hazards. A majority of the standards-developing organizations we selected—14 of 17—are accredited by the American National Standards Institute or similarly follow an open, consensus-based process to develop their standards, codes, or certifications. We asked each of the representatives of organizations we interviewed whether there were other organizations we should contact and adjusted our list as needed. While the standards-developing organizations we selected do not represent all organizations that develop standards, codes, and certifications in the infrastructure sectors on which we focused, they include all the major standards-developing organizations within the sectors that met our selection criteria. Table 1 lists the organizations we reviewed and the areas of focus—the scope and purpose—of their design standards, building codes, and voluntary certifications. To address our first objective, we reviewed reports by standards- developing organizations and subject-matter experts and documents that standards-developing organizations provided to us. For example, standards-developing organizations provided us with examples of one or more standards, codes, or certifications that referenced climate information such as average temperatures or rainfall rates to show how this information is typically used. We interviewed representatives of these organizations using semi-structured interview techniques, including a mixture of both open-ended and closed-ended questions. Some of the questions in our interviews were about the organizations’ use of historical observations and forward-looking climate information and other actions they may have taken to consider how climate change may affect their standards, codes, and certifications. In this report, we defined “use forward-looking climate information” to mean that the standards- developing organization specified a particular source or sources of data and required their use in order to meet the design standard or building code or to earn the voluntary certification. Similarly, to address our second objective, we reviewed reports by standards-developing organizations, federal agencies, and subject-matter experts. Other questions in our interviews with representatives of standards-developing organizations, as seen above, were aimed at identifying any challenges they face and steps they plan, if any, to address these challenges. To address our third objective, we identified and analyzed federal laws, policies, and reports relevant to federal use of design standards, building codes, and voluntary certifications; preparedness for natural disasters; and potential responses to the effects of climate change on infrastructure. These laws, policies, and reports included the National Technology Transfer and Advancement Act of 1995, as amended; Office of Management and Budget (OMB) Circulars A-11 and A-119; Executive Order 13653; and the National Mitigation Framework. We also examined our prior work on the federal response to climate change, federal green buildings, and response to natural disasters. As part of our interviews with representatives of standards-developing organizations, described above, we asked them to identify the types of federal actions that could help address any challenges they face. We also interviewed officials from agencies and entities with a role in coordinating, developing, and adopting standards, codes, and certifications; assessing the impacts of climate change; or helping to coordinate the federal government response to climate change to identify any actions they have taken and any additional actions they could take. These agencies and entities were the Department of Commerce’s National Institute of Standards and Technology and National Oceanic and Atmospheric Administration; the Department of Energy; the Department of Homeland Security’s Federal Emergency Management Agency; the Department of Housing and Urban Development; the Department of Transportation; the Environmental Protection Agency; and the General Services Administration and, within the Executive Office of the President, the Council on Environmental Quality, the National Security Council, OMB, the Office of Science and Technology Policy, and the U.S. Global Change Research Program. We analyzed standards-developing organizations’ responses to our interview questions and other information to identify the actions these organizations have taken to use forward-looking climate information, any challenges they face in doing so, and any actions that federal agencies have taken, and additional actions they could take, if any, to help address these challenges. We identified categories of challenges and agency actions on the basis of scoping interviews with academics and subject- matter experts, reports, and our analysis of the interviews with representatives of standards-developing organizations and federal agency officials. These categories encompassed a majority of the challenges and actions we identified and were mutually exclusive. We categorized challenges as either institutional or technical. Categories of federal actions were improving coordination of federal efforts to help standards-developing organizations use the best available forward- looking climate information and providing such information for consideration in the standards-developing process. We did not report on challenges and actions that did not fit within the categories we developed because they were generally outside the scope of our review. For example, some challenges and federal actions were related to the adoption and enforcement of design standards and building codes. We compared relevant federal laws, policies, and reports with the actions that federal agencies have taken and could take that, according to reports we reviewed and representatives of standards-developing organizations and agency officials we interviewed, could help standards-developing organizations address the challenges they face. We conducted this performance audit from July 2015 to November 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Joseph Dean Thompson (Assistant Director), Mark Braza, Alicia Cackley, Martin (Greg) Campbell, Christopher Currie, Swati Deo, Kathryn Godfrey, Brian Lepore, Armetha Liles, Tim Persons, Kiera Reifschneider, Oliver Richard, Michelle Sager, Amber Sinclair, Jeanette Soares, Ruth Solomon, Anne Stevens, Marie Suding, Kiki Theodoropoulos, and David Wise made key contributions to this report. | Over the last decade, extreme weather cost the federal government more than $320 billion for, among other things, repairs to federal infrastructure, and according to the President's 2017 budget request, these costs may rise as the climate continues to change. GAO's prior work found that using the best available climate information, including forward-looking projections, can help manage climate-related risks. Federal, state, local, and private decision makers use design standards, building codes, and voluntary certifications in the construction of infrastructure. Standards-developing organizations, such as professional engineering societies, issue standards, model codes, and certifications. GAO was asked to review the use of forward-looking climate information by standards-developing organizations. This report examines (1) what is known about the use of such information in standards, codes, and certifications; (2) challenges standards organizations face to using climate information; and (3) actions federal agencies have taken to address such challenges and additional actions they could take. GAO analyzed laws and policies, reviewed reports, and interviewed representatives from 17 selected organizations and officials from agencies that address climate issues. Selected standards-developing organizations generally have not used forward-looking climate information—such as projected rainfall rates—in design standards, building codes, and voluntary certifications and instead have relied on historical observations. Further, some organizations periodically update climate information in standards, codes, and certifications, but others do not. Some standards-developing organizations have taken preliminary steps that may lead to the use of forward-looking climate information. For example, in 2015, the American Society of Civil Engineers issued a paper that recommended engineers work with scientists to better understand future climate extremes. Standards-developing organizations face institutional and technical challenges to using the best available forward-looking climate information in design standards, building codes, and voluntary certifications, according to reports, representatives of these organizations, and federal officials. Institutional challenges include a standards-developing process that must balance various interests and can be slow to change. For example, representatives of some standards-developing organizations told GAO that their members have not expressed interest in standards that use forward-looking climate information. Technical challenges include difficulties in identifying the best available forward-looking climate information and incorporating it into standards, codes, and certifications. For example, representatives from one organization said that climate models provide a wide range of possible temperatures that is difficult to use in their standards. Agencies have initiated some actions and could take more to help standards-developing organizations address challenges, according to various reports, representatives of standards-developing organizations, and agency officials. For example, in 2015, the National Institute of Standards and Technology (NIST) convened a panel that seeks to identify gaps in standards and codes to make infrastructure more resilient to extreme weather. In addition, officials from the U.S. Global Change Research Program (USGCRP)—which coordinates research across 13 federal agencies—told GAO they have begun discussions with representatives of standards-developing organizations on their climate information needs. In 2015, the Mitigation Framework Leadership Group (MitFLG)—which coordinates hazard mitigation efforts—issued a draft strategy to encourage federal support for more resilient standards and codes. Opportunities exist for additional agency actions that may help address the challenges organizations identified to using forward-looking climate information. Specifically, agencies that address climate issues could improve interagency coordination to help standards-developing organizations address institutional challenges and could provide the best available forward-looking climate information to help them address technical challenges. Federal policy directs agency standards executives—senior-level officials who coordinate agency participation in standards organizations—to coordinate their views when they participate in the same standards activities so as to present, whenever feasible, a single, unified position. The policy also directs the Secretary of Commerce, who has delegated the responsibility to NIST, to coordinate and foster executive branch implementation of the policy governing federal participation in the development of voluntary consensus standards. A governmentwide effort could also present a benefit by reducing the federal fiscal exposure to the effects of climate change. GAO recommends that NIST, in consultation with USGCRP and MitFLG, convene an ongoing governmentwide effort to provide forward-looking climate information to standards organizations. Commerce neither agreed nor disagreed with GAO's recommendation. |
The SBIR program was initiated in 1982 and has four main purposes: (1) use small businesses to meet federal R&D needs, (2) stimulate technological innovation, (3) increase commercialization of innovations derived from federal R&D efforts, and (4) encourage participation in technological innovation by small businesses owned by women and disadvantaged individuals. The purpose of the STTR program—initiated in 1992—is to stimulate a partnership of ideas and technologies between innovative small businesses and research institutions through federally funded R&D. The National Defense Authorization Act for Fiscal Year 2012, enacted on December 31, 2011, reauthorized the SBIR and STTR programs through September 30, 2017. The SBIR and STTR programs each include the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, phase I awards generally last 6 to 9 months and for STTR these awards generally last 1 year. In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years. Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR or STTR programs. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or from funding sources within the agency that made the initial award other than its SBIR or STTR program. While SBIR or STTR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases. SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR and STTR programs by setting overarching policy and issuing policy directives, collecting program data, reviewing agency progress, and reporting annually to Congress, among other responsibilities. As part of its oversight and coordination role, SBA issued SBIR and STTR policy directives in September 2002 and December 2005, respectively, and updated them in August 2012, January 2014, and February 2014. These directives explain and outline additional requirements for agencies’ implementation of the SBIR and STTR programs. Among the topics discussed, the policy directives include a listing of the data that agencies are to submit to SBA annually—such as their extramural R&D budget amounts and the amounts obligated for awards for the programs—and call for agencies to submit reports describing their methodologies for calculating their extramural R&D budgets within 4 months of the enactment of appropriations. Each participating agency must manage its SBIR and STTR programs in accordance with program laws, regulations, and the policy directives issued by SBA. In general, the programs are similar across agencies. For those agencies that have both SBIR and STTR programs, agencies usually use the same process for both programs. Each participating agency has considerable flexibility to design and manage the specifics of these programs, such as determining research topics, selecting award recipients, and administering funding agreements. All of the agencies follow the same general process to obtain proposals from and make awards to small businesses for both the SBIR and STTR programs. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each agency uses its own process to review proposals and determine which proposals should receive awards. Also, each agency determines whether the funding for awards will be provided as grants or contracts. Agency data indicate that not all agencies complied with the SBIR and STTR spending requirements for fiscal year 2012. Program managers identified several reasons why agencies did not comply with the spending requirements. The data agencies submitted to SBA indicates that 8 of the 11 participating agencies met or exceeded their fiscal year 2012 spending requirements for the SBIR program, while 3 of the agencies did not meet the requirements (see fig. 1 and app. I for additional data). According to the agencies’ data, the 8 agencies that met or exceeded the requirements spent between 2.6 percent and 4.0 percent of their extramural R&D budgets on the program, and the remaining 3 agencies spent between 2.3 percent and 2.5 percent. In comparison, agency data indicated that 10 of the 11 agencies met or exceeded spending requirements in fiscal year 2011, and that 3 of the 11 agencies complied with spending requirements each fiscal year from 2006 through 2011, as we found in September 2013. Our analysis of the data agencies submitted to SBA indicates that two of the five agencies participating in the STTR program met or exceeded their fiscal year 2012 spending requirements, while the remaining three agencies did not meet the requirements (see fig. 2 and app. II for additional data). According to the agencies’ data, the two agencies that complied with the requirements spent between 0.35 percent and 0.38 percent of their extramural R&D budgets on their STTR programs, and the three agencies that did not comply spent between 0.30 percent and 0.32 percent. In comparison, the data that agencies submitted to SBA indicated that two of the five agencies, HHS and NASA, complied with spending requirements in fiscal year 2011, and one of the agencies— HHS—complied with spending requirements each fiscal year from 2006 to 2011, as we found in September 2013. Program managers at the agencies that did not comply with spending requirements for fiscal year 2012 identified reasons that the agencies did not comply: (1) some agencies reserved funds to spend in a subsequent fiscal year without spending the minimum required amount in fiscal year 2012; (2) the spending requirement increased part of the way through the year, after agencies made spending plans; (3) agencies did not submit data on all of their spending; and (4) the amount agencies spent on extramural R&D was higher than estimated at the beginning of the fiscal year. Some of these circumstances also applied to agencies that complied with spending requirements in fiscal year 2012. Two of the agencies that did not comply with spending requirements— DOD and USDA—reserved funds to spend in a subsequent fiscal year without spending the minimum required amount in fiscal year 2012. The Small Business Act requires participating agencies to “expend” the minimum percentages of their extramural R&D budgets with small businesses annually. Additionally, SBA officials said they expect agencies to spend at least the minimum required percentages on the programs each year. However, program officials at DOD and USDA told us that they believe their agencies comply with spending requirements if the agencies spend the total amount reserved or budgeted for the program, regardless of the year the funding is spent. We found that these two agencies did not implement the annual program spending requirements as written in the Small Business Act, in part because SBA’s SBIR and STTR policy directives inaccurately summarize the law. Specifically, the policy directives say that the relevant statutory provision requires participating agencies to “reserve” the minimum percentages for awards to small businesses each year. Some of the participating agencies receive multiyear appropriations and choose to carry over some funding from one fiscal year to the next, in part because of this misinterpretation of the spending requirements. For example, if the amount of funding remaining in the program account is less than the amount of a phase I or phase II award, program managers said they carry over the funding to the next year, rather than make a smaller award to a recipient. An agency can carry over funding from one year to the next and comply with spending requirements if the agency spends the minimum required amount during the fiscal year, regardless of the year the funding was appropriated. Carrying over funds to the next fiscal year without spending the minimum required amount contributed to two agencies—DOD and USDA—not complying with spending requirements in fiscal year 2012. Program managers from DOD and USDA said their agencies did not meet spending requirements using our method of calculating compliance, but DOD and USDA officials said they will spend all of the funding that was budgeted for the programs before the funding expires, which they believe meets the intent of the law. Program managers from both agencies explained that they receive multiyear appropriations for research and development funding, which would generally allow them to carry over funds from one year to the next. However, if an agency carries over funding from one year to the next without spending the minimum required amount on the program in each fiscal year, then the agency is not in compliance with the spending requirements. According to SBA officials, SBA agrees with our methodology for calculating compliance and interprets the Small Business Act as requiring agencies to spend, rather than reserve, the required percentages each year. Carrying over funds from one year to the next without spending the minimum required amount in fiscal year 2012 also contributed to at least one agency—DOD—not complying with spending requirements in prior years. To demonstrate the effect that carrying over funds can have, we made the following calculations for DOD for fiscal years 2006 to 2011 using two different methodologies for calculating program spending. First, we determined the amount spent in a specific year, regardless of the year the funding was appropriated, from DOD’s total program obligations data submitted to SBA; this is the method that we used to calculate compliance with spending requirements for this report and the method SBA uses. Second, we calculated the amount of the funding appropriated in a fiscal year that was spent in that year or the next year; this is how DOD believes it should determine its compliance. We found that DOD complied with SBIR spending requirements in 2 of the 6 years from fiscal years 2006 through 2011 and with STTR spending requirements in 4 of the 6 years using our method. DOD’s method is incorrect; however, if it were correct, it would yield a compliance determination in each of the 6 years for SBIR and in 5 years for STTR (see app. III for additional detail on our analysis). Increases to the spending requirements partway through fiscal year 2012 contributed to two agencies not complying with spending requirements in fiscal year 2012, according to program managers. The 2011 reauthorization of the SBIR and STTR programs increased the minimum percentages to be spent for the programs for fiscal year 2012, but the law was enacted on December 31, 2011—a full quarter into fiscal year 2012. These increases were the first increases in many years for the programs: the SBIR levels had remained at a minimum of 2.5 percent of the extramural R&D budget from 1997 through 2011, and STTR levels had remained at a minimum of 0.3 percent from 2004 through 2011. Appropriations for fiscal year 2012 were enacted in November and December 2011, so some agencies had already planned their spending for the programs and had started to make awards to meet the prior percentages of 2.5 percent of their extramural R&D budgets for SBIR awards and 0.3 percent for STTR awards. For some agencies, this increase totaled millions of dollars. For example, NASA’s SBIR spending requirement increased by about $5.5 million, and its STTR spending requirement increased by about $2.7 million over its estimates at the beginning of the fiscal year due to the higher percentages included in the reauthorization. If the spending requirements had remained at fiscal year 2011 levels, one of the three agencies that did not meet SBIR spending requirements for the year would have met the requirements, and the remaining two agencies would have been much closer to meeting the SBIR spending requirements, and all five agencies would have met the STTR requirements. The increased spending requirements also affected agencies that complied with spending requirements for the year. For example, program managers at one agency that met SBIR spending requirements told us it was difficult to spend SBIR and STTR funds at the increased levels in the remaining portion of the fiscal year because the agencies had already begun to make awards, and their spending plans for the programs included funding a certain number of projects at a certain level. Program officials at one agency said that, as a result of the increased spending requirements, they increased the amounts of their awards for fiscal year 2013. The officials anticipate that the increased award amounts will help them meet their minimum spending requirements in future years. Program managers from two agencies that met SBIR spending requirements also told us it was difficult to obtain additional funding within their agency to meet the increased spending requirements for the programs because the reauthorization act and resulting increased spending requirements became effective after appropriations were enacted for the year. Program managers at two agencies said that they did not include technical assistance funds as part of their total spending data for the SBIR program, which contributed to the appearance that agencies were more out of compliance than they were for fiscal year 2012. Program managers from three other agencies also told us they could not submit these data. In certain circumstances, amounts spent for discretionary technical assistance count as part of the agency’s funding for SBIR or STTR. However, SBA’s policy directives for the programs call for agencies to submit data on the amounts spent for awards, but not the amount spent on technical assistance. According to SBA officials, they did not request information on the amounts that agencies spent for technical assistance because SBA does not report the information to Congress. Program officials at seven agencies—DOD, DOE, DHS, EPA, HHS, NSF, and USDA—said that they provided between about $125,000 and $3.5 million for discretionary technical assistance to certain SBIR or STTR award recipients in fiscal year 2012. Only two of the agencies—DOD and NSF—included this assistance in their total spending data. Several program managers indicated that they did not submit data to SBA on the amounts spent for discretionary technical assistance because SBA did not provide written guidance on whether or how such spending should be included in their data. As a result, agencies did not report the total amounts that they spent on the programs and, therefore, Congress does not have access to complete and accurate information about the amounts spent on the SBIR and STTR programs. For the two agencies that provided technical assistance to award recipients but did not comply with spending requirements, including the amount spent on technical assistance in their total spending figures would have brought the agencies closer to meeting their spending requirements, but it would not have brought the agencies into compliance for the year. Program officials at one agency said that changes to the amount of the agency’s extramural R&D budget between the estimates early in the fiscal year and the actual amount obligated, which is determined at the end of the year, contributed to the agency not complying with the spending requirements. The Small Business Act requires agencies to calculate their extramural R&D budget by subtracting amounts obligated for intramural R&D from total obligations for R&D. However, the total amount obligated for extramural R&D is not known until the end of the fiscal year. For fiscal year 2012, NASA estimated its extramural R&D budget at the beginning of the year as about $5.5 billion and developed a spending plan for the SBIR and STTR programs based on this budget. However, according to program officials, NASA’s extramural R&D budget increased to about $5.7 billion based on the total amount obligated for extramural R&D during the fiscal year. This increase in the extramural R&D budget throughout the year led to an unexpected increase in NASA’s minimum spending requirements of about $6.3 million. The officials said that they had no way of knowing what the final extramural R&D budget number would be until after the end of the fiscal year, and by then it was too late to adjust their spending plan for the SBIR or STTR programs. As a result, the increase contributed to NASA’s noncompliance with spending requirements in fiscal year 2012. Participating agencies and SBA did not fully comply with certain reporting requirements for the SBIR and STTR programs. Specifically, participating agencies did not comply with requirements related to reporting their methodologies for calculating their extramural R&D budgets, and two agencies submitted incorrect data to SBA on the size of their extramural R&D budgets for the STTR program. Additionally, SBA has not yet submitted its report on the programs to Congress for fiscal year 2012. Each of the agencies submitted its required report on the methodology for calculating the extramural R&D budget to SBA later than required by the Small Business Act and at least 6 of the agencies did not itemize and explain all exclusions from their calculations of their extramural R&D budgets, as called for in the policy directives. Agencies are required by the Small Business Act to submit their methodology reports to SBA within 4 months of enactment of their annual appropriations. However, for fiscal year 2012, the 11 agencies included their methodology reports as part of their data submissions to SBA. Agencies generally submitted their data to SBA from March to July 2013—more than a year after agency appropriations for fiscal year 2012 were enacted on November 18, 2011, and December 23, 2011—because SBA allowed them to submit the reports later. SBA officials said that, as in previous years, they did not need the methodology reports before the program data were due because the officials use the methodology reports to prepare SBA’s report to Congress, which cannot be completed without the program data. As we found in our first annual report on these issues, as a result of not having the methodology reports earlier in the year, SBA does not have an opportunity to promptly analyze these methodologies and provide the agencies with timely feedback to assist agencies in accurately calculating their spending requirements. Without such review and feedback, agencies may be calculating their extramural R&D budgets incorrectly, which could lead to agencies spending less than the required amounts on the programs. We recommended in that report that SBA provide timely annual feedback to each agency following submission of its methodology report on whether its method for calculating the extramural R&D budget complies with program requirements. SBA officials said as of May 2014 that they plan to provide feedback to agencies on their methodology reports for fiscal year 2013 shortly after they receive the reports from the agencies, which are expected in June 2014. Additionally, at least six agencies did not itemize and explain exclusions from their calculations of their extramural R&D budgets. Agencies are required to exclude certain subunits or programs in calculating the extramural R&D budget. For example, agencies with subunits in the intelligence community are to exclude those subunits from their extramural R&D budget. SBA’s policy directives call for agencies to itemize their exclusions and their reasons for such exclusions in their reports to SBA. Six of the 11 agencies’ methodology reports—DOD, DOE, EPA, NASA, NSF, and DOT—noted that the agencies excluded some programs from their calculations, but these agencies either did not itemize the specific programs that they excluded, did not specify the reasons why they excluded the programs, or both. In the case of DOD, the agency’s report stated that some of its programs were exempted by the section of the Small Business Act described above, which exempts programs in the intelligence community. However, DOD’s report does not itemize the specific programs or subunits that were excluded, as required by the policy directives. Also, DOE, EPA, NASA, and NSF provided general categories of exclusions but not particular itemized programs. DOT excluded the research expenditures of the Federal Aviation Administration and the Federal Highway Administration from its extramural R&D budget without explanation in the report about why the programs were excluded. As we found in our first annual report on these issues, agencies submitted different levels of detail on their methodologies, such as the programs excluded from the extramural budget and the reasons for the exclusions, and SBA did not raise questions about details of the methodologies. SBA officials told us they would like agencies to include more information about exclusions in their methodology reports. In our first annual report, we concluded that, without guidance from SBA, participating agencies are likely to continue to provide SBA with broad, incomplete, or inconsistent information on their methodologies for calculating their extramural R&D budgets. At that time, we recommended that SBA provide additional guidance on the format agencies are to include in their methodology reports, among other issues. As of May 2014, SBA said that a working group of program managers had developed a template for agencies to use to submit their methodology reports. Agencies will be encouraged to use the template for their fiscal year 2013 submission and required to use it beginning in fiscal year 2014. Two agencies—DOD and HHS—submitted incorrect figures to SBA for the size of their extramural R&D budgets for the STTR program for fiscal year 2012. The Small Business Act requires federal agencies to spend a certain amount of their extramural R&D budgets on the SBIR and STTR programs if the agency meets certain thresholds for participation. The threshold for participating in the programs is based on the entire agency’s extramural R&D budget and not that of the specific subunits within the agency. Additionally, the extramural R&D budget figures for the SBIR and STTR programs should be consistent because the budget must be calculated the same way for both programs under the act. However, DOD submitted an extramural R&D budget for SBIR that was about $2.7 billion more than its budget for STTR, and HHS submitted an extramural R&D budget for SBIR that was about $337 million more than its budget for STTR. This occurred because the two agencies incorrectly excluded the budgets of subunits within the agencies that spent less than $1 billion per year on extramural R&D from the budget calculation for the STTR program. For example, HHS calculated its extramural R&D budget data for STTR using the amount of the extramural R&D budget of the National Institutes of Health and excluded the extramural R&D funding from the other subunits that participate in the SBIR program—the Centers for Disease Control and Prevention, the Food and Drug Administration, and the Administration for Children and Families—from its calculation. As a result of the incorrect data, DOD and HHS underestimated their STTR spending requirements by about $9.3 million and $1.2 million, respectively, for fiscal year 2012. Using the correct extramural R&D budget figures did not change our assessment of DOD’s or HHS’s compliance with spending requirements for fiscal year 2012 because DOD did not meet its spending requirement using the lower extramural R&D budget figure and HHS’s spending for the STTR program was high enough that it met its spending requirements even using the higher extramural R&D budget amount from its SBIR report. However, since spending requirements are calculated as a percentage of the extramural R&D budget, using an incorrect budget figure could lead to an agency not spending the required amount for the programs in the future. For example, the National Institutes of Health is the only subunit that participated in HHS’s STTR program in fiscal year 2012. If the National Institutes of Health had not exceeded the minimum spending requirements for HHS in fiscal year 2012, HHS would not have complied with its agencywide spending requirements. DOD officials said they were aware of the problem because we identified it in our first annual report, but it was too late for them to correct it for fiscal year 2012. The officials said that they have corrected the problem and plan to use the same extramural R&D budget numbers for the SBIR and STTR programs starting with the data submitted for fiscal year 2013. HHS officials told us they did not correct the budget numbers for fiscal year 2012 because it was too late to do so. However, they also said that they have not corrected this problem for fiscal years 2013 or 2014 because HHS has not received guidance from SBA to do so. SBA officials said they have discussed this issue with HHS. According to SBA’s report to Congress for fiscal years 2009 through 2011, SBA and HHS were discussing the appropriate extramural budget figure. SBA has not issued its report to Congress on the programs for fiscal year 2012. The Small Business Act requires SBA to report to certain congressional committees on the SBIR and STTR programs—including an analysis of the agencies’ methodology reports—not less than annually, but the act does not specify a date that the report is due. SBA officials said that they had begun drafting the report for fiscal year 2012 but, early in 2014 two agencies—DOD and EPA—notified SBA that they needed to submit updated data, so SBA postponed its work on the report. According to SBA officials, SBA’s report to Congress depends on the timeliness and quality of the participating agencies’ submissions to SBA, and they delayed the submission of the last report and the fiscal year 2012 report to provide Congress with more accurate information on the SBIR and STTR programs. SBA officials told us they planned to submit their report for fiscal year 2012 by the end of fiscal year 2014—2 years after the subject fiscal year. In our first annual report on these issues, we found that SBA had issued reports on 3 of the 6 years covered by our review—2006 through 2008— and those reports contained limited analyses of the agencies’ methodologies, and some of the analyses were inaccurate. SBA issued its report to Congress for fiscal years 2009 through 2011 in December 2013, making the data available to Congress about 2 to 4 years after the end of the subject year. In that report, we concluded that, without more rigorous oversight by SBA, and more timely and detailed reporting on the part of both SBA and participating agencies, it will be difficult for SBA to ensure that intended benefits of these programs are being attained and that Congress receives critical information to oversee these programs. Consequently, we recommended that SBA provide Congress with a timely annual report that includes a comprehensive analysis of the methodology each agency used for calculating the SBIR and STTR spending requirements. SBA agreed with our recommendation and stated in its comments on the report that it planned to implement the recommendation. SBA’s policy directives for the programs call for agencies to submit their program data to SBA by March 15 each year. However, SBA officials said that they have no enforcement mechanism to ensure that agencies submit their final data by that date. SBA introduced a scorecard in its report to Congress for fiscal years 2009 through 2011 to document agencies’ timeliness in submitting data for fiscal year 2011. SBA officials expect that publishing the information in the report to Congress will encourage the agencies to submit their data on time, which, according to the officials, should improve SBA’s timeliness in reporting to Congress. Potential effects of basing each participating agency’s spending requirement on its total R&D budget instead of its extramural R&D budget include an increase in the amount of the spending requirement—for some agencies more than others—and, if the thresholds for participation in the programs did not change, an increase in the number of agencies required to participate. Agency officials identified some benefits and drawbacks of changing the methodology for calculating the spending requirements for the SBIR and STTR programs. If the methodology for calculating the spending requirements had been changed so that the same percentages and thresholds for participating in the programs as under current law were applied to an agency’s total R&D budget rather than to its extramural R&D budget in fiscal year 2012, all but one agency would have been required to spend more than under current law, according to our analysis of budget data and data submitted to SBA. The change would have had this effect because an agency’s extramural R&D budget is a part of and, therefore, smaller than its total R&D budget, and the same percentages would have been applied to a larger amount of funding. Figure 3 shows a comparison of the agencies’ spending requirements for the SBIR and STTR programs in fiscal year 2012 under the current law, based on an agency’s extramural R&D budget, and this alternative methodology. These figures are generally consistent with the findings in our first annual report on these issues. As shown in figure 3, some agencies’ spending requirements would increase more than others’ under the alternative scenario. This variation is due to differences in the relative proportions of the extramural and intramural R&D budgets among agencies. Under the alternative scenario, agencies with a larger proportion of their total R&D budget for extramural R&D would experience a smaller increase in their spending requirements relative to the other agencies, as discussed in the following examples: DHS used about 84 percent of its total R&D budget for extramural R&D in fiscal year 2012 and was required to spend about $8 million on its SBIR program in that year. The agency would have a relatively small increase in its SBIR spending if the spending requirement were based on its total R&D budget instead of its extramural R&D budget: DHS would have been required to spend about $2 million more in fiscal year 2012 if the calculation methodology changed. The Department of Commerce used a relatively small percentage of its total R&D budget—about 17 percent—for extramural R&D in fiscal year 2012, and its spending requirement for SBIR would have increased more than five times, from about $5 million to $27 million in fiscal year 2012 if the calculation methodology had changed. While Commerce did not participate in the STTR program in fiscal year 2012, it would have been required to participate in the STTR program if the calculation methodology had changed and the thresholds for participating in the program had remained the same. Its spending requirement for the STTR program would have been $4 million rather than $0. Consequently, if the funding percentage required in law in fiscal year 2012 applied to the total R&D budget instead of the extramural budget, Commerce’s SBIR and STTR spending would have increased by a total of about $26 million. Changing the calculation methodology to the total R&D budget instead of the extramural R&D budget would also increase the number of agencies that would be required to participate in the SBIR and STTR programs, assuming the dollar thresholds for participating in the programs remained the same. Two additional agencies—the Departments of Veterans Affairs and the Interior—would have been required to participate in the SBIR program in fiscal year 2012 if the dollar thresholds for participating in the programs applied to the total R&D budgets. Adding these two agencies to the other agencies that participated in the SBIR program in fiscal year 2012 would have increased total federal SBIR spending requirements by about $51 million, in addition to the increased spending requirements for the other agencies. For STTR, three additional agencies—Commerce, USDA, and the Department of Veterans Affairs—would have been required to participate in the STTR program for fiscal year 2012 if the dollar thresholds for participating in the programs were applied to the total R&D budgets. Adding these three agencies to the other agencies that participated in the STTR program in fiscal year 2012 would have increased total federal STTR spending requirements by about $16 million, in addition to the increased spending requirements for the other agencies. We recognize that other scenarios could have different effects on the spending requirements. For example, basing the SBIR and STTR spending requirement on an agency’s total R&D budget and applying a lower percentage than under current law could result in reduced spending requirements for some agencies. Specifically, if the percentage applied to the total R&D budget had been 1.5 percent instead of 2.6 percent, and the thresholds for participating in the programs had remained the same, the spending requirement for the total SBIR programs would have slightly decreased in fiscal year 2012. Using this lower percentage, the spending requirements for some agencies, such as Commerce and DOD, would have increased, while the spending requirements for other agencies, such as DHS and NSF, would have decreased. Program managers identified benefits and drawbacks that basing the methodology for calculating the spending requirements on the total R&D budget could have for their agencies’ programs. For example, several program managers indicated that more funding for the programs would allow their agencies to fund more projects, which was viewed as a benefit because the agencies tend to receive more proposals than they can fund in a year under current budgets. Additionally, several program managers told us that basing the SBIR and STTR spending requirements on the total R&D budget could improve transparency and reduce complexity in determining the SBIR and STTR spending requirements because the agencies would no longer need to identify the extramural portion of their R&D budgets, which the agencies have to determine internally. Similarly, program managers at some agencies said that the calculation to determine the agency’s extramural R&D budget can be complex or difficult and that avoiding it would save time and effort, which would be a benefit. Program managers also identified drawbacks to changing the methodology for calculating the spending requirements, with most program managers indicating that the potential drawbacks of such a change could outweigh the benefits. For example, most program managers said that increasing the amount of funding for the SBIR and STTR programs could be a drawback because funding used to support the agency’s other R&D efforts would have to be spent on the SBIR and STTR programs. In addition, most program managers said that changing the methodology for calculating spending requirements for these programs could affect agency operations, depending on how the change is implemented within the agency. For example, several program managers said that basing spending requirements on the total R&D budget could increase SBIR and STTR budgets, which may lead to a decision within the agency to reduce intramural R&D programs and, in turn, lead to reductions in staffing of these programs. Most program managers also said that basing spending requirements on the total R&D budget could mean shifting money from other extramural R&D projects currently funded within the agency to SBIR and STTR. Little is known about the total amounts agencies spent administering the SBIR and STTR programs because agencies do not consistently collect such information. Agencies are not required to track or estimate all costs for administering the programs. In response to our requests to agencies for data on their fiscal year 2012 administrative costs, most agencies provided information on some categories of administrative costs and partial estimates of costs. Agencies provided information on several types of administrative costs, such as staff, contractor, and travel costs for preparing and awarding contracts and grants and for monitoring them. Administrative cost estimates that the agencies provided for fiscal year 2012 ranged from about $200,000 to about $8 million. As with the data on fiscal year 2011 for our first annual report, these data were wide-ranging, incomplete, and unverifiable. The 2011 reauthorization of the programs created a pilot program beginning in fiscal year 2013 that allows agencies to spend up to 3 percent of SBIR funds for administrative costs of the programs beginning in fiscal year 2013. The SBIR policy directive requires agencies to submit information to SBA on the funding used for administrative costs through the pilot program. As such, we anticipate that agencies that participate in the pilot program will have additional information on administrative costs for fiscal year 2013, which we will examine in our next annual review of the programs. As of May 2014, SBA officials expected that agencies would submit their data for fiscal year 2013 in June 2014. According to SBA’s policy directives, funding under the pilot program must not replace current agency administrative funding for SBIR. Consequently, even with the pilot program, agencies will likely not identify or track all administrative costs for SBIR. Federal agencies have awarded billions of dollars to small businesses under the SBIR and STTR programs to develop and commercialize innovative technologies. In our first annual report on these issues, we identified some areas where SBA could take actions to ensure that agencies comply with spending and reporting requirements. Our report was issued in September 2013, after agencies’ fiscal year 2012 data and reports were due to SBA, and, as a result, some of the issues we identified in the data and reports for fiscal years 2006 through 2011 remained in fiscal year 2012. For example, in our prior report, we found that the agencies submitted different levels of detail in their methodology reports, such as the programs excluded from the extramural R&D budget and the reasons for the exclusions. In that report, we recommended that the SBA Administrator provide the format for agencies to include in their methodology reports and to provide timely annual feedback to agencies on whether their methodology calculations for extramural R&D budgets comply with program requirements. We found similar issues with agencies’ reports for fiscal year 2012 and continue to believe that this oversight is needed and that the recommendation is valid and should be fully implemented. Additionally, as part of its oversight role, SBA is required to provide Congress with annual reports on the SBIR and STTR programs. However, SBA has faced challenges in submitting its report in a timely manner—particularly with agencies revising their data submissions well after the fiscal year is over—leading to reports that are submitted between 2 and 4 years after the subject year. In our September 2013 report, we recommended that SBA provide Congress with a timely annual report that includes a comprehensive analysis of the methodology each agency used for calculating the SBIR and STTR spending requirements. We continue to believe that providing a timely report to Congress is important and that the recommendation continues to have merit and should be fully implemented. Moreover, such a report could demonstrate SBA’s oversight to help ensure that the programs are meeting their intended goals. In addition to those issues that could be addressed by implementing our prior recommendations, we identified four additional issues that—if left unaddressed—could affect compliance with spending and reporting requirements in the future. First, some agencies did not comply with the requirement to spend program funds annually because SBA’s policy directives inaccurately summarize the requirement. Without correct information in the policy directives, such misinterpretations could lead to agencies spending less than required. Second, agencies did not report the total amounts spent on the programs because SBA has not provided guidance on whether or how to submit information on spending for reasons other than awards, such as technical assistance. As a result, Congress does not have access to complete and accurate information on the amounts spent on the programs. Third, agencies have continued to submit their methodology reports to SBA significantly later than required by law. In fiscal year 2012, most agencies submitted their methodology reports more than a year after the deadline established in the Small Business Act. Without holding agencies to the deadlines in the law, SBA did not have an opportunity to perform timely oversight by analyzing these methodologies and providing the agencies with feedback, if needed, to correct problems with the calculations and help to ensure that agencies meet mandated spending requirements. Fourth, two agencies have calculated their extramural R&D budgets for the STTR program incorrectly. DOD officials told us that they will use the same extramural R&D budget figure for both programs moving forward, but HHS officials do not plan to do so. Using the wrong figure could lead to spending less than the required amount for the programs in the future. To improve compliance with the Small Business Act and enhance SBA’s ability to provide oversight of the programs, we recommend that the SBA Administrator take the following three actions: Revise the language in the SBIR and STTR policy directives to accurately summarize the statutory provisions that describe the program spending requirements. Provide written guidance to agencies clarifying whether and how agencies should submit data to SBA on spending outside of awards that is allowed under the programs, such as discretionary technical assistance. Request that the agencies submit their methodology reports within 4 months of the enactment of appropriations, as required by the Small Business Act and the program policy directives. To help ensure that the agency continues to spend the required amount for the STTR program, we recommend that the Secretary of Health and Human Services include all of the agency’s extramural R&D budget in the calculation of STTR spending requirements and in the data submitted to SBA. We provided a draft of this report to the Secretaries of Health and Human Services, Agriculture, Commerce, Defense, Education, Energy, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; and the Director of the National Science Foundation for review and comment. In response, six of the agencies—Commerce, Education, DOE, DHS, DOT, and EPA— stated by email that they had no technical or written comments. Two agencies—NASA and NSF—provided technical comments by e-mail but did not provide formal written comments. We incorporated these technical comments, as appropriate. The remaining four agencies—SBA, HHS, USDA, and DOD—provided written comments, which are reproduced in appendixes IV through VII and discussed below. In written comments, reproduced in appendix IV, SBA generally agreed with the issues and recommendations included in our report. The letter states that SBA does not believe that the policy directive inaccurately summarizes the law and that the use of the term “reserve” refers to the allocation of the extramural budget. SBA officials plan to start using the term “extramural obligations” instead of “extramural budget” to address confusion with participating agencies, but they will review all language in the policy directives to ensure that the funding requirements are clear. SBA’s proposed change could help address some confusion among participating agencies, but we continue to believe that SBA should implement our first recommendation to revise the language in the SBIR and STTR policy directives to accurately summarize the statutory provisions that describe the program spending requirements. Specifically, the policy directives currently say that the relevant statutory provision requires participating agencies to “reserve” a minimum percentage of their extramural budget for awards to small businesses each year, whereas the law requires participating agencies to “expend” the minimum percentages. As reflected in USDA’s agency comments (see app. VI), the use of the term “reserve” is a specific point of confusion for at least one of the participating agencies. In written comments, reproduced in appendix V, HHS concurred with our recommendation regarding the inclusion of all of the agency’s extramural R&D budget in the calculation of the STTR spending requirements and in the data submitted to SBA. HHS plans to ensure that the agency’s extramural R&D budget is calculated the same way for the SBIR and STTR programs beginning in fiscal year 2015, as funding for the programs in fiscal year 2014 is already under way. In written comments, reproduced in appendix VI, USDA’s Director of the National Institute of Food and Agriculture, stated that USDA generally agrees with our report, but the agency does not agree that it did not comply with the spending requirements for the SBIR program. USDA’s written comments state that USDA has not always obligated the minimum percentage of its extramural R&D budget for the SBIR program in a single fiscal year because some of the funds used for the program are available without fiscal year limitations, referred to as “no-year money.” USDA’s written comments explain that USDA did not obligate the required amounts due to the language in the program policy directive, which directs federal agencies to “reserve” the minimum percentage of their extramural R&D budgets for awards to small business concerns. This is consistent with what officials told as during our review. We recognize that agencies with multiyear appropriations are generally allowed to carry funds over from one year to the next and that there are benefits to doing so, but we continue to believe that the Small Business Act requires participating agencies to spend at least the minimum percentage of their extramural R&D budgets on the program each year, regardless of the year the dollars spent were appropriated. In other words, an agency can use a mix of funds from different fiscal years, consistent with the limitations specific to its appropriations, to meet the spending requirement in any given fiscal year, but it must still meet the spending requirement in each fiscal year. Conversely, as we state in the report, if an agency carries over funding from one year to the next without spending, or at least obligating, the minimum required amount on the program in each fiscal year, then the agency is not in compliance with spending requirements. As noted above, we continue to believe that a change to the program policy directives is needed to address this misinterpretation of the spending requirements. In written comments, reproduced in appendix VII, the DOD Administrator for the SBIR and STTR programs stated that DOD concurs with our finding that DOD does not expend all SBIR and STTR funds appropriated to the department in the same fiscal year that they are received, but DOD believes that the agency is in compliance with the law in that it obligates the minimum percentage of SBIR and STTR funds each year in accordance with the obligation authority conferred by Congress and long- standing DOD procedures. We neither state in the report, nor do we believe, that agencies are required to spend all of the SBIR or STTR funds appropriated in the same year that they are received. As we state in the report, we used the total obligations data that agencies submitted to SBA to calculate compliance with spending requirements. These data represent the amount obligated in a specific year, regardless of the year the funding was appropriated. Additionally, we agree that an agency is in compliance with program spending requirements if it obligates the minimum percentage of program funds each year. However, using the spending data that DOD submitted to SBA for fiscal year 2012, DOD did not comply with the spending requirements for the STTR program. We are sending copies of this report to the Secretaries of Health and Human Services, Agriculture, Commerce, Defense, Education, Energy, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; the Director of the National Science Foundation; the appropriate congressional committees; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII. Our analysis of the data that the agencies submitted to the Small Business Administration (SBA) indicate that the amounts that 8 of the 11 participating agencies spent for the Small Business Innovation Research (SBIR) program met or exceeded their fiscal year 2012 spending requirements, while spending for the remaining 3 agencies did not meet the requirements. See table 2 for data on agency compliance. Our analysis of the data that the agencies submitted to the Small Business Administration (SBA) indicate that two of the five agencies participating in the Small Business Technology Transfer (STTR) program met or exceeded their fiscal year 2012 spending requirements, while the remaining three agencies did not. See table 3 for data on agency compliance. Differences in how agencies interpret the spending requirements for the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs can lead to different results when calculating compliance with spending requirements. To demonstrate the effect that these differences can have, we made the following calculations for the Department of Defense (DOD). First, we used the methodology we used for this report, as well as our first annual report on these issues, in which we compared the agency’s spending in each year to the spending requirements for that year. Second, we used the methodology that DOD uses to calculate its spending. DOD calculates its spending for the year as the funding that was appropriated in one year and spent in the same year and the following year. For example, for fiscal year 2006, DOD calculated its spending as the sum of the funding appropriated in fiscal year 2006 and spent in fiscal year 2006 and the funding appropriated in fiscal year 2006 and spent in fiscal year 2007. We used DOD for this comparison because DOD is the only agency that submits its spending data to the Small Business Administration (SBA) in a way that allows us to determine the year that funding was appropriated and spent. We found that DOD complied with SBIR spending requirements in 2 of the 6 fiscal years from 2006 to 2011 and with STTR spending requirements in 4 of the 6 years using our method. DOD’s method is incorrect, but if it were correct, it would yield a compliance determination in each of the 6 years for both the SBIR and STTR programs (see tables 4 and 5). In addition to the individual named above, Hilary Benedict, Assistant Director; Antoinette Capaccio; Cindy Gilbert; Richard Johnson; Armetha Liles; Rebecca Makar; Cynthia Norris; and Daniel Semick made key contributions to this report. | Federal agencies have awarded more than 156,000 contracts and grants, totaling nearly $40 billion, through the SBIR and STTR programs to small businesses to develop and commercialize innovative technologies. The Small Business Act requires agencies with extramural R&D budgets that meet certain thresholds for participation—$100 million for SBIR and $1 billion for STTR—must spend a percentage of these annual budgets on the programs. The agencies are to report on their activities to SBA and, in turn, SBA is to report to Congress. The 2011 reauthorization of the programs mandated GAO to review compliance with spending and reporting requirements, and other program aspects. This report addresses, for fiscal year 2012, (1) the extent to which agencies complied with spending requirements, (2) the extent to which agencies and SBA complied with certain reporting requirements, (3) the potential effects of basing spending requirements on agencies' total R&D budgets, and (4) what is known about the amounts spent administering the programs. GAO reviewed agency spending data and required reports for fiscal year 2012 and interviewed program officials from SBA and the participating agencies. Agency data indicate that 8 of the 11 agencies participating in the Small Business Innovation Research (SBIR) program and 2 of the 5 agencies participating in the Small Business Technology Transfer (STTR) program complied with spending requirements in fiscal year 2012. Program managers for agencies that did not comply with the requirements identified reasons for noncompliance. For example, program managers at two of the agencies told GAO that they believe their agencies comply with spending requirements if the agencies spend the total amount reserved or budgeted for the program, regardless of the year the funding is spent. However, the authorizing legislation for the programs requires agencies to “expend” a certain amount of funding each year. This difference in the interpretation of spending requirements occurred, in part, because the Small Business Administration's (SBA) policy directives for the programs inaccurately state that the authorizing legislation requires agencies to “reserve” the minimum amount each year. Additionally, some officials told GAO their agencies did not comply with spending requirements because the recent reauthorization of the programs included an increased spending requirement in fiscal year 2012, but the reauthorization was enacted a full quarter into the fiscal year, after some agencies had planned their programs and made awards. Participating agencies and SBA did not fully comply with certain reporting requirements for the SBIR and STTR programs. For example, participating agencies are required to submit reports to SBA describing their methodologies for calculating their budgets for extramural research or research and development (R&D)—which is generally conducted by nonfederal employees outside of federal facilities—within 4 months of the enactment of appropriations. However, all 11 participating agencies were late in submitting these reports because SBA allowed them to submit the reports later. As a result, SBA was unable to analyze the reports and provide timely feedback to assist agencies in accurately calculating these budgets. Potential effects of basing each participating agency's spending requirement on its total R&D budget instead of its extramural R&D budget include an increase in the amount of the spending requirement—for some agencies more than others—and, if the thresholds for participation in the programs did not change, an increase in the number of agencies required to participate. Officials identified benefits of such a change, such as funding more projects, but they generally said the drawbacks could outweigh the benefits. Little is known about the total amounts agencies spent administering the SBIR and STTR programs because agencies did not consistently collect such information for fiscal year 2012. Agencies are not required to track costs for administering the programs. Most agencies provided GAO with some data on such costs for fiscal year 2012, ranging from about $200,000 to about $8 million, but the data were wide-ranging, incomplete, and unverifiable. With the start of a pilot program in fiscal year 2013 that allows agencies to use up to 3 percent of SBIR program funds for administrative costs, agencies will be required to report to SBA on the amount spent for such activities. However, even with the pilot program, agencies will likely not identify or track all administrative costs. GAO recommends, among other things, that SBA revise program policy directives to accurately summarize spending requirements and request that agencies submit their methodology reports on time. SBA and participating agencies generally agreed with GAO's findings and recommendations. |
The base of the individual income tax covers income paid to individuals, such as wages, interest, dividends, realized net capital gains, various forms of business income, and income from pensions, annuities, trusts and estates. This tax base is reduced by personal exemptions for taxpayers and their spouses and children, as well as by numerous preferences— statutorily defined as tax expenditures—such as the deduction for mortgage interest, the earned income tax credit, and the exclusion of the value of employer-provided health insurance from individuals’ taxable income and taxable wage base. The statutory rates of tax on net taxable income range from 10 percent to 35 percent. Lower rates (5 percent and 15 percent, depending on taxable income) apply to long-term capital gains and dividend income. Individuals may also pay tax under the alternative minimum tax (AMT). The base of this tax equals regular taxable income, plus the value of various tax items, including personal exemptions and certain itemized deductions that are added back into the base. This AMT income base is then reduced by a substantial exemption and then taxed at a rate of 26 percent or 28 percent, depending on the taxpayer’s income level. Taxpayers compare their AMT tax liabilities to their regular tax liabilities and pay the greater of the two. Although the income tax applies to all who have taxable income, nearly all workers pay social insurance taxes to fund retirement, disability and retiree health programs. According to Congressional Budget Office estimates, in 2000 over 40 percent of households paid more in just their portion of social insurance taxes than they paid in income taxes. Further, when both their contribution and their employers’ is counted, over 70 percent of households paid more in social insurance taxes than they did in income taxes. The consensus among economists is that the employees ultimately bear the entire social insurance tax burden. In 2005 workers paid a total of $794 billion in social insurance taxes to fund federal social insurance, retirement, disability, and retiree health programs. This amount was in addition to their income tax liabilities. From the taxpayers’ view, these taxes may not appear significantly different than income taxes. They reduce the workers’ take-home pay each pay period and, although the taxes are set aside in a separate account to fund specific benefits, the portion of these taxes not immediately needed for current beneficiaries goes to fund current government expenses just like income taxes. Three long-standing criteria—equity; economic efficiency; and a combination of simplicity, transparency, and administrability—are typically used to evaluate tax policy. These criteria are often in conflict with each other and, as a result, there are usually trade-offs to consider and people are likely to disagree about the relative importance of the criteria. To the extent that a tax is not simple and efficient, it imposes costs on taxpayers beyond the payments they make to the U.S. Treasury. As shown in figure 1, the total cost of any tax from a taxpayer’s point of view is the sum of the tax liability, the cost of complying with the tax system, and the economic efficiency costs that the tax imposes. In deciding on the size of government, we balance the total cost of taxes with the benefits provided by government programs. Over the long term, the United States faces a large and growing structural budget deficit primarily caused by known demographic trends and rising health care costs, and this deficit is exacerbated over time by growing interest on the ever larger federal debt. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Addressing the nation’s long-term fiscal imbalances constitutes a major transformational challenge that may take a generation or more to resolve. Fiscal necessity may prompt a fundamental review of major program and policy areas. Many current federal programs and policies—including tax policies—were designed decades ago to respond to trends and challenges that existed then but may no longer suit our 21st century needs. Clearly, the individual income, social insurance, and corporate income taxes, which have been the federal government’s three largest sources of revenue, will need to be considered in any plan for addressing the nation’s long-term fiscal imbalance. Over the next few decades, as the baby boom generation retires, federal spending on retirement and health programs, such as Social Security, Medicare, and Medicaid, will grow dramatically and bind the nation’s fiscal future. Absent policy changes on the spending and/or revenue sides of the budget, a growing imbalance between federal spending and tax revenues will mean escalating and ultimately unsustainable federal deficits and debt. In simple terms, the gap between projected spending and expected revenues grows larger every year. For example, as figure 2 indicates, if discretionary spending grows at the same rate as the economy, all expiring tax provisions are extended, and then federal revenues are held as a constant share of the economy, revenues could be adequate to cover little more than interest on the federal debt by 2040. We cannot grow our way out of this long-term fiscal challenge because the imbalance between spending and revenue is so large. We will need to make tough choices using a multipronged approach: (1) revise budget processes and financial reporting requirements; (2) restructure entitlement programs; (3) reexamine the base of discretionary spending and other spending; and (4) review and revise tax policy, including tax expenditures and tax enforcement programs. Individual income tax policy, tax expenditures, and enforcement need to be key elements of the overall tax review. One promising—and perhaps necessary—approach to tackling both the tax and entitlements part of our long-term fiscal challenge is a credible, capable, and bipartisan Tax and Entitlements Reform Commission. Such an approach would help ensure that any decisions made on taxes and spending are well coordinated and will produce a sustainable fiscal system that meets agreed-upon objectives. The individual income tax has long been the single largest source of federal tax revenue. In 2005, individual taxpayers paid $927 billion in income taxes. Figure 3 shows the relative importance of federal taxes. Since 1962, the individual income tax has ranged between a low of 7 percent (in 2004) and a high of 10.3 percent (in 2000) of gross domestic product (GDP). Over the same period, social insurance taxes have grown considerably in importance—from 3 percent of GDP in 1962 to 6.5 percent of GDP (or $794 billion) in 2005. Revenue from the individual income tax has historically accounted for between 40 percent and 50 percent of total federal tax revenue. In contrast, in the early 1960s, social insurance taxes accounted for less than 20 percent of the total; however, they have grown to represent 37.1 percent of revenue in 2005. Concerns about the complexity, efficiency, and equity of the individual income tax have motivated calls for a substantial restructuring of the tax or its replacement with some form of consumption tax. The widely recognized complexity of the tax results in (1) significant compliance costs, frustration, and anxiety for taxpayers; (2) decreased voluntary compliance; (3) increased difficulties for IRS in administering the tax laws; and (4) reduced confidence in the fairness of the tax. The individual income tax also causes taxpayers to change their work, savings, investment, and consumption behavior in ways that reduce their well- being. These reductions in well-being, known to economists as efficiency costs, are likely to be large—perhaps on the order of 2 percent of GDP or more. The success of our tax system hinges very much on the public’s perception of its fairness and transparency. There are differences of opinion about the overall fairness of the individual income tax and concerns have been expressed about the equity of many specific features of the tax. If they are to take advantage of the many tax benefits in the tax code, virtually all taxpayers must familiarize themselves with, or pay someone to advise them on, the sometimes complex rules for determining whether they qualify (and, if so, to what extent). Moreover, in cases where multiple tax expenditures have similar purposes, taxpayers may have to devote considerable time to learn and plan in order to make optimal use of these tax benefits. For example, the IRS publication Tax Benefits for Education outlines 12 tax expenditures, including 4 different tax expenditures for educational saving. The use of one of these tax expenditures can affect whether (or how) a taxpayer is allowed to use the other tax expenditures. Adding to the taxpayer’s challenge to select the best educational tax benefit, the use of one of these tax expenditures may affect a student’s eligibility for other forms of federal assistance for higher education, such as Pell grants and subsidized loans. The tax benefits, or tax expenditures, available under the income tax are usually justified on the grounds that they promote certain social or economic goals. They grant special tax relief (through deductions, credits, exemptions, etc.) that encourages certain types of behavior by taxpayers or aids taxpayers in certain circumstances. Tax expenditures can promote a wide range of goals, like encouraging economic development in disadvantaged areas, financing postsecondary education, or stimulating research and development. For example, a wide range of tax provisions are intended to help individuals save for their retirement. These include traditional and Roth Individual Retirement Accounts (IRA) and various plans administered by employers or available to self-employed individuals. Again, individuals face complex choices to select the best options as well as complex rules to stay in compliance once they select a retirement savings option. From a public policy perspective, all of this complexity and the burden it imposes on taxpayers would most likely be worthwhile if the tax incentives are successful in achieving their intended purposes. However, in many cases this is questionable or unknown. Although research results vary, many studies suggest that IRAs result in little actual increase in retirement saving. One concern is that individuals can take a lump sum withdrawal and, depending on how the sum is used, the individual may not have a sufficient stream of income over his/her remaining lifetime. The sum of the revenue loss estimates associated with tax expenditures was more than $775 billion in 2005 and the vast majority of this loss was for tax expenditures provided to individuals, rather than to corporations. As the data in figure 4 indicate, revenue losses due to tax expenditures exceeded discretionary spending for half of the last decade. Much of the revenue loss due to individual income tax expenditures is attributable to a small number of large tax expenditures. The seven tax expenditures shown in figure 5—each with an annual revenue loss estimated at $36 billion or more—accounted for about half of the sum of revenue losses for all tax expenditures for fiscal year 2005. With revenue losses estimated at $4.9 billion, the earned income tax credit (EITC) does not appear on this list. The EITC has both revenue losses and outlays when a taxpayer’s refund exceeds their tax liability. If $34.6 billion in associated outlays were included, this refundable credit would rank among the largest tax expenditures. The costs of complying with the individual income tax are large but unclear. IRS’s most recent estimates suggest that these costs are roughly on the order of ½ to 1 percent of GDP. These costs include the time and money spent complying with the computational, reporting, planning, and recordkeeping requirements of the tax system. Estimates of compliance costs are uncertain because taxpayers generally do not keep relevant records documenting their time and money spent complying with the tax system and many important elements of the costs are difficult to measure because, among other things, federal tax requirements often overlap with recordkeeping and reporting that taxpayers do for other purposes. The available compliance cost estimates do not represent the potential cost savings to be gained by replacing the current federal individual income tax. Any replacement tax system will impose significant compliance costs of its own. Moreover, given that many state and local government income taxes depend upon the same compliance activities as the federal income tax does, taxpayers would still bear the costs of those activities unless those other governments replaced their own taxes to conform to the new federal system. In addition, if some of the subsidies, such as the earned income tax credit and child tax credit, which are provided by the current federal tax system, are replaced by spending programs under a reformed system, tax compliance costs may be reduced, but only as a result of their being shifted to those new programs. Similarly, if a replacement tax system no longer requires individuals to compute and document their incomes, individuals will still need to document their incomes for borrowing and other purposes, and government statistical agencies will incur expenses to replace the data that they currently obtain from income tax returns. Taxes impose efficiency costs by altering taxpayers’ behavior, inducing them to shift resources from higher valued uses to lower valued uses in an effort to reduce tax liability. This change in behavior can cause a reduction in taxpayers’ well-being that, for example, may include lost production (or income) and consumption opportunities. One important behavioral change attributable to the income tax arises from the fact that investment in housing is given more favorable treatment than investment in business activities. Economists generally agree that this differential tax treatment reduces the amount of money available to businesses for investment in productivity-enhancing technology. This in turn results in employees receiving lower wages because increases in wages are generally tied to increases in productivity. The tax exclusion for the exclusion of employer- provided health insurance from individuals’ taxable income, discussed in text box 1, is another example of an income tax provision that clearly reduces economic efficiency. The exclusion encourages more extensive insurance coverage, but introduces a well-known problem with health insurance. Because much of the cost of medical treatment is paid for by the insurer, patients and doctors are generally unaware of, or disconnected from, the total costs of health care and have little incentive to economize on health care spending. Efficiency costs, along with the tax liability paid to the government and the costs of complying with tax laws, are part of the total cost of taxes to taxpayers. However, this does not mean that taxes are not worth paying. One reason people bear taxes is they desire the benefits of government programs and services. (The government does deliver some services effectively and often provides services that otherwise would not be available.) Taxpayers implicitly or explicitly balance the costs of taxes with the benefits of government. Nevertheless, minimizing efficiency costs is one criterion for a good tax. Economists agree that taxes with broad bases and low rates generally cause lower efficiency costs than do taxes with narrow bases and high rates. The goal of tax policy is to design a tax system that produces revenue needed to pay current bills and deliver on future promises while at the same time balancing economic efficiency with other objectives, such as equity, simplicity, transparency, and administrability. Moreover, as noted earlier, the failure to provide sufficient tax revenues to finance the level of spending we choose as a nation gives rise to deficits and debt. Large, sustained deficits could ultimately have a negative impact on economic growth, productivity, and potentially our national security. Large structural deficits also raise serious stewardship and intergenerational equity issues. Text Box 1: Tax Expenditure for Employer-Provided Medical Insurance Premiums and Medical Care The current U.S. tax system excludes employer-provided health insurance from individuals' taxable income even though such insurance is a form of income (noncash compensation). The Department of the Treasury estimates that the tax exclusion for employer-provided health insurance resulted in $118.4 billion in lost revenue during 2005, not including forgone social insurance taxes and state taxes. Including forgone federal social insurance taxes, an estimated $177.6 billion in revenue was forgone due to this exclusion. The tax exclusion increases the proportion of the population covered by health insurance. In 2004, nearly 46 million Americans were without health insurance. The tax exclusion encourages employers to offer and employees to participate in health insurance plans, increasing the proportion of workers covered. Because individuals may be better able to anticipate their health care needs than insurers, health care plans may attract customers with higher risk of poor health, resulting in higher premiums. By encouraging the pooling of high-and low-risk individuals, the tax exclusion may help to reduce premiums below those that individuals would face if they purchased insurance on their own. However, some question whether the tax subsidy for health insurance is the best way to increase health insurance coverage. For example, the tax exclusion provides the most assistance to taxpayers who have high marginal tax rates (those with high incomes)—the exclusion saves those taxpayers more in taxes owed than it saves those with lower marginal tax rates. The tax exclusion for health insurance also contributes to higher health care costs. The exclusion, by lowering premiums, encourages more extensive insurance coverage, which compounds another well-known problem with health insurance. Because much of the cost of medical treatment is paid for by a third party (the insurer), patients and doctors are generally unaware of, or disconnected from, the total costs of health care and have little incentive to economize on health care spending. Unlike the tax exclusion for employer-provided health insurance, an ideal health care payment system would foster the delivery of care that is both effective and efficient, resulting in better value for the dollars spent on health care. Estimating the efficiency costs of the federal tax system is an enormous, complicated, and uncertain task, given the complexity of existing tax rules, the breadth and diversity of the U.S. economy and population, and the limited empirical evidence available on how individuals and businesses change their behavior in response to tax rules. In practice, researchers have not been able to obtain and analyze all of the detailed data they need to produce efficiency cost estimates that are free from a large degree of uncertainty. The two studies that have made the most comprehensive estimates of the efficiency costs arising from the individual income tax in the past two decades suggest that those costs are considerable. The first study, which examined the combined efficiency costs of the individual income and payroll taxes, estimated those costs to have been on the order of 2 to 5 percent of GDP in 1994. Estimates from the second study indicate that the efficiency cost of the individual income tax was on the order of 2 percent of GDP in 1997. Efficiency cost estimates such as these are often quite sensitive to the assumed magnitude of key behavioral responses and those assumptions are often based on empirical research that continues to evolve over time or, in other cases, has yet to be undertaken. For example, the consensus of recent research is that individuals are less responsive to changes in taxes than the first study assumed them to be. The extent to which efficiency gains could be realized by switching to an alternative tax system depends critically on the detailed characteristics of the alternative. All of the alternative tax system proposals that have received serious consideration in recent decades would have imposed significant efficiency costs. Moreover, in assessing the potential efficiency gains from any tax reform proposal it is also important to consider compensating changes that may be made on the spending side of the federal budget. For example, if any tax expenditures in the current federal income taxes are replaced by grants, spending programs, regulations, or other forms of nontax subsidies, those subsidies can result in efficiency costs similar in magnitude to those associated with the tax expenditures they replaced. The success of our tax system hinges very much on the public’s perception of its fairness and transparency. The myriad of tax deductions, credits, special rates, and so forth cause taxpayers to doubt the fairness of the tax system because they do not know whether those with the same ability to pay actually pay the same amount of tax. Fairness is ultimately a matter of personal judgment about issues such as how progressive tax rates should be and what constitutes ability to pay. Public confidence in the nation’s tax laws and tax administration is critical because we rely heavily on a system of voluntary compliance. If taxpayers do not believe that the tax system is credible, easy to understand, and treats everyone fairly, then voluntary compliance is likely to decline. The latest available IRS estimates indicate that about 84 percent of total taxes due for tax year 2001 were paid voluntarily and on time. Complexity and the lack of transparency it can create exacerbate doubts about the current tax system’s fairness. There are differences of opinion about the fairness of the individual income tax. Likewise, concerns have been expressed about the equity of many specific features of the tax, such as: marriage penalties (and bonuses) built into the tax under which the combined tax liabilities of two individuals differ, depending on whether or not those individuals are married; the inconsistent treatment between taxable wages and salaries and other components of total employee compensation, such as employer-provided health benefits that are not taxed; the fact that many low-income individuals face high effective marginal tax rates over certain income ranges as the benefits of tax preferences, such as the earned income tax credit, phase out; the provision of certain tax benefits in the form of deductions, which are more valuable to taxpayers in higher income brackets, rather than as tax credits; the requirement that a taxpayer must own a home in order to receive the significant advantage of tax-preferred borrowing; and the greater ease with which self-employed individuals can underreport income, compared to employees whose incomes are subject to withholding and third-party reporting. Judging the equity of the individual income tax can depend substantially on the frame of reference used. For example, for many, a progressive tax code is considered to be more equitable. When looked at in isolation, the individual income tax system is somewhat progressive. If the frame of reference is expanded, however, and payroll taxes are also taken into account, total progressivity drops. As mentioned earlier, more than 70 percent of taxpayers are estimated to pay more in payroll taxes than individual income taxes when the combined employee and employer shares are considered. These frames of reference, of course, look only at the payment of taxes. An even wider frame of reference would take into account the benefits taxpayers receive, which could alter yet again judgments about the equity of the tax system. In fact, it could be argued that the full effect of federal government policies on different groups of individuals can only be determined by examining the effects of all federal taxes, spending programs, and regulations. The extent of individual taxpayer noncompliance with the current tax laws is another factor that could motivate calls for reform. Ensuring compliance with our nation’s tax laws is a challenging process for both taxpayers and IRS. The difficulty in ensuring compliance is underscored by the tax gap—the difference between the taxes that should be paid voluntarily and on time and what is actually paid—that arises every year when taxpayers fail to comply fully with the tax laws. Most recently, IRS estimated the gross tax gap for tax year 2001 to be $345 billion, including individual income, corporate income, employment, estate, and excise taxes. IRS estimated it would eventually recover about $55 billion of the gross tax gap through late payments and enforcement actions, resulting in a net tax gap of $290 billion. About 70 percent of the gross tax gap for tax year 2001, or an estimated $244 billion, was attributed to the individual income tax. As shown in table 1, individual taxpayers that underreported their income, underpaid their taxes, or failed to file an individual tax return altogether or on time (nonfiling) accounted for $197 billion, $23 billion, and $25 billion of the tax gap, respectively. Improving compliance and reducing the tax gap would help improve the nation’s fiscal stability. Even modest progress would yield significant revenue; each 1 percent reduction would likely yield nearly $3 billion annually. However, the tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with our tax laws has changed little over the past three decades. As such, we need to consider not only options that have been previously proposed but also explore new and innovative approaches to improving compliance including fundamental reform of the tax system as well as providing IRS with additional enforcement tools and ensuring that significant resources are devoted to enforcement. Fundamentally reforming our tax system has the potential to improve compliance, especially if a new system has few tax preferences or complex tax code provisions and if taxable transactions are transparent to tax administrators. One factor that some believe contributes to the difficulty of achieving compliance is the complexity of our tax system. The complexity of, and frequent revisions to, the tax system make it more difficult and costly for taxpayers who want to comply to do so and for IRS to explain and enforce tax laws. Complexity also creates a fertile ground for those intentionally seeking to evade taxes, and often trips others into unintentional noncompliance. Likewise, the complexity of the tax system challenges IRS in its ability to administer our tax laws. Whether under our current income tax system or a reformed one, enforcement tools, particularly information reporting and tax withholding, are key to high levels of compliance. The extent to which individual taxpayers accurately report the income they earn has been shown to be related to the extent to which the income is reported to them and IRS by third parties or taxes on the income are withheld, as shown in figure 6. Taxpayers tend to report income subject to tax withholding or information reporting with high levels of compliance because the income is transparent to the taxpayers as well as to IRS. For example, employers report most wages, salaries, and tip compensation to employees and IRS through Form W-2. Also, banks and other financial institutions provide information returns (Forms 1099) to account holders and IRS showing the taxpayers’ annual income from some types of investments. Findings from IRS’s recent study of individual tax compliance indicate that nearly 99 percent of these types of income are accurately reported on individual tax returns. For types of income for which there is little or no information reporting, individual taxpayers tend to misreport over half of their income. Ensuring that significant resources are devoted to enforcement also has the potential to minimize the tax gap for our current income tax system as well as for reformed systems Congress may adopt. For the current system, devoting more resources has the potential to reduce the tax gap by billions of dollars in that IRS would be able to expand its enforcement efforts to reach a greater number of potentially noncompliant taxpayers. Importantly, expanded enforcement efforts could reduce the tax gap more than through direct tax revenue collection, as widespread agreement exists that IRS enforcement programs have an indirect effect through increases in voluntary tax compliance. However, determining the appropriate level of enforcement resources to provide IRS requires taking into account many factors, such as how effectively and efficiently IRS is currently using its resources, how to strike the proper balance between IRS’s taxpayer service and enforcement activities, and competing federal funding priorities. Generally, when holding IRS accountable for the use of resources, it is also desirable to focus on the outcomes achieved rather than on how IRS allocates the resources it receives. Results are really what counts. If IRS, or any other agency, can figure out how to more cost effectively achieve a result, then reallocation of resources to other problem areas could be an appropriate strategy, within the restrictions applying to appropriation accounts, for making the best use of limited resources. In sum, regardless of the tax system, Congress needs to assure itself that the revenue agency has sufficient resources and reasonable flexibility to achieve desired outcomes and hold the agency accountable for those outcomes. In moving forward on tax reform, policymakers may find it useful to compare proposals on common dimensions. These comparisons can be helpful whether reform is of the individual income tax, the current tax system more broadly, or in considering new systems altogether. First, is the tax base as broad as possible? Broad-based tax systems with minimal exceptions have many advantages. Fewer exceptions generally means less complexity, less compliance cost, less economic efficiency loss, and by increasing transparency may improve equity or perceptions of equity. In terms of the individual income tax, this suggests that eliminating or consolidating the myriad of tax expenditures must be considered. We need to be sure that the benefits achieved from having these special provisions are worth the associated revenue losses just as we must ensure that outlay programs—which may be attempting to achieve the same purposes as tax expenditures—achieve outcomes commensurate with their costs. To the extent tax expenditures are retained, consideration should be given to whether they are better targeted to meet an identified need. Many tax expenditures are broadly available and, in fact, provide greater “assistance” to those that most would consider least in need. This is broadly true of any tax expenditure that is worth more to higher income taxpayers than to lower income taxpayers, like the exclusion for the value of employer-provided health insurance and the mortgage interest deduction. Broad based tax systems can yield the same revenue as more narrowly based systems at lower tax rates. The combination of less direct intervention in the marketplace from special tax preferences, and the lower rates possible from broad based systems, can have substantial benefits for economic efficiency. For instance, some economists estimate that the economic efficiency costs of tax increases rise proportionately faster than the tax rates. In other words, a 50 percent tax increase could more than double the economic efficiency costs of a tax system. Does the proposed system raise sufficient revenue over time to fund our expected expenditures? As I mentioned earlier, we will fall woefully short of achieving this end if current spending and/or revenue trends are not altered. The economic efficiency costs of our current tax system likely will become an even more important issue as we grapple with the nation’s long-term fiscal challenges. Although we clearly must restructure major entitlement programs and the basis of other federal spending, it is unlikely that our long-term fiscal challenge will be resolved solely by cutting spending. If we must raise revenues, doing so from a broad base and a lower rate will help minimize economic efficiency costs. In this regard, the President’s Advisory Panel on Tax Reform has taken a useful step forward for tax reform, helping, for example, to focus the debate on specific proposals. Those proposals incorporate broader bases, with lower rates. However, the Panel acted within the guidance it was given, and one result is that the proposed reforms, if implemented as proposed, appear to provide much less than the necessary revenue to fund expected government spending. Although we have not evaluated the revenue effects of these proposals, other respected analysts have and they point to future revenue yields that would worsen the already difficult fiscal challenges the nation faces. Does the proposal look to future needs? Like many spending programs, the current tax system was developed in a profoundly different time. We live now in a much more global economy, with highly mobile capital, and investment options available to ordinary citizens that were not even imagined decades ago. We have growing concentrations of income and wealth. More firms operate multi-nationally and willingly move operations and capital around the world as they see best for their firms. Do the revenues for the proposed system hold up in the future? As an adjunct to looking forward when making reforms, the revenue consequences of all major tax changes should be estimated well into the future. Such long-term projections undoubtedly will be subject to uncertainty, but at the very least we should have the best estimates possible of whether the revenue trend is likely to shift up or down over the long-term. Does the proposed system have attributes associated with high compliance rates? Because any tax system can be subject to tax gaps, the administrability of reformed systems should be considered as part of the debate for change. In general, a reformed system is most likely to have a small tax gap if the system has few tax preferences or complex provisions and taxable transactions are transparent. Transparency in the context of tax administration is best achieved when third parties report information both to the taxpayer and the tax administrator. What transition issues exist and have they been dealt with in an equitable fashion that minimizes additional complexity and any adverse effects on the benefits to be gained from the new tax system? Under the current individual income tax system, citizens have made fundamental life choices based at least in part on the incentives in the tax system. For many, the favorable tax treatment of owner-occupied housing has led to choices to invest disproportionately in housing. Others have made long-term investments in tax-favored college savings plans. Thus, changes to the tax system can materially affect citizens’ futures. Still others make their livings advising taxpayers, helping them understand tax provisions and complete their tax returns, and helping them devise investment and other financial plans taking into account current tax rules. Our publication, Understanding the Tax Reform Debate: Background, Criteria, and Questions, may be useful in guiding policymakers as they consider tax reform proposals. It was designed to aid policymakers in thinking about how to develop tax policy for the 21st century. While not designed to break new conceptual ground, this report brings together a number of topics that tax experts have identified as those that should be considered when evaluating tax policy. It attempts to provide information about these topics in a clear, concise, and easily understandable manner for a non-technical audience. The problems that I have reviewed today relating to the compliance costs, efficiency costs, equity and tax gap associated with the current individual income tax system—many of which arise from the complex accumulation of tax preferences in that system—would seem to make an overwhelming case for a comprehensive review and reform of our tax policy. Further, we live a world that is profoundly different than when the individual income tax and many of its provisions were adopted. Despite numerous and repeated calls for such reform, progress has been slow. One reason why reform is difficult to accomplish is that the provisions of the tax code that generate compliance costs, efficiency costs, the tax gap and inequities also benefit many taxpayers and the individuals and companies that advise taxpayers and help them with their tax filing obligations. Reform is also difficult because, even when there is agreement on the amount of revenue to raise, there are differing opinions on the appropriate balance among the often conflicting objectives of equity, efficiency, and administrability. This, in turn, leads to widely divergent views on even the basic direction of reform. Fiscal necessity, prompted by the nation’s unsustainable fiscal path, will eventually force changes to our spending and tax policies. We must fundamentally rethink policies and everything must be on the table. Tough choices will have to be made about the appropriate degree of emphasis on cutting back federal programs versus increasing tax revenue. Tax reform, if it broadens the tax base, could reduce the costs of raising a given amount of revenue by reducing the associated efficiency costs. Such a reform also likely would reduce inequities, compliance burden, and administrative costs. The recent report of the President’s Advisory Panel on Federal Tax Reform recommended two different tax reform plans. Although each plan provides for significant simplification, neither of them addresses the growing imbalance between federal spending and revenues that I highlighted earlier. One approach for getting the process of comprehensive fiscal reform started would be through the establishment of a credible, capable, and bipartisan commission, to examine options for a combination of entitlement and tax reform. As policymakers consider proposals to reform the current individual income tax, or the entire tax system, they may find it useful to compare the proposals on common dimensions. Our publication, Understanding the Tax Reform Debate, may be useful when making these comparisons. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions you may have at this time. For further information on this testimony please contact James White on (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Michael Brostek, Director; Kevin Daly and Jim Wozny, Assistant Directors; Jeff Arkin; Elizabeth Fan; Tom Gilbert; Don Marples; and Jeff Procak. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government currently relies heavily on the individual income tax and payroll taxes for about 80 percent of its total annual revenue. Long-range projections show that without some form of policy change, the gap between revenues and spending will increasingly widen. The debate about the future tax system is partly about whether the goals for the nation's tax system can be best achieved by reforming the current income tax so that it has a broader base and flatter rate schedule, or switching to some form of consumption tax. This testimony reviews the revenue contribution of the current individual income tax as well as its complexity, economic efficiency, equity, and taxpayer compliance issues; discusses some common dimensions to compare tax proposals; and draws some conclusions for tax reform. This statement is based on previously published GAO work and reviews of relevant literature. The United States faces a large and growing structural budget deficit as current projected revenues are not sufficient to fund projected spending. The individual income tax has long been the largest source of federal revenue--amounting to $927 billion (7.5 percent of Gross Domestic Product (GDP)) in 2005. (Total revenues that year amounted to 17.5 percent of GDP.) Income tax policy, including existing tax expenditures, such as the exclusion of employer-provided health insurance from individual income, and enforcement approaches, need to be key elements of a multipronged approach that reexamines federal policies and approaches to address our nation's large and growing long-term fiscal imbalance. Concerns regarding the complexity, efficiency, and equity of the individual income tax have contributed to calls for a substantial restructuring of the individual income tax or its full or partial replacement with some form of consumption tax. The widely recognized complexity of the tax results in (1) significant compliance costs, frustration, and anxiety for taxpayers; (2) decreased voluntary compliance; (3) increased difficulties for the Internal Revenue Service (IRS) in administering the tax laws; and (4) reduced confidence in the fairness of the tax. The tax also causes taxpayers to change their work, savings, investment, and consumption behavior in ways that reduce economic efficiency and, thereby, taxpayers' well-being. Taxpayer noncompliance with the current individual income tax is another factor that could motivate reform. For tax year 2001, IRS estimated that noncompliance with the individual income tax accounted for about 70 percent of the $345 billion gross tax gap, which is the difference between the taxes that should have been paid voluntarily and on time and what was actually paid. Reducing this gap can improve the nation's fiscal stability, as each 1 percent reduction in the tax gap would likely yield about $3 billion annually. Reducing the tax gap within the current income tax structure will require exploring new and innovative administrative and legislative approaches. In moving forward on tax reform, policymakers may find it useful to compare alternative proposals along some common dimensions. These include, in part, whether proposed tax systems over time will generate enough revenue to fund expected expenditures, whether the base is as broad as possible so rates can be as low as possible, whether the system meets our future needs, and whether it has attributes that promote compliance. Our publication, Understanding the Tax Reform Debate (GAO-05-1009SP), provides background, criteria, and questions that policymakers may find useful. |
Modern commercial aircraft contain sophisticated electronic systems that gather, process, and manage digital data on many aspects of flight. These data originate from various systems and sensors throughout the aircraft. The data range from pilot operations to the outputs of sensors and systems. Some of these data are continuously recorded by the aircraft’s digital flight data recorder to help investigators understand what happened if the aircraft is involved in an accident or a serious incident. Designed to survive crashes, flight data recorders typically retain the data recorded during the last 25 hours of flight. Rather than analyzing flight data only after an incident or accident, some airlines routinely analyze the flight data from regular flights. Their aim is to identify problems that occur in routine operations and to correct these problems before they become accidents or incidents. In its 1992 study for FAA, the Flight Safety Foundation coined the term “Flight Operational Quality Assurance” to describe this function. The Foundation defined FOQA as “a program for obtaining and analyzing data recorded in flight to improve flight crew performance, air carrier training programs and operating procedures, air traffic control procedures, airport maintenance and design, and aircraft operations and design.” FOQA has its origin in the use of flight data recorders as mandated by the Civil Aeronautics Administration in 1958. Although the first flight data recorders captured only six parameters, they were a valuable tool for reconstructing what had occurred preceding a crash. In addition to recording data to assist in crash investigations, some airlines began to monitor data recorded on routine flights. Initially, the monitoring systems captured airworthiness data, but over time they have expanded to include operational data. FOQA programs were first established in Europe and Asia, and only within the past few years have some U.S. airlines begun adopting such a system on a trial basis. At present, about 33 foreign airlines and 4 U.S. airlines—United, US Airways, Continental, and Alaska—have implemented FOQA or FOQA-type programs. (See app. I for more detailed background information on FOQA and U.S. airlines’ experience with these programs; see app. II for a list of airlines worldwide that have implemented FOQA programs.) As part of FAA’s strategy to achieve significant reductions in aviation accident rates despite the rapid increase in air travel anticipated over the next decade, in 1995 the agency initiated a FOQA demonstration project to promote the voluntary implementation of FOQA programs by U.S. airlines. The objective of such a program is to use flight data to detect technical flaws, unsafe practices, or conditions outside of desired operating procedures early enough to allow timely intervention to avert accidents or incidents. For example, identifying repeated instances of unstabilized approaches to a particular airport could help to define a new approach pattern less likely to lead to an accident under adverse conditions, or to improved pilot training. Such a system has potentially broad application to flight crews’ performance and training, aircraft operating procedures, air traffic control procedures, aircraft maintenance, and airport design and maintenance. Major airlines in Europe and Asia, as well as the U.S. airlines that have FOQA programs, are uniform in their support of the program. How FOQA Works. FOQA involves (1) capturing and analyzing flight data to determine if the pilot, the aircraft’s systems, or the aircraft itself deviated from typical operating norms; (2) identifying trends; and (3) taking action to correct potential problems. Airlines with FOQA programs typically use a device called a quick access recorder to capture flight data onto a removable optical disk that facilitates the data’s frequent removal from the aircraft. Periodically, the optical disks are removed from the aircraft, and the flight data are analyzed by the ground analysis system at a centralized location. The data are analyzed by a computer system that evaluates about 40 to 80 predefined events for deviations from the airline’s specified tolerance thresholds. For example, an event might be the descent rate during approach. Deviations of more than certain predetermined values, called “exceedances,” are flagged and evaluated by a monitoring team. After investigating these exceedances to determine their validity and analyzing them to understand possible causes, the monitoring team will propose and evaluate corrective actions. Periodically, airlines aggregate exceedances over time to determine and monitor trends. (For a more complete discussion of FOQA operations, see app. I.) The FOQA Demonstration Project. In July 1995, FAA initiated a 3-year, $5.5 million demonstration project to facilitate the start-up of voluntary airline FOQA programs and to assess the costs, benefits, and safety enhancement associated with such programs. FAA provided hardware and software to each of the three airlines—United, US Airways, and Continental—that have implemented FOQA programs according to the demonstration project’s requirements. FAA purchased quick access recorders to equip 15 Boeing 737 aircraft at each of the three airlines. FAA also purchased a ground analysis system—the computer hardware and software for analyzing and visualizing FOQA data—for US Airways and Continental. Because United already had purchased a ground analysis system that analyzes these data for other types of aircraft, FAA purchased for the airline the additional software needed to analyze FOQA data from 737s. For their part, these airlines funded the cost of obtaining supplemental type certification of the airborne equipment, the costs of installation and maintenance, and the cost of personnel to run and monitor the program. Alaska Airlines is the fourth U.S. airline to have begun a FOQA program, but it has only recently met the demonstration project’s requirement for an agreement on FOQA by the airline’s pilot union. Consequently, the project has not yet provided any equipment to the airline. Alaska Airlines, however, received quick access recorders and a ground analysis system from the FAA Structural Loads Program and uses this equipment to operate its FOQA program. (See app. III for more information on the Structural Loads Program.) Other airlines that are participating in the demonstration project and are considering the implementation of a FOQA program are America West, Delta, Northwest, Trans World, Southwest, Continental Express, and United Parcel Service.(See app. I for a detailed description of the FAA demonstration project.) As a research and development effort of the FOQA initiative, FAA is developing the Aviation Performance Measuring System, an advanced system for conducting automated analysis and research on FOQA data. (See app. III for a description of this system and FAA’s other related technical programs.) Rather than requiring airlines to implement FOQA, FAA has chosen to promote the initiative through a cooperative demonstration project in partnership with the industry. According to the demonstration project’s program manager, it would be premature for FAA to mandate FOQA at this time because U.S. aviation is still in the early stages of developing FOQA and is primarily in a learning mode. The program manager contends that a mandated program would stifle innovation, encounter substantial resistance from airlines and pilots, and most likely result in minimal compliance. Thus, at present, FAA is working with the industry to raise interest in the concept, facilitate the design and implementation of voluntary FOQA programs, provide financial and technical assistance, and foster innovation. The primary characteristic that distinguishes FOQA from other safety reporting programs, such as the Aviation Safety Reporting Program or Aviation Safety Action Programs, is that FOQA provides objective, quantitative data on what occurs during flights rather than what is subjectively reported by individuals. Instead of needing to rely on perceived problems or risks, FOQA yields precise information on many aspects of flight operations, and this information can be used to help objectively evaluate a wide range of safety-related issues. U.S. and foreign airlines have reported on previously unknown or suspected problems for which FOQA has provided objective information that resulted in corrective actions. One airline found through its FOQA program that more exceedances occurred during visual flying than during instrument flying. This finding prompted the airline’s flight-training managers to rethink the relative emphasis given visual and instrument flying in the airline’s training programs. Another airline’s FOQA analysis confirmed that the incidence of descent rate exceedances during approaches was significantly higher at a particular runway at a U.S. airport than at other runways. After investigating the problem, the airline concluded that the air traffic control approach had been set too high, requiring pilots to descend more steeply than usual during their final approach. When the airline shared its findings with FAA management, the approach was modified to correct this potential problem. For landings, some airports’ air traffic control procedures require pilots to approach high and fast and then descend steeply. These approaches can result from a number of factors, including noise abatement rules, traffic volume, terrain, or weather conditions. Although airline managers know about the situations from pilots’ reports, FOQA gives them the quantitative information to demonstrate the extent of this problem at the various airports. With these data in hand, managers can be more effective in addressing the problem and taking action to mitigate or eliminate risks. FOQA can also help airlines determine the frequency of certain occurrences rather than having to rely on human judgment, particularly for the level of maintenance required. Two examples of these types of occurrences are hard landings and exceedances in engine temperatures. Prior to FOQA, airlines generally relied on pilots’ judgment of the necessity for corrective action if a hard landing occurred or an engine overheated. FOQA, however, can provide better information on the amount of force the aircraft experienced during a hard landing. Similarly, FOQA gives more data on the engines’ temperatures and the duration of overheating in some aircraft than were previously available without FOQA. With these data, managers can make more informed decisions about whether the aircraft needs to be inspected to check for structural damage or whether an engine needs to be overhauled. U.S. and foreign airlines have reported that they have used FOQA analysis to identify a variety of potential safety problems and take corrective action to resolve or mitigate them. These have included steep takeoffs, which can damage the aircraft’s tail; approaches that are outside the prescribed procedures for a “stabilized” approach; descent rates or bank angles that are considered excessive; high taxi speeds; hard landings; wind shear occurrences; ground proximity warnings; and engine malfunctions. Corrective action can include notifying pilots of a change in standard operating procedures or restating and emphasizing them, correcting an equipment problem, or providing additional training. The continued monitoring of trends will tell the airline if the corrective action has been effective or whether additional measures are needed. A number of airlines plan to complement the use of FOQA data with information from safety reporting systems, such as Aviation Safety Action Programs or internal pilot reporting systems. FOQA data, originating from aircraft sensors and systems, tell “what” happened to the aircraft. Internal safety reporting systems, based on reports of pilots, flight crews, and other persons, are more likely to tell “why” something happened. Together, information from FOQA and internal reporting systems can provide valuable insight into current and emerging problems. Based on preliminary estimates from an ongoing cost-benefit study by Universal Technical Resource Services, Inc. (UTRS), an FAA contractor, table 1 summarizes the estimated annual costs for airlines to equip 15, 50, and 100 aircraft with quick access recorders, purchase a ground analysis system, and pay FOQA-related salaries. The cost-benefit study estimates that airlines will reduce their expenditures for fuel and maintenance as well as reduce the number of accidents and incidents over time, avoiding their associated costs. Because FOQA programs analyze additional data on aircraft systems and engine conditions, airlines are better able to achieve optimum fuel consumption and avoid unneeded engine maintenance. Although more difficult to quantify and directly relate to a FOQA program, enhanced safety should result in lower costs over time as a result of accidents avoided and lower insurance premiums. Table 2 summarizes the estimated annual savings for fleet sizes of 15, 50, and 100 aircraft. Fuel savings and engine savings figures are based on estimates of a 0.5-percent reduction in fuel consumption and a 1-percent reduction in engine maintenance costs. The safety savings figure is based on a hypothetical 1-percent reduction in the annual costs incurred from accidents. FAA’s contractor based its safety savings calculation on a current loss rate of 2 aircraft per million departures at a cost of $150 million for each loss. According to these annual cost and savings estimates, FOQA would result in net annual savings of $11,800 for 15 aircraft, $892,000 for 50 aircraft, and $2,035,000 for 100 aircraft. See table 3. Although airline officials, pilot organizations, and FAA officials recognize the potential for improving safety and operations through FOQA programs, airline officials and representatives of the pilot organizations were unanimous in their view that data protection issues need to be resolved. Both airline officials and pilots’ representatives stated that the lack of protections for FOQA data has been a major contributor to pilot unions’ reluctance to sign FOQA agreements with airlines and airlines’ reluctance to implement FOQA programs. According to the Flight Safety Foundation’s 1992 report, the greatest impediment to the implementation of FOQA in the United States is associated with the “protection of data from use for other than safety and operational improvement purposes.” Basically, airline managers and pilots have three concerns: (1) that the information may be used in enforcement/discipline actions, (2) that such data in the possession of the federal government may be obtained by the public and the media through the provisions of the Freedom of Information Act (FOIA), and (3) that the information may be obtained in civil litigation through the discovery process. Similar concerns have been expressed in connection with other programs under which information is submitted voluntarily to FAA. Representatives from each of the major airlines as well as the unions that represent pilots from the major airlines—the Air Line Pilots Association, the Allied Pilots Association, the Independent Association of Continental Pilots, and the Southwest Airlines Pilot Association—told us that the airlines and pilots fear the possibility that FOQA data might be used against them in FAA enforcement proceedings. In addition to these concerns, pilots’ representatives were concerned that airline managers could use FOQA data to punish or discipline pilots. “The FAA commits that it will not use information collected by a carrier in an FOQA program to undertake any certificate or other enforcement action against an air carrier participating in such a program or one of its individual employees. Notwithstanding, the FAA reserves its rights to use, for any other purpose, information obtained from sources other than FOQA, including flight-recorder parameters specifically required by the Federal Aviation Regulations. The limitation on the use of information applies only to information collected specifically in an FOQA program.” In an April 1997 letter to the Air Transport Association’s FOQA Steering Committee, the Director of FAA’s Flight Standards Service said that the 1995 policy letter will remain in effect until the regulation on enforcement is issued. The letter stated that a proposed rulemaking setting forth FAA’s enforcement protection policy should be ready by the end of 1997. According to airline officials and a pilot union’s representative, FAA’s delay in promulgating an enforcement regulation has hampered efforts to reach agreement with some pilot unions and threatens the continuance of agreements already reached. One of the issues facing FAA is how broad the enforcement protection should be. FAA attorneys have concluded that it is beyond the scope of FAA’s authority and in violation of its statutory duties to issue a regulation that precludes the agency from taking action if FOQA data reveal that an airplane was not in a condition for safe flight or that a pilot lacked qualifications. Pilots’ representatives, however, have cited the precedent of FAA’s cockpit voice recorder regulation that prohibits the agency from using the record in enforcement actions without exceptions. FAA officials told us that the agency is trying to find the proper balance between carrying out its enforcement responsibilities and providing incentives for implementing safety programs and sharing information with FAA. In similar programs, such as the Aviation Safety Reporting Program, Air Carrier Voluntary Disclosure Reporting Procedures, and Aviation Safety Action Programs, under which safety information is voluntarily submitted, the agency has a policy of addressing alleged violations through administrative actions or forgoing and/or waiving the imposition of any legal enforcement if certain qualifying criteria are met. These programs are intended to encourage prompt reporting of violations, sharing of important safety information, and pilot training to enhance future compliance. While the qualifying criteria differ for each program, these programs exclude actions that are deliberate or demonstrate or raise questions of qualifications. Generally, the parameters of the programs, including the qualifying criteria, are spelled out in the governing advisory circular. It is FAA’s belief that by offering incentives, such as forgoing legal enforcement actions under certain conditions, more problems may be reported and ultimately corrected than could be discovered through other means, such as inspections. Airline Enforcement. Airline managers are working with their respective pilot unions to enter into data-use agreements that include individual protection provisions. According to the Flight Safety Foundation study, data-use agreements with pilot associations have existed since flight data recorders were first required in the late 1950s. Having such an agreement is a precursor to becoming a full partner in the FOQA demonstration project. Generally, these agreements provide, among other things, the company’s assurance not to use the recorded flight data for punitive or disciplinary action against a crew member, or as evidence in any proceeding. Also, to ensure the protection of the company’s employees, the data-use agreements generally provide for the de-identification of the information as soon as possible, usually within 7 days. This practice ensures the confidentiality and anonymity of the flight crew members participating in the program. Both airlines and pilots are concerned that FOQA data could become public and available to the media through the federal FOIA, if such data are provided directly to FAA. The federal FOIA sets forth a policy of broad disclosure of government documents to ensure “an informed citizenry, vital to the functioning of a democratic society.” NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 242 (1978). The Congress understood, however, that “legitimate governmental and private interest could be harmed by release of certain types of information.” FBI v. Abramson, 456 U.S. 615, 621 (1982). Accordingly, the act provides for nine categorical exemptions. In the past, safety information voluntarily submitted to FAA, for example under Air Carrier Voluntary Disclosure Reporting Procedures, has been protected under exemption 4 of FOIA. Exemption 4 protects trade secrets and commercial or financial information obtained from a person that is privileged or confidential. Airline officials and pilots’ representatives expressed concern that FOQA data may not be protectable under this exemption. “(1) the disclosure of the information would inhibit the voluntary provision of that type of information and that the receipt of that type of information aids in fulfilling the Administrator’s safety and security responsibilities; and (2) withholding such information from disclosure would be consistent with the Administrator’s safety and security responsibilities.” 49 U.S.C. 40123. The provision also requires the Administrator to issue regulations to implement the section. The House report accompanying this legislation noted with approval the data-sharing programs such as FOQA and the Committee’s intent to encourage and promote these sorts of innovative safety programs. The report provides that information submitted under these programs would arguably be protected from release under exemption 4 of FOIA; however, the report notes that such a decision to withhold the information would be discretionary with the agency. The report states that to provide assurance that such information is not publicly released, the legislation would prohibit FAA from disclosing voluntarily submitted safety information. According to the report, this protection should “alleviate the aviation community’s concerns and allow the data-sharing safety programs to move forward.” Moreover, the report noted that the provision would not reduce the information available to the public, since the public does not receive the data. Rather, the report states that public safety will be enhanced by the increase in FAA’s understanding of ongoing trends in operations and technologies. FAA is currently working on a rulemaking procedure that will prohibit the release of voluntarily submitted safety data through FOIA. It is expected that the rulemaking will provide the procedures that the agency will use in making the required determinations. It is also expected that FOQA data will be proposed as qualifying for the protection. According to an FAA attorney, the determinations for the FOQA program may be included in the notice of proposed rulemaking on the FOQA nonenforcement policy. The anticipated FOIA rulemaking and the subsequent findings to include the FOQA program within the protection should help mitigate or resolve the industry’s fears about the possible disclosure of FOQA data through FOIA requests if FOQA data are provided directly to FAA. Some airline officials have told us that although they want to improve aviation safety by implementing a FOQA program, the voluntary collection of data may potentially expose airlines to greater liability in civil litigation. FOQA data may indicate conditions outside of desired operating procedures. Airline officials and pilot representatives told us that they are concerned that through broad discovery rules, FOQA data could be inappropriately used or disclosed to the public. The general purpose of discovery is to remove surprise from trial preparation so that parties may obtain the evidence necessary to evaluate and resolve their dispute.Since FOQA data are retained at the airlines and are not currently provided directly to FAA, the focus has been on the airlines’ ability to protect the information. Under federal rules, parties in litigation in federal court are authorized to obtain discovery of any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party. Generally, privileges are narrowly construed and in some cases are qualified. However, even in the absence of a privilege, a district court has broad discretion under the federal rules to issue an order to protect a person from annoyance, embarrassment, oppression, or undue burden or expense if there is a good cause for issuance of the order. Courts generally invoke a balancing test to decide when a protective order is appropriate and how it is to be applied. In two recent cases, the airlines have tried to convince federal courts that voluntarily collected safety data similar to FOQA data should be protected from discovery or, at the very least, covered under a protective order. In both cases, the courts sought to achieve a balance between the airlines’ desire to protect the information and the plaintiffs’ right to a fair trial. In the first case, the court rejected a claim that the information should be protected under the self-critical evaluation privilege but limited the possible uses of the documents it ordered to be produced. This determination was effected through a protective order. In the other case, the court also rejected the claim of self-critical evaluation privilege but at the same time recognized a new qualified privilege for information collected under a partnership program with FAA, the American Airlines Safety Action Program. Although airlines are generally pleased with the court’s decision to grant a qualified privilege to Aviation Safety Action Program materials, it is not clear whether other courts will recognize this new privilege or extend it to other safety and security information that has been voluntarily collected. Nor is there a guarantee that FOQA data or other similar information, if found not to be privileged, would be covered under a protective order. However, we found no instances to date in which FOQA data have been subject to a discovery request. This situation may result from the fact that airlines are just beginning to institute FOQA programs. However, some of the pilot union officials we spoke with noted that discovery is a concern because of the potentially large amounts of data that will be collected. While some in the aviation community believe that one way to ensure protection would be through legislation, there does not appear to be a consensus to seek legislation at this time. Concern has been expressed that the failure of a legislative effort may adversely affect how courts treat voluntarily collected safety information. In the event that FAA does receive FOQA data directly, according to FAA attorneys, it has provisions in place for dealing with requests from private litigants for documents in the agency’s possession. FAA attorneys noted that a request for records from a private litigant, when the agency is not a party to the action, will generally be treated as a FOIA request (see 49 C.F.R. 9.13). If the agency is a party to the litigation, FAA will seek to protect the information, if appropriate, under a claim of government privilege and, if that fails, to release the information under a protective order. We provided copies of a draft of this report to the Department of Transportation and FAA for their review and comment. We met with officials, including FAA’s Deputy Associate Administrator for Regulation and Certification and the demonstration project’s program manager. They agreed with the report and provided several technical corrections, which were incorporated into the report. To obtain the information in this report, we reviewed FAA’s FOQA demonstration project’s requirements, policies, and plans to assist airlines in implementing FOQA programs. We discussed specific details of the project with FAA’s Deputy Associate Administrator for Regulation and Certification as well as the demonstration project’s program manager and contractor. We conducted interviews with FAA and National Aeronautics and Space Administration officials responsible for developing the Aviation Performance Measuring System. We discussed FOQA issues with the National Transportation Safety Board. We interviewed representatives of each of the 10 largest passenger airlines: Alaska, America West, American, Continental, Delta, Northwest, Southwest, Trans World, United, and US Airways; representatives of each of the four unions—the Air Line Pilots Association, the Allied Pilots Association, the Independent Association of Continental Pilots, and Southwest Airlines Pilot Association—representing the pilots of these airlines; and United Parcel Service. We also conducted interviews with the Air Transport Association, the Flight Safety Foundation, and the vendors providing hardware and software for the demonstration project. Last, we interviewed and collected information from foreign airlines and Britain’s Civil Aviation Authority on their respective FOQA efforts. We performed our work primarily at FAA headquarters in Washington, D.C., and conducted our evaluation from January through October 1997 in accordance with generally accepted government auditing standards. As requested, we plan no further distribution of this report until 30 days after the date of this letter unless you publicly announce the report’s contents earlier. At that time, we will send copies to the appropriate congressional committees and the Department of Transportation and FAA. We will also make copies available to others upon request. Please call me at (202) 512-2834 if you have any questions about this report. Major contributors to this report are listed in appendix VI. Flight Operational Quality Assurance (FOQA) had its origin in the use of flight data recorders as mandated by the Civil Aeronautics Administration in 1958. Although the first flight data recorders captured only six parameters—time, airspeed, heading, altitude, vertical acceleration, and time of radio transmission—they were a valuable tool for reconstructing what had occurred before and during accidents. By the 1960s, airlines had begun to monitor data on routine flights. Initially, the monitoring systems captured airworthiness data, but over time they have expanded to include operational data. In the late 1960s, Trans World Airlines began a program to monitor a limited number of parameters related to approaches and landings as flight data recorders received periodic maintenance. At least eight foreign airlines have had FOQA-type programs in operation for over 25 years. A program using data from flight data recorders was begun by British Airways (BA) in 1962 to validate airworthiness criteria. Although limited by today’s standards, BA’s program contained the seeds of a modern, safety-oriented FOQA program. Currently, BA analyzes the flight data from all of the aircraft in its fleet through its Special Events Search and Master Analysis program. Over the years, the number of foreign airlines that have implemented a FOQA-type program has steadily risen. Japan Airlines’ FOQA program of over 15 years includes a printer in the cockpit so that pilots can monitor their own performance. All Nippon Airways began a program to analyze flight data in 1974. Other foreign airlines with established FOQA programs include Scandinavian Airlines System, Royal Dutch Airlines (KLM), and Lufthansa. Many of these airlines are convinced that FOQA is a critical component in their safety efforts and that the program has paid valuable safety dividends over the years. Currently, about 33 foreign airlines and 4 U.S. airlines—United, US Airways, Continental, and Alaska—have implemented FOQA programs (see app. II for the complete list). “The proposal was based on FSF’s conviction, formed by the positive experiences of its international member airlines using FOQA, that the appropriate use of FOQA data by airlines, pilot associations and aircraft and equipment manufacturers would result in a significant improvement of flight safety by identifying operational irregularities that can foreshadow accidents and incidents.” The FSF study concluded that FOQA must proceed in the United States and that the implementation of FOQA by U.S. airlines would have a more positive impact on Part 121 operational safety than any other human factors program included in FAA’s research and development plans. FSF recommended that FAA promote voluntary FOQA programs by instituting a demonstration program in partnership with industry. In 1992, FAA’s Flight Standards Service proposed funding for a demonstration program. On February 9, 1995, FAA announced its plans for an FAA-industry demonstration project, and the Administrator sent a policy letter to the Air Transport Association and the Air Line Pilots Association stating that FAA would not use FOQA data for enforcement purposes, provided that the airlines met certain requirements. At a minimum, FOQA involves the analysis of flight data on a routine basis to reveal situations requiring corrective actions before problems occur. To institute such a program, airlines need methods to capture flight data, transform the data into the appropriate format for analysis, and generate reports and visualizations to assist personnel in analyzing the data. Although different methods are available, the following describes how a representative FOQA program operates; the descriptions are based on the experience of the four U.S. airlines that have implemented FOQA. Management. A typical program is managed and operated by a FOQA manager, one or more analysts, and a FOQA monitoring team (sometimes referred to as the exceedance guidance team) made up of airline pilots who work on FOQA on a part-time basis. Generally, the majority of the monitoring team’s pilots are also representatives of the pilot union. These individuals manage the FOQA program in strict adherence to the agreements made with the pilot union, most notably on ensuring the confidentiality of pilots’ identities. This group is responsible for defining and refining exceedances and parameters, reviewing and analyzing data, and determining and monitoring corrective actions. Data capture. The first step is the capture of data over the duration of the flight. Flight data comprise snapshots of values or measurements from various aircraft systems. Each data item represents information from a discrete source, such as an instrument or sensor. Generally, these data items are referred to as “parameters.” Examples of parameters are “altitude” or “landing gear position.” Recording rates vary, depending on the parameter, ranging from many times per second to about once per minute. Although flight data recorders continuously record, at a minimum, FAA-mandated parameters during every flight, they typically are not designed to provide frequent access to their data but rather to survive the extreme conditions during and after crashes to preserve flight data for accident investigations. These devices are housed in crash-resistant, sealed containers designed to withstand high “g” forces, submersion in water, and fire. Obtaining frequent access to flight data recorders for FOQA purposes, however, would produce increased wear on internal mechanisms and result in shortened mechanical life and increased expense for a very specialized device. Also, flight data recorders may not capture a sufficient number of parameters to be useful for FOQA purposes. Currently, FAA requires from 16 to 29 parameters to be recorded on flight data recorders in transport aircraft; a FOQA program, however, would likely capture many more parameters. Typically, the 200-500 parameters available on modern digital aircraft allow a more comprehensive set of conditions to be monitored. Finally, flight data recorders hold about 25 hours of flight data, a relatively short time period. Instead, some U.S. airlines use a device called a quick access recorder (QAR) to record FOQA data to a removable optical disk or Personal Computer Memory Card International Association (PCMCIA) card. QARs record flight data that are output from the aircraft’s digital flight data acquisition unit (DFDAU), the same device that feeds parameters to the flight data recorder. On average, QARs hold from 100 to 200 hours of flight data. Data transfer. As aircraft receive periodic servicing, the medium (optical disk or PCMCIA card) containing flight data is removed from the QAR and sent to a central location for analysis. A new disk or card is inserted into the QAR for the next round of flights. Airlines retrieve the data on schedules ranging from 3 to 20 days. An alternative to physical recording media is the use of datalink systems to transmit information directly to the ground-based system, eliminating the need to retrieve data from the aircraft. Two participating airlines are investigating the use of automatic wireless data transfer upon landing at specially equipped airports. Data would be transmitted on a radio frequency link from the aircraft to a receiving station after the aircraft lands. In turn, a local area network would transfer the data to the ground analysis station. Data encryption and other methods would be used to ensure the security of the transmitted FOQA data. Data processing and analysis. Each airline has a ground analysis system where airborne collected data are processed and analyzed. The ground analysis system transforms the raw digital flight records into usable form for processing, analyzes the flight information, and generates information on any detected exceedances that represent deviations from normal operating practices or exceptional conditions. The flight data analysis component of the ground analysis system categorizes operational events to be flagged by defining a set of parameters that indicate normal operating envelopes. The associated thresholds for these parameters vary by the type of aircraft and associated operating limits, accepted practices for safe operations, the phase of flight, and the duration of any irregularity. For example, the threshold of selected parameters may be defined for various altitudes, e.g., 1,000, 500, 250, and 100 feet, during landing mode events. Typically, 40 to 80 events are defined and analyzed for a particular aircraft. For example, events might be the ground speed during taxi or the descent rate during approach. The analysis software will track the descent over time to calculate a rate in terms of feet per minute. Depending on the aircraft’s altitude, a descent rate in excess of specified thresholds will trigger an exceedance. Various categorization schemes are used to classify the seriousness of the exceedance. U.S. airlines use two or three categories to describe the seriousness of exceedances, ranging from minor deviations to major deviations. Exceedances are typically specified on the basis of a strategy for identifying those that have the greatest potential for safety and performance considerations. Once the initial exceedance categories and associated parameters have been defined and utilized, they are subject to an ongoing evaluation and refinement process. The ground analysis software also validates the quality and integrity of the collected data and filters out any marginal or transitory irregularities. Ground analysis systems also include protective mechanisms, such as the de-identification of pilot and specific flight information and user access privileges based on assigned passwords. As the data are processed, the flight number and day of the month are removed and saved into a separate controlled file. This step “de-identifies” the FOQA data. The FOQA monitoring team investigates each exceedance to determine what occurred and the severity of the exceedance. An analyst will review the parameter values surrounding the event and other information to determine if the exceedance was valid or if the exceedance was based on bad data, a faulty sensor, or some other invalidating factor. For example, one flight had excessive rudder input on landing that correctly registered as an exceedance. On closer examination, it was determined that because the aircraft was making a cross-wind landing, the use of large rudder input was justified. In this case, the exceedance was deemed invalid and was removed from the exceedance database. Depending on the particular circumstances of the exceedance, the pilot association’s representative may contact the flight crew to gather more information. After reviewing the situation to determine the exceedance’s cause, the FOQA monitoring team and pilot association’s representative will determine any necessary corrective action. Corrective action can range from additional flight crew training, to revisions of the operating procedures, to redesigns of equipment. Trend analysis. On a periodic basis, airlines aggregate and analyze exceedances over time—for example, the number of unstabilized approaches at a particular airport per month, over the last 12 months. This type of analysis provides valuable information to the airline, especially in terms of whether the airline’s performance is improving, holding steady, or deteriorating. This look at aggregate exceedances over time provides airline managers with a new perspective on potential problems that would not be visible otherwise. On the basis of the trend analysis, airline managers can take corrective action to reduce or eliminate these exceedances by focusing on the root causes and making or recommending changes. Data retention. Detailed FOQA data, including exceedances, are destroyed in 30 days or less by three of the four U.S. airlines with FOQA programs. Trend data, however, are kept indefinitely. Aircraft equipping decisions. The U.S. airlines with active FOQA programs have each equipped a portion of their available fleets with QARs. They began their programs by equipping their more modern, technically advanced aircraft with QARs—late-generation aircraft already contain the sensors and advanced digital systems that acquire and control many more flight data parameters than earlier-generation aircraft. Generally, these airlines do not plan to equip any of their older, analog-based aircraft, such as Lockheed L-1011, McDonnell Douglas DC-9 and DC-10, and Boeing 727, 737-100, and 737-200, with QARs to record flight data because these aircraft would be expensive to retrofit and because the airlines plan to retire many of them in the near future. Several U.S. airlines plan to equip all new aircraft with QARs or other technology to capture FOQA data. Some new aircraft, for example, are delivered with QARs as standard equipment. Airlines cited several advantages in having new aircraft delivered with factory-equipped QARs. One advantage is that aircraft are not taken out of service to be retrofitted with equipment. Another advantage is that the additional cost of a QAR can be spread over the finance period of the new aircraft. Depending on the specific goals of a FOQA program, an airline may wish to equip some or all of its fleet to collect flight data. If a program’s goal is to identify broad trends in flight operations and safety, the airline may choose to equip only a portion of its fleet. If a program’s goal, however, is to more closely monitor the flight operations and performance of individual aircraft, the airline may want to equip more or all of its fleet. For an airline that begins by equipping only a portion of its fleet, more aircraft will likely be added to the program so that these data can be monitored as its FOQA program matures and efficiency and maintenance functions are added to the program. Some U.S. airlines, for example, are planning to use FOQA data to cut aircraft maintenance costs by more closely monitoring engine conditions and fuel consumption. “The goal of DEMOPROJ is to facilitate the start-up of the FOQA initiative and to comprehensively assess the cost-benefits and safety enhancement effectiveness of an implemented FOQA program in which airlines voluntarily employ in-flight recorded data to routinely monitor their flight operations.” UTRS facilitated the establishment of collaborative partnerships between FAA, UTRS, and interested airlines. Airlines may participate in DEMOPROJ at one of three levels within the project, ranging from attending meetings and expressing interest to a full partnership with FAA. Level 3 participation refers to the airlines that have not yet established an official FOQA program but attend meetings to learn about FOQA. At Level 2, the airlines already have their own equipment or will acquire equipment using airline funding, but they allow UTRS to monitor and document their program. Level 1 describes a full partnership in which equipment and software are provided through DEMOPROJ. Currently, 11 airlines are participating in DEMOPROJ. The airlines participating at Level 1 are United, US Airways, and Continental. All other participating airlines in DEMOPROJ are at Level 3: Alaska, America West, Delta, Northwest, Trans World, Southwest, Continental Express, and United Parcel Service. The airline participants were selected on the basis of a number of characteristics, including financial stability, management commitment, resource commitment, fleet characteristics, fleet size, aircraft availability, and an approved implementation and operation plan. Additionally, airlines are required to sign nondisclosure and cooperation agreements that define the treatment of confidential and proprietary information, enumerate data access control and security provisions, and specify the responsibilities and contributions of each party. Participating airlines also had to secure agreements with their pilot associations for the collection and analysis of flight data. These airlines made the commitment to record and process FOQA data on all scheduled flights that are equipped with FAA-supplied equipment, participate in periodic project reviews, and allow UTRS to interview airline personnel during the project to document procedures, problems, issues, and solutions. UTRS assisted airlines in determining the equipment best suited to their needs, acquiring the equipment, and delivering it for installation by the airlines. Hardware and software were selected from commercially available, off-the-shelf sources. As part of this effort, the contractor developed an Equipment Overview to facilitate the airlines’ analysis and selection of available equipment. UTRS also monitors and documents the airlines’ FOQA demonstration programs’ policies, procedures, usage, and effectiveness. The contractor is collecting and analyzing information on how each airline is implementing FOQA, including data processing and analysis; the retention of detail and trend data; the selection of flight data parameters; and the adjustment of threshold values, system effectiveness, technical problems, and resource information for establishing and maintaining a FOQA program. These findings are integrated and disseminated among participants throughout the study. UTRS is also collecting information about the projects’ costs and anticipated benefits. The contractor is determining how each airline transforms FOQA data into information and how this information is used in the airline’s decision-making. UTRS holds periodic meetings for all partners to promote the sharing of information and lessons learned. UTRS, with airlines’ and pilot associations’ involvement, is developing a FOQA advisory circular to provide information and guidance to airlines on how to design, implement, and maintain a FOQA program. This document is scheduled to be issued approximately 90 days after FAA issues its proposed rulemaking on enforcement policy in connection with FOQA. UTRS is also developing a cost-benefit analysis that will provide estimates of (1) the costs that an airline would incur when starting and maintaining a FOQA program and (2) potential savings. The cost-benefit study is scheduled to be completed in January 1998. UTRS will issue a technical report and a set of FOQA guidelines in June 1998. The technical report will be an overall description of the technical effort to implement FOQA, summarizing the airlines’ experiences with commercially available equipment and systems. The FOQA guidelines will synthesize the airlines’ experiences in implementing FOQA with a view toward helping new airlines learn from the airlines that have implemented a FOQA program. The guidelines will include information on (1) designing a FOQA program; (2) the start-up and initial operation of a system; (3) the use of FOQA for trend analysis, knowledge building, and decision-making; and (4) critical success factors for implementing a FOQA program. In fiscal years 1995 through 1997, according to the FAA FOQA program manager, FAA allocated $5.5 million for DEMOPROJ. The manager stated that, as of September 26, 1997, DEMOPROJ had expended $2.1 million, including $1.1 million for the purchase of hardware and software for the three Level 1 airline participants. FAA plans to pursue follow-on development focused on the acquisition and use of FOQA information by FAA for safety monitoring purposes. Currently, four U.S. airlines have active FOQA programs: United Airlines, US Airways, Continental Airlines, and Alaska Airlines. These airlines have equipped a number of their aircraft with QARs, from 7 aircraft at Alaska Airlines to 52 aircraft at United Airlines. The number of parameters continuously recorded on the QARs range from about 38 to over 300, depending on the airline and the type of aircraft. United Airlines. United Airlines has the largest and longest-running FOQA program of any U.S. airline, begun in 1995. As of August 1997, United had 52 aircraft equipped with QARs and had collected FOQA data on over 25,000 flights. The aircraft currently equipped include Boeing 737-500s and 777s and Airbus 319s and 320s. United plans to equip over 120 aircraft by 1999, including all new aircraft currently on order. DEMOPROJ has funded the purchase of QARs to equip 15 Boeing 737-500s and additional data analysis packages and computer equipment to run on systems that United had already established. The remainder of the hardware and software was purchased by United, which has been tracking and correcting exceedance events for more than a year. United has identified and taken corrective action to reduce the incidence of a number of safety- and maintenance-related exceedances. US Airways. US Airways has 23 QAR-equipped aircraft. Its program, begun in September 1996, has collected FOQA data on over 18,000 flights to date. Aircraft equipped include Boeing 737-400s and 767s. US Airways, however, characterizes its program as being in the data collection and trouble-shooting phase and just beginning the data analysis and trending phase. DEMOPROJ has funded the purchase of QARs to equip 15 Boeing 737-400s and a ground analysis system. Six additional 737-400s have been equipped with QARs paid for by a separate FAA program, the Structural Loads Program (see app. III). In addition to these aircraft, US Airways is in the process of purchasing QARs and equipping 12 Boeing 767s. Data from all QARs are being accessed by both programs. DEMOPROJ has also funded a trial program of a wireless ground datalink system with five specially equipped Boeing 757s. Continental Airlines. Continental has equipped 15 Boeing 737-500s with QARs. In addition, Continental plans to equip with QARs all new aircraft on order. These include Boeing 737-500s, –600s, –700s, and –800s as well as a number of 757s. Begun in December 1996, Continental’s program has analyzed the flight data from over 11,000 flights to date. According to the program manager, this program is in the data collection phase and will soon be making the transition to the data analysis and trending phase. Alaska Airlines. Alaska Airlines has equipped six McDonnell Douglas MD-80s and one Boeing 737-400 with QARs. In addition, Alaska has equipped a flight simulator with equipment to record hundreds of flight parameters. Begun in July 1996, the program has analyzed the flight data from over 5,000 flights to date. Still in the early stages of the program, Alaska plans to “go slow” and refine its program. Alaska’s FOQA manager said that the airline may eventually equip every aircraft in its fleet. Unlike United, US Airways, and Continental, which are Level 1 participants in DEMOPROJ, Alaska is a not yet a full partner in DEMOPROJ because it has only recently secured the required agreement with its pilot union on FOQA. The airline, however, has received six QARs and a ground analysis system from FAA’s Structural Loads Program (see app. III). Alaska uses the equipment and analysis system for both the Structural Loads Program and FOQA. Aviation Performance Measuring System. In 1993, FAA contracted with the National Aeronautics and Space Administration (NASA) to establish and demonstrate the feasibility of developing an Aviation Performance Measuring System (APMS). The objective of the APMS effort is to develop tools and methodologies to allow large quantities of flight data to be processed in a highly automated manner to address questions relating to operational performance and safety. APMS is concerned with converting flight data into useful safety information in support of the national air transport system, airlines, and air crews. Although concerned with all aspects of flight operations, APMS primarily will develop an objective method for continuously evaluating air crews’ technical performance in support of FOQA and the Advanced Qualification Program (discussed below). Current FOQA programs focus on exceedances; APMS, however, will expand FOQA’s scope by utilizing all flight data. The tools will facilitate multiple functions, including the acquisition of flight data, their storage in a database management system, the study of statistical characteristics and trends, the development of “data mining” techniques, and better methods of visualizing flight data. APMS will also investigate flight animation capabilities to assist flight crews in replaying and understanding exceedances. Finally, APMS will facilitate the sharing of data among databases, products, and interested parties. According to NASA officials, one of the most important components to be developed by APMS is a risk assessment tool to measure how much risk is associated with certain activities, for example, the riskiness of flights to/from certain airports. After APMS began in 1993, the project documented the status of the technologies, systems, and software used by foreign airlines with FOQA programs. According to the NASA project manager, the project has conducted user needs studies at Alaska Airlines, United Airlines, and US Airways and has commitments to conduct user needs studies at America West, Trans World Airlines, Comair, and United Parcel Service. The APMS team is also building prototype systems at several airlines. Alaska Airlines is now in its third prototype APMS system. The project was scheduled to begin building the initial prototype system at United Airlines on November 1, 1997. Eventually the developed technology will be transferred to industry so that a relatively low-cost system will be commercially available. APMS management hopes to initiate the transfer of this technology to commercial vendors in 12 to 18 months. To date, NASA has received $2.9 million in funding from FAA for the development of APMS. NASA contributed $300,000 to the project in fiscal year 1997. The extent of future NASA and FAA funding for further development and implementation of APMS has not yet been determined. Structural Loads Program. As part of FAA’s Aging Aircraft Research and Development Program, the Structural Loads Program is a cooperative FAA and NASA effort to collect information about the external loads to which airframe components are subjected during flight. The collected data will be used to develop and maintain an extensive database of transport aircraft usage to continuously validate and update flight and landing load airworthiness certification standards on the basis of actual measured usage. To date, the Structural Loads Program has equipped with QARs six MD-80s at Alaska Airlines and six Boeing 737-400s at US Airways. Data collected from these QARs are also being made available for FOQA analysis. Advanced Qualification Program. FAA’s Advanced Qualification Program (AQP) is an alternate method of qualifying, training, certifying, and ensuring the competency of flight crew members and other operations personnel subject to the training and evaluation requirements of Federal Aviation Regulation (FAR) parts 121 and 135. AQP’s intent is to achieve the highest possible standards of individual and crew performance without undue increases in training costs. FOQA and APMS will be used to continuously evaluate air crews’ technical skills and airlines’ procedures and training in support of AQP. For example, FOQA data could be used to identify problems occurring during recurrent flight simulator training and to highlight training areas for increased emphasis. Global Analysis and Information Network. The Global Analysis and Information Network (GAIN) is a concept being actively explored by the aviation community to facilitate the analysis, sharing, and dissemination of aviation safety information with a goal of achieving zero accidents. GAIN would have many information sources—FOQA information would be one of the most important. Proposed by FAA in May 1996, GAIN will function as a “significantly improved operational early warning capability that is sensitive enough to detect and alert the aviation community to existing and emerging problems.” Information will be shared among airlines and manufacturers and at the different functional levels within organizations. Although GAIN is still in the conceptual phase, the aviation community and FAA are working to address the needs and concerns of prospective members as well as explore potential designs for a prototype system. FAA has implemented a number of voluntary programs involving the self-reporting of safety-related information to enhance aviation safety. Although these programs involve the reporting of information by people instead of by automated systems, they are similar to FOQA in that they involve voluntary efforts to identify and correct potential safety problems. We have highlighted three such programs. Aviation Safety Reporting Program. Established by FAA in 1975 and administered by NASA, the Aviation Safety Reporting Program (ASRP) promotes the voluntary reporting of problems into the Aviation Safety Reporting System (ASRS). Under 14 C.F.R. 91.25, FAA will not use reports submitted under the program in any enforcement action (except accidents or criminal offenses). Under FAA’s policy, although a finding of violation may be made, no sanction will be imposed if (1) the violation was inadvertent and not deliberate, (2) the violation did not involve a criminal offense or an accident or an action that discloses a lack of qualification or competency, (3) the person filing the report has not been found in any prior FAA enforcement action to have committed a violation of federal aviation regulations or law within a period of 5 years prior to the occurrence, and (4) the report was filed within 10 days after the violation. AC 00-46D (Feb. 26, 1997), “Aviation Safety Reporting Program.” Air Carrier Voluntary Disclosure Reporting Procedures. Initiated by FAA in 1990 for air carriers, the Voluntary Disclosure Procedures encourage airlines to promptly disclose to FAA any instances of noncompliance with the requirements for maintenance, flight operations, and security. FAA initiated a policy of forgoing civil penalty actions if five conditions are met: (1) the certificate holder immediately notifies FAA of the apparent violation after detecting it and before the agency learns of it; (2) the apparent violation is inadvertent; (3) the apparent violation does not indicate a lack, or reasonable question, of the basic qualification of the certificate holder; (4) immediate action must have been taken, or begun, upon discovery to terminate the conduct that resulted in the apparent violation; and (5) the certificate holder must develop and implement a comprehensive solution satisfactory to the FAA. AC 120-56 (Jan. 23, 1992), “Air Carrier Voluntary Disclosure Reporting Procedures.” Aviation Safety Action Programs. FAA has established several demonstration Aviation Safety Action Programs (ASAP), including the USAir Altitude Awareness Program, the Alaska Airlines Altitude Awareness Program, and the American Airlines Safety Action Program.These programs established incentives to encourage the employees of the air carriers that are participating in the programs to disclose information and identify possible violations of the Federal Aviation Regulations without fear of punitive legal enforcement sanctions. FAA has recently expanded the use of ASAP through the implementation of a 2-year demonstration program. Under this program, apparent violations will normally be addressed with administrative action if the apparent violations do not involve (1) deliberate misconduct, (2) a substantial disregard for safety and security, (3) criminal conduct, or (4) conduct that demonstrates or raises a lack of qualifications. For apparent violations not excluded under an ASAP, neither administrative action nor punitive legal enforcement actions will be taken against an individual unless there is sufficient evidence of the violation other than the individual’s safety-related report. AC 120-66 (Jan. 8, 1997), “Aviation Safety Action Programs (ASAP).” Airline officials and pilot unions’ representatives are concerned about the use of discovery in civil litigation to reveal voluntarily collected safety information. In two recent cases, the courts have sought to find a balance between the airlines’ desire to protect such information and the plaintiffs’ right to a fair trial. In one case, the documents were required to be produced, but under a protective order. In the other case, the court recognized a new qualified privilege. In 1995, the United States District Court, District of South Carolina, Columbia Division, rejected USAir, Inc.’s argument that certain safety data were protected under the self-critical evaluation privilege. Court Order of Oct. 26, 1995, In re Air Crash at Charlotte, North Carolina, on July 2, 1994, MDL Docket No. 1041 (D.S.C. 1995). This privilege, when recognized, protects documents that reflect self-analysis. “ther courts have generally required that the party asserting the privilege demonstrate that the material to be protected satisfies at least three criteria: first, the information must result from a critical self-analysis undertaken by the party seeking protection; second, the public must have a strong interest in preserving the free flow of the type of information sought; finally, the information must be of the type whose flow would be curtailed if discovery were allowed. . . .To these requirements should be added the general proviso that no document will be accorded a privilege unless it was prepared with the expectation that it would be kept confidential, and has in fact been kept confidential.” The court found that the safety documents did not meet the criteria for the privilege. According to the court, the most significant stumbling block for the airline was meeting the third criterion—that the flow of the information would be curtailed if discovery was allowed. Specifically, the court found that the airline industry is highly competitive and tightly regulated and that airlines have a keen interest in advancing and promoting safety as well as services. Thus, the court reasoned that the airlines were likely to conduct internal audits. The court reasoned that while the disclosure of such audits to competitors would deter their use in the future, disclosure for limited use in litigation is unlikely to have such an impact. “. . . plaintiff and their counsel shall be prohibited from disclosing, disseminating or communicating in any manner to any person or entity not involved in this litigation any portion of the information contained in those documents. . . . Plaintiff and their counsel shall be further precluded from utilizing these documents or the information contained in them for any purpose other than for this multidistrict litigation. “In furtherance of this order, plaintiffs’ counsel shall insure that each person who is to be given access to the referenced documents, including plaintiff and their attorneys, shall first sign a document acknowledging that they are aware of and will comply with this order. Plaintiffs’ counsel shall maintain a list of those persons which shall be provided to USAir’s attorney upon request, subject to protection upon application to this court for good cause shown.” Court Order of Nov. 14, 1995, In Re: Air Crash at Charlotte, North Carolina, on July 2, 1994, MDL Docket No. 1041 (D.S.C. 1995). In October 1996, the Supreme Court let stand the district court order rejecting the airline’s assertion of a self-critical evaluation privilege. 65 U.S.L.W. 3221 (Oct. 8, 1996). Recently, in another case involving documents prepared by American Airlines’ employees collected under the American Airlines Safety Action Program, the United States District Court, Southern District of Florida, on a motion for reconsideration, also rejected the airline’s self-critical analysis privilege claim. However, in this case the court recognized a new qualified privilege to protect these documents. In re Air Crash Near Cali, Colombia, on Dec. 20, 1995, 959 F. Supp. 1529 (S.D. Fla. 1997). “Even assuming that the materials prepared by American’s pilots in conjunction with the ASAP program may be of a type whose creation might be curtailed if discovery is allowed, these materials were prepared for dissemination to representatives of entities unaffiliated with American (a federal regulatory agency and a union).” The court, however, recognized a new, qualified common law privilege for the ASAP materials. In recognizing a new privilege, the court considered the principles for evaluating claims of federal common law privileges recently articulated in the Supreme Court case, Jaffee v. Redmond, __ U.S. __, 116 S. Ct. 1923 (1996): (1) the “private interest” involved—in other words whether the dissemination of the information would chill the frank and complete disclosure of fact; (2) the “public interests” furthered by the proposed privilege; (3) the “likely evidentiary benefit that would result from the denial of the privilege;” and (4) the extent to which the privilege has been recognized by state courts and legislatures. “The ASAP materials in dispute . . . were prepared voluntarily, in confidence and for use in a discrete, limited context in cooperation with the FAA and the pilot’s union. There is a genuine risk of meaningful and irreparable chill from the compelled disclosure of ASAP materials in connection with the pending litigation.” The court specified that the privilege should be qualified. Accordingly, the plaintiffs could overcome the privilege with a persuasive showing of need and hardship. The plaintiffs did not make such a showing in the case. Mindi Weisenbloom The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on: (1) how the Federal Aviation Administration's (FAA) and U.S. airlines' Flight Operational Quality Assurance (FOQA) programs will enhance aviation safety; (2) the costs and benefits of such programs; and (3) the factors that could impede their full implementation and actions that could be taken to overcome any impediments. GAO noted that: (1) the early experience of domestic airlines with established FOQA programs, as well as the testimony of foreign airlines with extensive experience in this area, attests to the potential of such programs to enhance aviation safety by identifying possible safety problems that could lead to accidents; (2) airlines have used FOQA programs to identify potential problems that were previously unknown or only suspected; (3) where potential problems where already known, airlines have used these programs to confirm and quantify the extent of the problems; (4) on the basis of analyses of flight data, airlines have taken actions to correct problems and enhance aviation safety; (5) costs associated with implementing a FOQA program depend on a large number of factors, including the technology used to capture flight data, the number and types of aircraft to be equipped with this technology, and personnel costs; (6) although the program is primarily viewed as a safety program, U.S. and foreign airlines have reported financial benefits as well; (7) with additional data on aircraft systems and engine conditions, airlines are better able to achieve optimum fuel consumption and avoid unneeded engine maintenance; (8) enhanced safety should result in lower costs over time as a result of accidents avoided and lower insurance premiums; (9) FAA's estimates suggest a net savings from 50 aircraft of $892,000 per year; (10) the primary factor impeding the implementation of FOQA programs among the major domestic carriers is the resolution of data protection issues; (11) airline managers and pilots raise three significant data protection concerns: (a) use of data for enforcement and disciplinary purposes; (b) disclosure to the media and the public under the provisions of the Freedom of Information Act; and (c) disclosure through the civil litigation discovery process; (12) FAA has taken a number of actions that may resolve these issues, although it is not clear whether the aviation community will be satisfied with FAA's actions; (13) FAA has begun work on a rulemaking procedure to establish what protections from enforcement actions, if any, will apply to information submitted to FAA under a FOQA program; (14) Congress enacted legislation, and FAA has begun work on a rulemaking procedure, that would prohibit the Administrator from disclosing voluntarily submitted safety information under certain circumstances; and (15) airlines seek to protect voluntarily collected safety information from disclosure in civil litigation on a case-by-case basis. |
The process of issuing and enforcing regulations is one of the basic tools of government. The main elements of the federal rulemaking process are described in section 553 of the Administrative Procedure Act (APA), which was enacted in 1946. The APA generally requires agencies to (1) publish a notice of proposed rulemaking in the Federal Register; (2) allow interested persons an opportunity to participate in the rulemaking process by providing “written data, views, or arguments”; and (3) publish the rule 30 days before it becomes effective. The notice of proposed rulemaking must include reference to the legal authority under which the rule is proposed and state the time, place, and nature of public rulemaking proceedings. In some cases, agencies issue advance notices of proposed rulemaking before a formal notice is published to receive public reaction to a rule as early as possible. Although the federal government has long regulated economic activity, several major new statutes were enacted in the 1960s and 1970s that prompted regulation in such areas as environmental quality, workplace safety, and consumer protection. By the 1980s, an array of federal regulations were in place that affected many of the decisions made by businesses and by other governmental units. For some time, state, local, and tribal governments have expressed concerns about the difficulty of complying with federal regulatory mandates without additional resources. Business groups have voiced similar concerns about rising costs that they said were being imposed by federal regulations. Both the executive and legislative branches have responded to these public and private sector concerns by attempting to reform the federal regulatory process. For example, in 1981, President Reagan issued Executive Order 12291 on “Federal Regulation,” which gave OMB the authority to review all new regulations for consistency with administration policies. The order also required agencies to prepare a “regulatory impact analysis” for each major rule, describing the costs, benefits, and alternatives to the rule. In September 1993, President Clinton issued Executive Order 12866 on “Regulatory Planning and Review,” which, among other things, established “principles of regulation” (e.g., requiring agencies to “identify and assess alternative forms of regulation” and to tailor their regulations to “impose the least burden on society”) and specific processes that agencies had to follow (e.g., conduct cost-benefit analyses for all economically significant rules). This executive order also states that agencies must, wherever feasible, “seek views of appropriate tate, local, and tribal officials before imposing regulatory requirements that might significantly or uniquely affect those governmental entities.” In October 1993, the President issued Executive Order 12875 on “Enhancing the Intergovernmental Partnership,” which, among other things, requires each agency to “develop an effective process to permit elected officials of state, local, and tribal governments to provide meaningful and timely input in the development of regulatory proposals containing significant unfunded mandates.” The President also made regulatory reform one of the central elements of the administration’s National Performance Review (NPR), which is a major management reform effort that was started in March 1993 under the direction of Vice President Gore and is intended to identify ways to make the government work better and cost less. Congress has been equally active in attempting to reform the federal regulatory process. For example, in 1980 Congress enacted the Regulatory Flexibility Act, which requires agencies to assess the impact of their regulations on small entities (e.g., businesses and governments) and to publish their plans for new regulations. During the 104th Congress, numerous legislative initiatives were introduced that attempted to reform the regulatory process. One of the first such efforts was UMRA, which was introduced as S. 1 in the Senate on January 4, 1995, and was enacted on March 22, 1995. Title I of UMRA established new procedures designed to ensure that Congress fully considers the potential effects of unfunded federal mandates before imposing them on state, local, and tribal governments or the private sector. Among other reforms, the procedures call for CBO to provide statements to authorizing committees about whether reported bills contain mandates and, if so, what their costs would be. Title II of UMRA, entitled “Regulatory Accountability and Reform,” contains the requirements imposed on federal agencies during the rulemaking process, and took effect on the day the act was signed by the President. Section 201 states that “ach agency shall, unless otherwise prohibited by law, assess the effects of ederal regulatory actions on tate, local, and tribal governments, and the private sector (other than to the extent that such regulations incorporate requirements specifically set forth in law).” Other sections in title II require agencies to prepare a written statement containing specific descriptions and estimates for any proposed rule or any final rule for which a proposed rule was published that includes any federal mandate that may result in the expenditure of $100 million or more in any 1 year by state, local, and tribal governments, in the aggregate, or the private sector—one of the items required in the written statement is a qualitative and quantitative assessment of the anticipated costs and benefits of the federal mandate (sec. 202); “identify and consider a reasonable number of regulatory alternatives” and select the least costly, most cost-effective, or least burdensome alternative (or explain why that alternative was not selected) for each rule for which a written statement is prepared (sec. 205); develop a plan in which agencies provide notice of regulatory requirements to potentially affected small governments; enable officials of those governments to provide input in the development of regulatory proposals; and inform, educate, and advise those governments on compliance with the requirements before establishing any regulatory requirements that might “significantly or uniquely” affect small governments (sec. 203); and develop an effective process to permit elected officers of state, local, and tribal governments (or their designees) to provide input in the development of regulatory proposals containing significant intergovernmental mandates (sec. 204). Section 206 of UMRA requires the OMB Director to collect the written statements prepared by the agencies and periodically forward them to the CBO Director. Section 207 requires the OMB Director to establish pilot programs in at least two agencies to test innovative and flexible regulatory approaches to reduce the reporting and compliance burden on small governments while meeting statutory goals and objectives. Section 208 requires the OMB Director to submit annual reports to Congress detailing agencies’ compliance with title II of UMRA. Title III of UMRA required the Advisory Commission on Intergovernmental Relations to conduct a study reviewing federal mandates, and title IV established judicial review under the act. The committee reports for the Senate bill that ultimately resulted in UMRA indicate that Congress was aware that the bill duplicated existing requirements in many respects. For example, the report by the Senate Committee on the Budget stated that, except for the requirement for small government plans, “the bill will not impose new requirements to implement in the regulatory process that are not already required under Executive Orders 12866 and 12875.” However, the report by the Senate Committee on Governmental Affairs stated that the “spirit and intent” of the written statement requirements involving cost-benefit analysis were “meant to be entirely consistent with the relevant portions of [Executive Order] 12866.” Therefore, Congress may have expected that the scope of these requirements would be the same as the scope of the executive order and would cover all economically significant rules. Within OMB, the Office of Information and Regulatory Affairs (OIRA) has primary responsibility for monitoring agency compliance with title II of UMRA. On March 31, 1995, the OIRA Administrator issued guidance for implementing title II. The guidance generally repeated the requirements in UMRA and did not further define many of the key words or phrases in the act (e.g., “expenditure” or “significantly or uniquely affect small governments”). The OIRA guidance noted parallels between the requirements in (1) sections 202 and 205 of UMRA and Executive Order 12866 and (2) section 203 and the Regulatory Flexibility Act. “Each agency has developed processes suited to its needs, appropriate to its mission, and responsive to its constituents. While more work remains to be done, real progress has occurred in both the agency infrastructure under which consultations take place, and the way that agencies use this structure to analyze specific rules in ways that reduce costs and increase flexibility for all levels of government, and for the private sector, in implementing important national priorities.” Despite the enactment of UMRA and other reform initiatives, concerns have continued to be raised about the effect of federal regulations on the public and private sectors. As a result, proposed legislation to reform the federal rulemaking process was introduced in the 105th Congress. One such proposal is S. 981, the “Regulatory Improvement Act of 1997,” which was introduced in June 1997. S. 981 addresses many of the same issues as Executive Order 12866 and UMRA, including cost-benefit analysis, examination of regulatory alternatives, and the transparency of the regulatory process. However, the bill goes beyond the executive order and UMRA’s requirements in these areas and adds some new elements to the rulemaking process. For example, S. 981 would require agencies to conduct cost-benefit analyses for all “major” rules that have an annual effect on the economy of $100 million—a much broader standard than in UMRA ($100 million in expenditures by certain regulated entities). S. 981 also would require agencies to conduct risk assessments and peer reviews for these major rules, and the bill would apply to many of the independent regulatory agencies. Neither UMRA nor Executive Order 12866 specifically requires risk assessments or peer reviews, and neither applies to independent regulatory agencies. S. 981 also contains judicial review provisions that are not in UMRA or the executive order. To address our overall objective of determining the effect of title II of UMRA on agencies’ rulemaking actions, we reviewed the substantive requirements in title II and determined how federal agencies have implemented those requirements. To determine if there were rules for which written statements under section 202 of UMRA should have been on file at CBO but were not, we first obtained a list of rules from the Regulatory Information Service Center (RISC) that its database indicated were economically significant rules published in the Federal Register between March 22, 1995, and March 22, 1997—the 2 years after the effective date of title II of UMRA. We focused our review on economically significant rules because rules that would result in the expenditure of $100 million in any 1 year by state, local, and tribal governments or the private sector (one of the factors necessitating an UMRA written statement) should be a subset of those rules that are considered economically significant according to Executive Order 12866. We reviewed each of the economically significant rules promulgated during this 2-year period for which written statements were not on file at CBO and noted any explanations presented in the rules regarding why they were not covered by UMRA’s section 202 written statement requirements. We asked follow-up questions regarding why no written statement was on file at CBO for these rules at OIRA and at the four agencies that had promulgated the greatest number of both economically significant rules and rules for which written statements were on file—USDA, HHS, DOT, and EPA. Using this and other information that we collected about the rules, we then determined whether any of them should have had an UMRA written statement on file at CBO. Certain terms in UMRA that dictate whether a written statement should be prepared are not defined in the act, the conference report, or OMB guidance. Therefore, we had to develop working definitions of those terms to determine whether agencies should have prepared written statements for the rules in our review. We defined an “expenditure” as a payment made by either the public or private sector, but we did not include lost income by those groups or payments made by other entities (e.g., the federal government). We defined an “enforceable duty” as a responsibility or obligatory task that can be compelled by the force of government. We defined a “voluntary” federal program as one in which participants are involved of their own choice. We had to define other terms to determine whether the written statements met UMRA requirements and whether the agencies should have prepared small government plans under section 203 and developed consultation processes under section 204. For example, we defined “qualitative” cost-benefit assessments as any nonnumerical measure of the effects of a rule (e.g., “substantial” costs or “would save many lives”). If an agency’s written statement contained an estimate of the rule’s cost in any forthcoming period, we considered that to be evidence of “future compliance costs.” We used definitions that were suggested or used by OMB or rulemaking agencies to describe the possible scope of other terms (e.g., a “significant ederal intergovernmental mandate” that triggers the consultation process requirement in sec. 204). We reviewed all of the written statements that were on file at CBO (plus one statement that OMB had not forwarded to CBO) and, using a data collection instrument modeled on our interpretation of the statute, determined whether the statements met the specific requirements of section 202 of UMRA and whether the statements contained information relevant to section 205. We interviewed officials in the four selected agencies to (1) ensure that all required elements in their statements had been identified, (2) verify our coding of those elements, and (3) obtain other information. To determine what consultation processes the selected agencies established under section 204, we reviewed descriptions of those processes in OMB’s annual reports on UMRA, interviewed officials in the four selected agencies, and obtained and reviewed copies of any relevant documents in those agencies. To determine whether the agencies had developed small government plans required under section 203, we focused on all final rules that had been promulgated during the 2-year period included in our review and that appeared on the list of rules that RISC identified as economically significant or that we identified as economically significant. We reviewed the Unified Agenda of Federal Regulatory and Deregulatory Actions to determine whether the agencies had previously identified the rules as having an effect on small governments. We also obtained comments from officials in the Small Business Administration’s (SBA) Office of Advocacy on whether they believed that any of the final rules would have an effect on small governments. Finally, we asked officials in each of the four selected agencies whether they had developed small government plans. To determine the status of the pilot programs established by OMB under section 207, we interviewed appropriate officials in the two agencies with such pilots and reviewed any available documentation for those pilots. We also conducted a legal review to determine whether any judicial decisions had been issued regarding agencies’ compliance with the written statement and small government plan requirements of UMRA. However, we did not identify cases that might have been filed with the courts regarding UMRA compliance but that had not yet been decided. We did not validate all of the databases we used in this review. The methodology we used in this review was not designed to identify all of the possible effects that UMRA may have had on agencies’ rulemaking actions. For example, we did not attempt to determine whether UMRA prevented agencies from proposing rules with significant mandates or caused them to eliminate certain burdensome effects that otherwise would have been contained in the rules that were proposed. Although we attempted to determine whether agencies’ written statements satisfied the basic requirements of sections 202 and 205 of UMRA, we did not assess the quality of the agencies’ economic analyses prepared to satisfy these provisions. For example, although we determined whether the written statements contained qualitative and quantitative assessments of the anticipated costs and benefits of a federal mandate, we did not attempt to determine whether an agency’s economic analysis used sound economic assumptions or methodologies. Neither did we determine whether all relevant quantitative and qualitative costs and benefits had been identified or whether the alternatives had been adequately considered. Any comments we received from officials in the four selected agencies are not generalizable to other federal agencies. We conducted our work between February 1997 and November 1997 at OMB, USDA, HHS, DOT, and EPA headquarters in Washington, D.C., in accordance with generally accepted government auditing standards. We provided a draft of this report for review and comment to the Director of OMB; the Secretaries of Agriculture, HHS, and Transportation; and the Administrator of EPA. Their comments are reflected in the agency comments section of this report. Section 202 of UMRA says that, unless otherwise prohibited by law, agencies must prepare a written statement for each applicable rule before promulgating any general notice of proposed rulemaking or any final rule for which a notice of proposed rulemaking was published. At our request, RISC provided us with a list of 132 rules that its database indicated were economically significant under Executive Order 12866 and that had been published in the Federal Register between March 22, 1995, and March 22, 1997. However, we determined that 22 of the rules on the RISC list were not economically significant and, therefore, were excluded from our review; 3 of the rules on the RISC list had been “promulgated” before UMRA’s March 22, 1995, effective date and, therefore, were excluded from our review; and 3 economically significant rules had been promulgated during this period that were not in the RISC database and, therefore, were included in our review. Therefore, we focused on a total of 110 economically significant rules in this portion of our review. Section 202 written statements were on file at CBO for 29 of these 110 rules. We discovered that one of the three additional economically significant rules described what the issuing agency had done to comply with UMRA, but OMB had mistakenly not forwarded a copy of the written statement for the rule to CBO. We included this rule with the 29 for which written statements were on file at CBO. Subtracting these 30 rules from the 110 economically significant rules promulgated during this 2-year period yielded a total of 80 rules that were economically significant but for which no written statement had been prepared. (See app. I for a list of these 80 economically significant rules for which no written statements were on file at CBO. See app. II for a list of the 30 rules for which written statements were on file at CBO.) Of the 80 economically significant rules that were promulgated between March 22, 1995, and March 22, 1997, for which no written statement was on file at CBO, the issuing agencies frequently did not mention UMRA in the rules. Those agencies that did mention UMRA in their rules frequently said that the rules did not contain a federal mandate and/or did not result in $100 million in expenditures by state, local, and tribal governments or the private sector and, therefore, were not covered by sections 202 or 205 of the act. We compared the substance of these 80 economically significant rules to the requirements in UMRA and concluded that 2 of the rules were required to have an UMRA written statement on file at CBO. No written statements appeared to be required for 78 of the rules for a variety of reasons as follows. One DOT rule established the light truck fuel economy standard for 1998 at 20.7 miles per gallon—the level at which Congress had required DOT to set the standard in the Department of Transportation and Related Agencies Appropriation Act of 1996. Because this rule incorporated requirements that were specifically set forth in law, section 201 of UMRA allowed DOT not to assess the rule’s effects on state, local, and tribal governments or the private sector. Eighteen of the rules were not notices of proposed rulemaking or final rules for which such notices had been published. Section 202 of UMRA states that a written statement must be prepared before promulgating any general notice of proposed rulemaking and before promulgating any final rule for which a general notice of proposed rulemaking was published. The rules without proposed rules included notices, advance notices of proposed rulemaking, and interim final rulemakings. For example, HHS issued six notices for the Medicaid and Medicare programs, each of which had associated costs of more than $100 million, but none of which had associated proposed rules. USDA issued a final rule involving the implementation of several farm programs with associated costs that the agency estimated at $36.8 billion. However, there was no notice of proposed rulemaking for this rule. Forty-seven of the rules had notices of proposed rulemaking but were not “mandates” as defined in UMRA. Section 202 of UMRA states that the written statement requirement applies to rules that include a federal mandate, which is defined in title I of the act as an “enforceable duty” that is not “a condition of ederal assistance” or “a duty arising from participation in a voluntary ederal program.” Three of the 47 rules did not appear to impose an enforceable duty. For example, one USDA rule allowed the importation of meat from Argentina and Mexico. Although USDA estimated that the rule could cause American livestock producers to lose as much as $190 million in income each year, the rule did not impose an enforceable duty on those producers. Forty-four of the 47 rules appeared to impose an enforceable duty, but that duty was either as a condition of federal assistance (33 rules) or arose from participation in a voluntary program (11 rules). For example, although USDA’s 1996 upland cotton program regulation appeared to impose the requisite enforceable duty (that farmers not plant cotton), the duty arose only as a condition of federal assistance. USDA estimated that this regulation would cost the federal government between $0.5 and $1.5 billion in 1996. Twelve of the rules met all of the aforementioned standards but were unlikely to result in expenditures of more than $100 million in any 1 year. For example, one of the rules issued by the Food and Drug Administration within HHS established new food labeling requirements. The rule was considered economically significant because the agency had estimated its benefits at more than $100 million per year. However, the agency estimated that the rule would cost the private sector only $4 million in the first year, and that costs would decline in subsequent years. Figure 1 summarizes this information, showing how many of the 110 economically significant rules that were promulgated during this 2-year period did and did not have written statements on file at CBO, and why many rules did not appear to require such statements. Table 1 shows the number of economically significant rules for which written statements were and were not on file at CBO and the total number of such rules, by department or agency. The two rules that we concluded should have had UMRA written statements on file at CBO but did not were EPA’s proposed national ambient air quality standards for ozone and particulate matter. As we said in our August 1997 report on these rules, we disagree with EPA’s interpretation of UMRA’s requirements regarding the written statements in one respect. EPA contended that a written statement was not required for these rules under section 202 of UMRA, which states that a statement need not be prepared if “otherwise prohibited by law.” However, although EPA was not required to include cost estimates described in sections 202(a)(2), (3), and (4) of UMRA because of Clean Air Act prohibitions, it was still required to identify the provision of federal law under which rules were being promulgated and to describe its outreach efforts with state, local, and tribal governments under sections 202(a)(1) and (5). Nevertheless, EPA appears to have satisfied the substantive UMRA written statement requirements. Subsection 202(a) of UMRA states that the written statements that agencies are required to prepare for certain rules must (1) identify the provision of federal law under which the rule is being promulgated; (2) contain a qualitative and quantitative assessment of the anticipated costs and benefits of the mandate; and (3) for certain rules, describe the extent of the agency’s prior consultation with representatives of affected state, local, and tribal governments. UMRA also says that the written statements should contain estimates, if the agency determines they are “reasonably feasible,” of future compliance costs; effects on the national economy; and any disproportionate budgetary effects on particular regions, governments, communities, or segments of the private sector. The 30 written statements that the agencies provided to OMB during the 2 years following the enactment of UMRA were usually contained in the preambles to the rules themselves and any associated economic analyses. Only 2 of the 30 rules had a separate written statement prepared specifically to comply with UMRA. About half of the remaining 28 rules had specific sections in the preambles describing the actions that the agencies had taken under the section 202 requirements. The UMRA sections in the preambles were typically less than a page in length. In the other half of the 28 rules, there were no specific sections dealing with UMRA compliance. However, the act does not require agencies to prepare a separate UMRA written statement or a separate UMRA section. Subsection 202(c) of UMRA states that an agency “may prepare any statement required under subsection (a) in conjunction with or as part of any other statement or analysis, provided that the statement or analysis satisfies the provisions of subsection (a).” Our analysis indicated that the written statements generally met most of the requirements of section 202 of UMRA. All of the 30 statements identified the provision of federal law under which the rules were being promulgated. All but one of the statements contained quantitative cost-benefit information, and a few others did not contain information on qualitative costs. About half of the statements contained descriptions of the agencies’ prior consultations with state, local, and tribal government representatives. However, there was no indication in the remaining statements that the rules would affect those governments to the degree that a description of their consultations was required. Subsection 202(a)(5) of UMRA states that the written statements must describe the agency’s intergovernmental consultations “under section 204.” As will be discussed later, section 204 may only apply to a few of the 110 economically significant rules promulgated during the 2 years after UMRA was enacted. Most of the written statements did not contain estimates of disproportionate budgetary effects of the mandates on particular regions or governments, or estimates of the effect of the mandates on the national economy. However, in most of those cases, the rules appeared unlikely to have such effects. Furthermore, even if the rules had budgetary or economic effects, UMRA allows agencies to exclude those items from the written statements if they determine that accurate estimates of those effects are not reasonably feasible. That determination is not required to be made in the written statement or even in writing. Section 205 of UMRA states that before promulgating a rule for which a written statement is required, agencies must “identify” and “consider” a reasonable number of alternatives and “select” the one that is least costly, most cost-effective, or least burdensome and that achieves the rule’s objective. However, UMRA does not require agencies to document those actions in the written statements that they are required to prepare under section 202(a), or even to identify, consider, or select the alternatives in writing. Nevertheless, all but 1 of the 30 written statements that were submitted during the first 2 years of UMRA’s implementation included some discussion of the regulatory alternatives that the agencies considered and the alternatives they selected. In most cases, the number of regulatory alternatives that the agencies considered was clear, but in other cases the number of alternatives was more difficult to tally. For example, one of the rules contained five basic options, each of which had four suboptions. Therefore, it was unclear whether the agency considered 5 alternatives or 20 alternatives for this rule. Most commonly, the agencies considered between three and seven alternatives for each of the rules, with the types of options considered varying widely. For example, the Department of Energy (DOE) identified six major policy alternatives in its proposed rule on energy conservation standards for refrigerators and freezers, including no new regulatory action, informational action, prescriptive standards, financial incentives, voluntary targets, and the proposed performance standards. DOE said it selected the proposed standards as the basis of its regulatory action because none of the other alternatives saved as much energy and all of the other options would have required legislation. Other agencies said that they selected the regulatory alternative being proposed because it was the least costly and/or least burdensome option. However, in its rule on Air Pollution Emission Standards for New Nonroad Spark Ignition Marine Engines, EPA said that it selected the least costly, most cost-effective, or least burdensome option, but the rule did not indicate which factor prompted the selection. Several of the requirements in sections 202 and 205 of UMRA are similar to the requirements in previous statutes and executive orders. For example, for more than 50 years, the APA has required that notices of proposed rulemaking contain “reference to the legal authority under which the rule is proposed.” Executive Order 12866, which had been in effect for more than 18 months by the time UMRA was enacted, requires agencies to conduct cost-benefit analyses of economically significant proposed and final rules, and to include in those analyses “an assessment . . . of potentially effective and reasonably feasible alternatives to the planned regulation . . . and an explanation why the planned regulatory action is preferable to the identified potential alternatives.” Cost-benefit analyses under the executive order are to include some of the same issues that UMRA requires cost-benefit analyses to cover, including effects on the economy, productivity, competitiveness, and employment. OIRA’s guidance on the implementation of title II of UMRA notes these areas of overlap between the executive order and the statute, and states that OIRA would review agencies’ written statements “during our reviews conducted under E.O. 12866.” Section 204 of UMRA requires agencies, to the extent permitted in law, to develop an effective process to permit elected officers of state, local, and tribal governments (or their designees) to provide meaningful and timely input in the development of regulatory proposals containing “significant ederal intergovernmental mandates.” The UMRA conference report stated that this requirement was included because improved communication with these nonfederal governments is “an important part of efforts to improve the ederal regulatory process . . . .” Although the term “federal intergovernmental mandate” is defined in title I of UMRA, the term “significant federal intergovernmental mandate” is not defined in either the statute or the conference report. OIRA officials told us that they also have not defined the term, but they said a “significant” intergovernmental mandate would at least include any mandate that may result in expenditures by state, local, and tribal governments, in the aggregate, of $100 million or more in any 1 year. EPA’s Office of Policy, Planning and Evaluation used exactly those words to define a significant mandate under section 204 of UMRA in draft guidance on implementing the act, which it issued to its regulatory steering committee and regional regulatory contacts in August 1995. Only 2 of the 110 economically significant rules that were promulgated during the first 2 years of UMRA were described as significant federal intergovernmental mandates in OIRA’s reports on agencies’ compliance with title II of the act. Both of the rules were issued by EPA in UMRA’s first year of implementation. Our review of the other 108 rules promulgated during this period indicated that EPA’s December 1996 proposed ozone and particulate matter rules may have also triggered the consultation process requirements in section 204. EPA’s cost-benefit analyses for these rules indicate that state and local governments may incur annual costs of more than $100 million. However, UMRA appears to require that an agency develop only a single consultation process for all its significant federal intergovernmental mandates. Therefore, the consultation process that EPA developed for the two rules identified as significant federal intergovernmental mandates in OIRA’s reports would have met the UMRA requirement for the ozone and particulate matter rules as well. The requirement in section 204 of UMRA is similar to consultation requirements that were in place at the time the act was put into effect. For example, for more than 50 years, the APA has required agencies to “give interested persons an opportunity to participate in the rulemaking through submission of written data, views, or arguments . . . .” Executive Order 12866 states that, whenever feasible, agencies must “seek views of appropriate tate, local, and tribal officials before imposing regulatory requirements that might significantly or uniquely affect those governmental entities.” Finally, in language that closely parallels UMRA, Executive Order 12875 requires each agency to “develop an effective process to permit elected officials of state, local, and tribal governments to provide meaningful and timely input in the development of regulatory proposals containing significant unfunded mandates.” None of the four agencies that we contacted said they had changed their intergovernmental consultation process as a result of the passage of UMRA. For example, EPA’s August 1995 draft UMRA guidance says that agency staff should continue to gather input from state, local, and tribal governments using the procedures EPA developed to implement Executive Order 12875, which had been issued nearly 2 years earlier. EPA’s guidance under that executive order was included as an appendix to the UMRA guidance and was updated to include references to UMRA. The guidance states that EPA’s general policy is that the amount and type of intergovernmental consultation for a given action should be commensurate with the extent of the rule’s costs, complexity, and controversy. Officials in USDA, HHS, and DOT said that, if their agencies promulgated a significant federal intergovernmental mandate, they would use essentially the same consultation processes to satisfy UMRA that they use to comply with the APA and Executive Orders 12866 and 12875. Section 203 of UMRA states that agencies must have developed a plan for notifying, educating, advising, and obtaining input from small governments before “establishing” any regulatory requirements that might “significantly or uniquely” affect small governments. Although not defined in UMRA, we interpreted “establishing” to mean the promulgation of final rules. Of the 132 rules that either RISC or we identified as economically significant rules that had been promulgated during the 2 years following the enactment of UMRA, 73 were final rules for which small government plans would have been required if the rules had a significant or unique effect on small governments. We reviewed all of these 73 final rules, and none indicated that a small government plan had been established. Fifty of these rules were in the four agencies that we focused on in our review—USDA, HHS, DOT, and EPA. Officials in these agencies said that none of the 50 rules would have a significant or unique effect on small governments, and, therefore, they had not developed small government plans for any of the rules. However, EPA officials said that they had developed a generic “interim small government agency plan” that would be tailored to any rule that the agency determines will have a significant or unique effect on small governments. We provided officials in SBA’s Office of Advocacy with a list of these 73 final rules. They concluded that one EPA rule on air emissions from municipal solid waste landfills could have had a significant or unique effect on small governments, but they could not be sure because of incomplete information. We also reviewed the Unified Agenda entries for the 73 rules to determine whether the issuing agencies had previously indicated that the rules would have a significant economic impact on a substantial number of small governments. If so, the rules might have also significantly or uniquely affected those small governments. The Unified Agenda indicated that 6 of the 73 final rules would have a significant effect on small governments. EPA promulgated three of these six final rules. However, EPA officials said that their assessments in the Unified Agenda were made early in the rulemaking process, and that the rules may have changed during that process to have less of an effect on small governments. The officials also said that they indicate in the agenda whether their rules will have any effect on small governments, not just a significant or unique effect. The other three rules were issued by USDA, HHS, and the Department of Labor (DOL). In the final rules, the three agencies said that the rules would not significantly or uniquely affect small governments. In its guidance on implementing title II of UMRA, OIRA said that the small government plan requirement in section 203 of the act “builds upon the policy objectives of the Regulatory Flexibility Act.” The Regulatory Flexibility Act requires federal agencies to assess the effects of their proposed rules on small entities, including small governments. If a proposed or final rule has a “significant economic impact on a substantial number of small entities,” the issuing agency must prepare and make available to the public a regulatory flexibility analysis. This analysis is to describe, among other things, the need for the rule, its objectives, reporting requirements, alternatives that would minimize the impact of the rule on small entities, and a summary of the issues raised by public comments. In 1996, Congress passed the Small Business Regulatory Enforcement Fairness Act, which amended the Regulatory Flexibility Act in several ways. One such amendment is a requirement that EPA and the Occupational Safety and Health Administration convene a panel soliciting the views of affected small entities (including small governments) before issuing any rule that has a significant impact on a substantial number of small entities. The agencies must report on the comments of the small entity representatives within 60 days after the panel is convened. Section 207 of UMRA requires the Director of OMB, in consultation with federal agencies, to establish pilot programs in at least two agencies “to test innovative, and more flexible regulatory approaches” that reduce reporting and compliance burdens on small governments and meet overall statutory goals and objectives. OMB’s April 1997 annual report on agencies’ compliance with title II indicated that OMB had designated three pilot projects in two agencies—one at USDA and two at EPA. The USDA pilot involved consolidation of its regulations on grants and loans for water and waste disposal from the former Rural Electrification Administration and the former Farmers Home Administration into the Rural Utilities Service. This consolidation was initiated because of a reorganization of responsibilities within USDA. Legislation implementing the new organizational structure was passed and signed into law in October 1994. In a final rule related to the pilot, USDA said that by combining the water and waste loan and grant regulations into one regulation, “necessary and burdensome requirements for entities seeking . . . financial assistance under the program are eliminated.” One of the two pilots at EPA is an initiative by EPA’s Office of Enforcement and Compliance Assurance to develop a policy on flexible state enforcement responses to small community violations. Under the final policy, issued in November 1995, EPA will defer to a state’s decision to provide a small community compliance assistance and waive part or all of the noncompliance penalty if the community is working diligently and in good faith to achieve compliance. An EPA official said that the project was started because representatives of Oregon and Idaho came to EPA in 1994 and requested that the agency develop a program to work with small local governments to identify environmental compliance problems and develop new methods of addressing them. At the time of our review, only Oregon and Nebraska had active small community environmental compliance assistance programs; however, according to the EPA official, five additional states had applied to participate. The other EPA pilot involves a number of activities in which the agency worked with the Environmental Council of the States (ECOS) to facilitate its interactions with state and local governments. According to OMB’s 1997 annual report on title II compliance, one of the key priorities of the effort was to promote flexible approaches to regulatory compliance for small governments. On June 17, 1996, EPA’s Small Town Task Force presented to the EPA Administrator its final report containing more than 39 recommendations developed during the previous 2 years. On March 17, 1997, the ECOS Small Town Task Force submitted a work plan to EPA to implement the recommendations. An EPA official said that some of the tasks in the work plan had been completed at the time of our review and that others were ongoing. In its March 1995 guidance on implementing title II of UMRA, OMB noted that agencies may already be considering efforts similar to the pilots as part of the administration’s NPR initiative, which had started 2 years before UMRA was enacted. In fact, the three pilots appear related or similar to that initiative in some respects. For example, USDA noted in its final rule related to the pilot that it was part of the NPR effort. The reorganization that USDA officials said prompted their pilot was recommended by the NPR in its September 1993 report. The EPA pilots appear related to an NPR recommendation that EPA improve environmental protection through increased flexibility for local governments. In our December 1994 report assessing the implementation of the recommendation, we noted that EPA had already formed its Small Town Task Force Advisory Committee to advise the EPA Administrator and recommend ways to increase flexibility for local governments. We also noted that EPA had established pilot projects in three states, one of which involved reviewing a community’s environmental risks and developing priorities to target the most pressing environmental needs. However, the impetus for EPA’s pilot on small community violations appears to have been actions by two states’ representatives, not NPR or UMRA. Although OMB appears to have satisfied UMRA’s requirement to establish pilot programs in at least two agencies, two of the three initiatives previously mentioned began before the enactment of UMRA. Furthermore, officials in both USDA and EPA indicated that the three initiatives were not started because of the passage of UMRA. Title IV of UMRA states that agencies’ compliance with the requirements to prepare the written statement under section 202 and the small government plan under section 203 are subject to limited judicial review. If an agency fails to prepare the written statement or the plan, a court may compel the agency to do so. However, the absence or inadequacy of a statement or a plan cannot be used as the basis for invalidating the rule. We identified one court case that had been decided in which the plaintiff alleged violations of UMRA as well as other laws by DOL in its rulemaking process. Regarding UMRA, the plaintiffs alleged that because DOL issued its final rule of December 20, 1996, without preparing any of the regulatory analyses and impact statements required by section 202, the court should declare the rule invalid. In accordance with section 401(a)(3) of UMRA, the court refused to grant the plaintiff’s requested relief and stated that the inadequacy or failure to prepare the written statement could not be used as a basis for staying, enjoining, invalidating, or otherwise affecting the agency rule. Our review of federal agencies’ implementation of title II of UMRA indicates that this title of the act has had little direct effect on agencies’ rulemaking actions during the first 2 years of its implementation. We reached this conclusion for three reasons. First, many of the UMRA requirements did not appear to apply to most economically significant rules promulgated during this period. For example, we concluded that 78 of the 80 economically significant rules for which section 202 written statements were not on file at CBO did not require such a statement under the terms of the statute. Economically significant rules that may cost individuals or businesses more than $100 million per year are not covered by UMRA’s requirement to develop a written statement if they (1) do not have an associated notice of proposed rulemaking; (2) do not impose an enforceable duty; (3) impose such a duty but only as a condition of federal assistance or as part of a voluntary program; or (4) do not involve an expenditure of $100 million in any 1 year by the private sector or by state, local, and tribal governments. Because section 205 of UMRA only applies to those rules for which a written statement is required, its reach is equally limited. The remaining two rules, which we believe should have had written statements, were EPA rules that complied with the substance of the UMRA written statement requirements. Sections 203 and 204 of UMRA also appeared to have had little impact on agencies’ rulemaking actions. Agencies did not prepare small government plans for any of the 73 final rules that we examined. Officials in the 4 agencies that we contacted—USDA, HHS, DOT, and EPA—said that none of the 50 final rules within this group that they promulgated had a significant or unique effect on small governments requiring a section 203 small government plan. Officials in SBA’s Office of Advocacy generally concurred with the agencies’ conclusions. OIRA and federal agencies said that only 2 of the 110 rules promulgated during the first 2 years of UMRA were significant federal intergovernmental mandates that required the development of a consultation process under section 204. Both of the rules were issued by EPA. Although two other EPA rules might have been significant intergovernmental mandates, the consultation process that the agency used for the other rules would satisfy the section 204 requirement for any mandates the agency developed. The second reason UMRA does not appear to have had much effect on the agencies’ rulemaking actions is that it does not require agencies to take the actions required in the statute if the agencies determine that the actions are duplicative of other actions or that accurate estimates of the effect of the rule are not feasible. For example, section 202(c) of UMRA says that the written statement required in section 202(a) may be prepared “in conjunction with or as part of any other statement or analysis” as long as that statement or analysis contains the required information. Because the agencies’ rules commonly contain the information that section 202(a) requires in the written statements, the agencies only rarely prepared a separate UMRA written statement. Subsection 202(a)(3) of UMRA says agencies’ written statements must contain estimates of future compliance costs and any disproportionate budgetary effects “if and to the extent that the agency determines that accurate estimates are reasonably feasible.” Subsection 202(a)(4) says that the written statements must contain estimates of the effect on the national economy “if and to the extent that the agency in its sole discretion determines that accurate estimates are reasonably feasible and that such effect is relevant and material.” Therefore, an agency can omit these estimates from any written statement if it considers them inaccurate, unfeasible, or, in the case of subsection 202(a)(4), irrelevant or immaterial. The third reason UMRA does not appear to have had much effect on the agencies’ rulemaking actions is that the act requires agencies to take certain actions that are either identical or similar to actions that they were already required to take or had completed, or that were under way. Because the scope of the previous requirements was usually much broader than the UMRA requirements, the following UMRA requirements did not appear to significantly alter the agencies’ rulemaking actions: Section 202(a) of UMRA requires agencies to prepare a written statement containing an assessment of the costs and benefits of proposed federal mandates. Section 206 of UMRA says that the Director of OMB must collect the written statements from the agencies. However, Executive Order 12866, which was issued more than a year before UMRA, already required agencies to provide OIRA with assessments of the costs and benefits of all economically significant proposed rules, including some rules that were not mandates. Section 205 of UMRA requires agencies to identify a number of regulatory alternatives for proposed mandates and to select the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of the rules. However, Executive Order 12866 already required agencies to identify regulatory alternatives and explain why the planned regulatory action is preferable to the other alternatives for all economically significant rules, including some rules that were not mandates. The executive order also says that agencies’ regulations should be cost-effective and impose the least burden on society. Section 204 of UMRA requires agencies to develop a process to consult with representatives of state, local, and tribal governments. However, the basic elements of the UMRA consultation process can be traced to the notice and comment requirements in the APA, which was enacted nearly 50 years before UMRA. More specifically, Executive Order 12866 requires agencies to seek the views of state, local, and tribal officials before imposing regulatory requirements that might significantly or uniquely affect them. Executive Order 12875, which was also issued more than a year before UMRA, requires agencies to “develop an effective process to permit elected officials of state, local, and tribal governments to provide meaningful and timely input in the development of regulatory proposals containing significant unfunded mandates”—language that is almost identical to section 204 of UMRA. Officials in the agencies where the section 207 pilot programs were established said that the pilots were not initiated to satisfy UMRA requirements. Two of the pilots began before the enactment of UMRA, and all three pilots were similar or related to initiatives already under way as part of the administration’s NPR management reform initiative. The committee reports for the Senate bill that led to the adoption of UMRA indicate that Congress was aware that the bill duplicated existing requirements in many respects. For example, the report by the Senate Committee on the Budget stated that, except for the requirement for small government plans, “the bill will not impose new requirements for agencies to implement in the regulatory process . . . .” Regulatory reform legislation currently under consideration by Congress also contains some requirements that are similar to those in Executive Order 12866 and existing statutes. For example, S. 981 would require agencies to conduct cost-benefit analyses for what are essentially economically significant rules and, as part of those analyses, to evaluate a reasonable number of alternative approaches reflecting the range of regulatory options that would achieve the objective of the statute. Therefore, if agencies are already performing those analyses to comply with the executive order, codification of the requirements through S. 981 would not impose significant additional requirements for those rules. However, the provisions in S. 981 are different from existing requirements in several other respects. First, the bill would cover more rules than are covered by UMRA or Executive Order 12866. For example, S. 981 would cover many independent regulatory agencies, whereas both UMRA and the executive order exclude independent regulatory agencies. Also, the analytical requirements in S. 981 would be broader than those in UMRA. UMRA requires that cost-benefit analyses be conducted for only a small group of rules that contain a narrowly defined mandate and that may result in expenditures of $100 million in any 1 year by state, local, or tribal governments, in the aggregate, or the private sector. S. 981, on the other hand, generally would cover all rules that have an annual effect on the economy of $100 million or that the Director of OMB declares to be a major rule. S. 981 also would address a number of topics that are not addressed by either UMRA or Executive Order 12866. For example, the bill includes requirements that agencies conduct risk assessments for certain rules and have those risk assessments and any cost-benefit analyses peer reviewed. Neither UMRA nor the executive order contain such requirements. These requirements in S. 981 could also have the effect of improving the quality of the regulatory analyses that agencies are currently required to perform under Executive Order 12866. We sent a draft of this report for review and comment to the Director of OMB; the Secretaries of USDA, HHS, and DOT; and the Administrator of EPA. OMB, USDA, HHS, and DOT officials said they had no comments on the draft report. On December 24, 1997, EPA’s Director of the Office of Regulatory Management and Evaluation suggested several changes in the draft report. First, the Director said the final report should clarify that UMRA has not had much effect on agencies’ rulemaking actions because some rules were not subject to UMRA or because agencies already had systems to address the act’s requirements, not because the agencies are ignoring UMRA. Therefore, he suggested changing the title of the report to “Agencies’ Rulemaking Actions Comply With UMRA.” Second, he said that EPA continued to disagree with our conclusion that written statements were required for the national ambient air quality standards for ozone and particulate matter, and that the report should clarify that the only areas of disagreement regarding these rules involved two of the five written statement requirements. Finally, he said the title of appendix I was misleading and should be clarified by adding a phrase or a footnote to the title to make it clear that written statements were not required for the rules in the table. In response to EPA’s first comment, we clarified the Results in Brief section of this final report to more clearly indicate that we concluded title II of UMRA did not have much effect on agencies’ rulemaking actions because of how many of the act’s requirements were written, not because of any systematic failure on the part of rulemaking agencies. However, we did not change the title of the report because we believe the current title more accurately reflects the report’s message than EPA’s suggested change. Regarding EPA’s second comment, we changed this final report to clarify that we disagreed with EPA’s interpretation of UMRA’s requirements “in one respect,” and we added a sentence noting that the disagreement centered on two of the five written statement requirements. Finally, in response to EPA’s third comment, we added a brief discussion after the title of appendix I indicating that, with the exception of the ozone and particulate matter rules, we did not believe that written statements were required for the listed rules. We are sending copies of this report to the Director of OMB; the Secretaries of USDA, HHS, and DOT; and the Administrator of EPA. We are also sending copies of this report to the Chairmen and Ranking Minority Members of (1) the House Committee on Government Reform and Oversight; (2) that Committee’s Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs; and (3) the House Committee on the Judiciary, Subcommittee on Commercial and Administrative Law. We will make copies available to others on request. Major contributors to this report are listed in appendix III. Please contact me on (202) 512-8676 if you or your staff have any questions concerning this report. The following table lists, by department or agency and office, the 80 economically significant rules promulgated between March 22, 1995, and March 22, 1997, for which no written statements were on file at CBO. We believe that no written statements were required for all but two of these rules—EPA’s national ambient air quality standards for ozone and particulate matter. Even for these two rules, EPA appeared to have met the substantive written statement requirements of UMRA. The table also presents the date each of these rules was published in the Federal Register. UMRA’s written statement requirements apply to rules promulgated after March 22, 1995. Although some of these rules may have been promulgated before publication in the Federal Register, none were promulgated before March 22, 1995. Amendments to the Peanut Poundage Quota Regulations 1995 Rice Acreage Reduction Program 1995 Wheat and Feed Grain Acreage Reduction Program (continued) Food and Nutrition Service (formerly Food and Consumer Service) Department of Health and Human Services (continued) Substances Prohibited From Use in Animal Food or Feed Medical Devices: Current Good Manufacturing Practices Food Labeling, Nutrition Labeling, Small Business Exemption Medicaid Program: Limitations on Aggregate Payments to Disproportionate Share Hospitals: Federal Fiscal Year 1996 Medicaid Program: Limitations on Aggregate Payments to Disproportionate Share Hospitals: Federal Fiscal Year 1996 Medicare Program: Monthly Actuarial Rates and Monthly Supplementary Medical Insurance Premium Rate Beginning January 1, 1996 Medicaid Program: Final Limitations on Aggregate Payments to Disproportionate Share Hospitals: Federal Fiscal Year 1995 Medicare Program: Schedule of Limits on Home Health Agency Costs per Visit for Cost Recording Periods Beginning on or After July 1, 1996 Medicare Program: Revisions to Payment Policies Under the Physician Fee Schedule for Calendar Year 1997 Medicare Program: HHS’ Approval of NAIC Statements Relating to Duplication of Medicare Benefits (continued) Sale of HUD-Held Single Family Mortgages Sale of HUD-Held Single Family Mortgages Single Family Mortgage Insurance-Loss Mitigation Procedures Requirements for Notification, Evaluation, and Reduction of Lead-Based Paint Hazards in Federally Owned Residential Property and Housing Receiving Federal Assistance (continued) Implementation of the Domestic Chemical Diversion Control Act of 1993 (P.L. 103-200) Migratory Bird Hunting: Final Frameworks for Late-Season Migratory Bird Hunting Regulations (continued) Lead: Requirements for Lead-Based Paint Activities Identification and Listing of Hazardous Waste (continued) The following table lists, by department or agency and office, the 30 economically significant rules promulgated between March 22, 1995, and March 22, 1997, for which written statements were on file at CBO. The table also presents the date each of these rules was published in the Federal Register. UMRA’s written statement requirements apply to rules promulgated after March 22, 1995. Although some of these rules may have been promulgated before publication in the Federal Register, none were promulgated before March 22, 1995. Apr. 3, 1996 (continued) Mar. 12, 1996 (continued) Alan Belkin, Assistant General Counsel Susan Michal-Smith, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed federal agencies' implementation of the Unfunded Mandates Reform Act of 1995 (UMRA), focusing on what effect title II of UMRA has had on agencies' rulemaking actions. GAO noted that: (1) the enactment of title II of UMRA appears to have had only limited direct impact on agencies' rulemaking actions in the first 2 years since its implementation; (2) most of the economically significant rules promulgated during UMRA's first two years were not subject to the requirements of title II; (3) title II contains exemptions that allowed agencies not to take certain actions if they determined that the actions were duplicative or not reasonably feasible; (4) written statements were not on file at the Congressional Budget Office for 80 of the 110 economically significant rules promulgated in the first 2 years of UMRA's implementation; (5) GAO concluded that UMRA did not require written statements for 78 of these 80 rules; (6) some of the rules did not have an associated notice of proposed rulemaking; (7) many did not impose an enforceable duty other than as a condition of federal financial assistance or as a duty arising from participation in a voluntary program; (8) others did not result in expenditures of $100 million by the state, local, and tribal governments, in the aggregate, or by the private sector in any 1 year; (9) the written statements that agencies prepared for 30 of the economically significant rules appeared to meet most of the UMRA requirements for those statements; (10) in almost every case, the written statements were not separate documents specifically prepared to comply with UMRA but were the rules themselves and any associated economic analysis; (11) also, sections 202 and 205: (a) give agencies discretion in how they can comply with the requirements; and (b) are similar to requirements in previous statutes and Executive Order 12866, which was issued in 1993; (12) during the first 2 years of UMRA's implementation, the requirement in section 204 of the act that agencies develop a process to consult with state, local, and tribal governments before promulgating any significant federal intergovernmental mandate appears to have applied to no more than four Environmental Protection Agency rules and no rules from other agencies; (13) section 203 small government plans were not developed for any of the 73 final rules promulgated during the first 2 years of UMRA implementation; (14) officials in the four agencies that GAO contacted said none of their final rules had a significant or unique effect on small governments; and (15) the Office of Management and Budget designated three UMRA pilot programs in two agencies, but none of these efforts appears to have been initiated because of UMRA. |
FOIA established a legal right of access to government information on the basis of the principles of openness and accountability in government. Prior to passage of the act in 1966, the government required an individual or entity to demonstrate a “need to know” before being granted the right to examine a federal record. FOIA established a “right to know” standard, under which an individual or entity could receive access to information held by a federal agency without demonstrating a need or reason. The “right to know” standard shifted the burden of proof from the individual or entity to the government agency holding the information and required the agency to provide proper justification when denying a request for access. Any person, with a few exceptions, can file a FOIA request, including foreign nationals, corporations, and organizations. For example, a foreign national can request his or her alien file, and a commercial requester, which can include data brokers that file a request on behalf of others, may request, among other things, a copy of a government contract or grant proposal. In response, the agency holding the desired record is required to provide it to the requester (unless the record falls within a permitted exemption). Generally, FOIA allows agencies to collect a fee for searching and duplicating records in connection with responding to a request. Apart from providing access to records in response to a request, FOIA also requires agencies to disclose certain information by publication in the Federal Register or electronically (e.g., on the Internet), or by making it available in a physical or electronic reading room. While FOIA has helped improve public access to government information and has been a positive step toward providing more openness in government, a March 12, 2007, House committee report accompanying the OPEN Government Act pointed out that agencies receive hundreds of thousands of FOIA requests a year, which has led to slow response times, increased backlogs, and costly and time-consuming litigation between requesters and the government. As such, according to the report, FOIA requesters have argued that they would benefit from having access to an ombudsman to provide guidance before, or as an alternative to, litigation. To help address the concerns surrounding FOIA implementation, the OPEN Government Act,NARA to: among other things, established OGIS within review policies and procedures that agencies have developed to administer FOIA; review agency compliance with FOIA requirements; recommend policy changes to Congress and the President to improve the administration of FOIA; and offer mediation services to resolve disputes between individuals or entities making FOIA requests and agencies as an non-exclusive alternative to litigation. OGIS was established within NARA, on September 8, 2009. The office operated directly under the Archivist of the United States until March 7, 2011, when it was moved to Agency Services, which operates under the authority of the agency’s Chief Operating Officer. According to its charter, the mission of Agency Services is to lead NARA’s efforts in servicing the ongoing records management needs of federal agencies and to represent the public’s interest in the accountability and transparency of these records. OGIS is one of five supporting offices under Agency Services, as shown on the organization chart in figure 1. Headquartered in Washington, D.C., OGIS is led by a director who reports to the Executive of Agency Services. As of August 2013, the Director was aided by a deputy director, an attorney advisor, two management and program analysts, and a staff assistant—for a total of six full-time employees. In addition to OGIS, other federal agencies also have responsibility for the oversight and administration of FOIA. Specifically, since it was established 30 years ago, the Office of Information Policy within the Department of Justice (Justice) has been responsible for overseeing the administration of FOIA by encouraging compliance, overseeing agencies’ implementation of the OPEN Government Act, and issuing policy guidance. As such, the office prepares a comprehensive guide that addresses various aspects of the act; conducts a variety of FOIA-related training programs for personnel across the government; and uses attorneys to serve as counselors that provide FOIA information, advice, and guidance to government staff and the public regarding implementation of the act. In addition, Justice represents federal agencies in lawsuits brought by FOIA requesters. According to Justice, as of fiscal year 2012, a total of 99 federal agencies had responsibility for implementing FOIA. These agencies process requests, publish related regulations, and submit annual reports through the heads of their agencies to the Attorney General that include statistics on their FOIA processing. Further, the OPEN Government Act gave agency chief FOIA officers responsibility for ensuring agencywide compliance by monitoring implementation throughout the agency; recommending changes in policies, practices, staffing, and funding; and reviewing and reporting to agency heads and to Justice on the agency’s performance in implementing FOIA. (These reports are referred to as chief FOIA officer reports and are in addition to the annual reports that agencies also submit to Justice.) Over the past 6 years, we have issued several reports on federal agencies’ implementation of FOIA, including their progress in improving FOIA processing and backlog reduction. GAO, Freedom of Information Act: Additional Actions Can Strengthen Agency Efforts to Improve Management, GAO-12-828 (Washington, D.C.: July 2012). example, using a single tracking system and providing requesters with the ability to track the status of their requests online. We recommended that the agencies improve the management of their FOIA programs by ensuring that actions were taken to reduce backlogs and the use of exemptions, improve FOIA libraries, and implement technology. Officials from the four agencies agreed or generally agreed with the recommendations. OGIS has engaged in several activities that, according to its officials, were intended to respond to the OPEN Government Act requirement that it review federal agencies’ FOIA policies, procedures, and compliance. Specifically, OGIS has engaged in tasks such as making suggestions for improving the clarity and readability of agencies’ proposed FOIA regulations and notices and offering general observations regarding agencies’ correspondence. For example, in 2010 and 2011, the office reviewed the Federal Register to identify when agencies had submitted FOIA regulations for public comment and then offered responses to the requests for comments on the proposed regulations. In this regard, OGIS offered comments on improving the contents of regulations that had been proposed by 18 agencies. Among the suggestions that it offered to one or more of these agencies were that they: provide requesters with an estimated amount of fees, including a breakdown of the fees for the time staff devote to searching, reviewing, and/or duplicating records for a FOIA request; add a statement to clarify the difference between a third-party request made under FOIA and a first-party request made under the Privacy Act; notify requesters in writing when their requests have been referred to another agency, and include the part of the request that has been referred and the name of the FOIA contact in that agency; and recognize the important statutory role of the FOIA Public Liaison in reducing delays, increasing transparency, and understanding the status of requests. In addition, as part of its actions taken to review policies and procedures, in 2011 and 2012 the office responded to agencies’ requests in the Federal Register for public comments on Privacy Act system of records notices. The office commented on six such requests during these 2 years. For example, the office suggested that agencies include model language in their system of records notices that would allow OGIS to share information with the affected agency as a permitted disclosure under the Privacy Act. According to the officials, without the model language, OGIS would be required to obtain written consent from each requester prior to being able to access their records when mediating a dispute. Further, through various means (for example, FOIA roundtable meetings, website, and blog) in 2012 and 2013, OGIS invited agencies to submit FOIA correspondence, such as acknowledgment and close-out letters, for its review. According to OGIS, one agency responded to these invitations and the office, in turn, made suggestions aimed at improving the clarity and readability of the agency’s correspondence. Specifically, OGIS provided comments to the National Geospatial Intelligence Agency on a template for its close-out letter that clarified the legal requirements to protect from disclosure, information on the location of classified military systems personnel, and information on contractor proposals. Beyond this activity, the office offered Dispute Resolution Skills training to agencies, including the Departments of State, Homeland Security, and Health and Human Services, and, as part of the training, provided instruction on improving agency correspondence to requesters. Nevertheless, while OGIS has engaged in these specific activities, none was a proactive, comprehensive evaluation of federal agencies’ FOIA policies and procedures. Moreover, the office has not conducted any reviews of agencies’ compliance with FOIA. Rather, the office has generally worked in an ad hoc, reactive manner to respond to Federal Register proposals put forth by agencies or to seek opportunities to comment or provide training on correspondence and documentation other than FOIA policies and procedures. Furthermore, the activities that it has undertaken have been limited to engaging with only a small fraction of the 99 federal agencies that, according to Justice, have responsibility for implementing FOIA. Similarly, while the office reported that it has reviewed agencies’ annual FOIA reports and Chief FOIA Officer reports from Justice’s Office of Information Policy website to identify best practices on improving FOIA processing, and has made general observations about agencies’ policies, procedures, and compliance with FOIA through the office’s mediation case work, these actions were not undertaken as part of a specific review of agencies’ compliance with FOIA, as required by the OPEN Government Act. A key factor contributing to the absence of proactive and comprehensive reviews of federal agencies’ FOIA policies, procedures, and compliance by OGIS is that the office has not established a structured methodology for conducting such reviews. Our work has determined that developing a methodology is critical to conducting quality, credible, and useful reviews. Our evaluation guidance states that a structured methodology should define, among other things, the scope, schedule, criteria, and evaluation questions for conducting the reviews. OGIS had not defined the scope of work for its reviews, to include information on which specific agencies it will review, (such as the agencies that receive the largest number of FOIA requests) and when it will do so. In addition, the office had not established the criteria against which the agencies’ policies, procedures, and compliance with FOIA requirements would be assessed; and it had not developed evaluation questions to be used in conducting the reviews. The Director of OGIS acknowledged the limitations of the reviews that had been conducted, stating that the office had prioritized its resources to favor mediation activities. In this regard, the Director stated that the staff tasked with providing mediation services should function as neutral third parties and be independent from staff tasked with reviewing agencies’ FOIA policies, procedures, and compliance. However, the Director said that, given the small number of staff assigned to OGIS, the office has not been able to establish a separate team of reviewers. OGIS officials added that the office is in the early stages of drafting a methodology for conducting the reviews, but that a time frame for when the methodology will be completed has not been established. Further, while Agency Services has identified a need for additional staff to support OGIS in implementing its mission, it has not established a plan that addresses how the office intends to staff the FOIA reviews. Industry practices stress the importance of analyzing workforce needs and developing a plan of action for addressing those needs. Moreover, in September 2012, a report issued by the Office of Inspector General at NARA concluded that while OGIS was currently able to meet its mission, additional resources would allow the office to have a more robust program for conducting the reviews.of OGIS, through the budget process, define resources necessary to better accomplish the office’s statutory requirement. As of early August 2013, however, OGIS had not yet implemented this recommendation. The Office of Inspector General recommended that the Director Until OGIS completes a methodology, and defines the resources needed to accomplish the requirements of the office as the NARA Inspector General has recommended, the office will not be positioned to effectively execute the responsibilities envisioned for it in assisting with this important aspect of FOIA implementation. In response to the OPEN Government Act requirement that it offer mediation services to resolve disputes between FOIA requesters and agencies as a non-exclusive alternative to litigation, OGIS defines two types of mediation services that it provides to address requests for assistance: Facilitation: A type of mediation in which an OGIS staff member facilitates communication between the requester and the agency, helping the parties to reach a mutually agreeable solution without the perceived formality or cost of mediation. Ombuds services: Advice and services (other than mediation) offered in response to complaints that the office receives. Ombuds services do not address the substance of a dispute (such as the exemptions taken), but rather, the mechanics of a dispute (such as the status of a delayed request). OGIS has a documented process for handling the requests that it receives. Specifically, when a request is received—by phone, e-mail, fax, or electronically through its website—a case file is opened and assigned a tracking number in an automated case management system. Once a case has been opened, the office goes through a fact-finding process to determine what services are called for, such as, helping the parties exchange information or suggesting options for resolution. For each case, further actions taken by OGIS and the other parties involved, as well as any agreements reached, are recorded in the case management system. During fiscal year 2012, OGIS accepted 855 requests for assistance: 46 involved facilitation or both facilitation/ombuds services, and 239 involved only ombuds services. Of the remaining requests, 498 were classified by OGIS as a “quick hit” and 72 were classified as miscellaneous (for example, “administrative closure,” “no direct action requested,” or “request withdrawn.”) Of the 44 facilitation and facilitation/ombuds services cases that OGIS initiated in 2012, remaining 14 were cases that OGIS did not mediate because it agreed with the agency’s decision on the FOIA request.) Further, among the cases that were mediated, we determined that 22 had a positive result, as defined by one or more of the following three actions: the office provided mediation for 30. (Most of the One or both parties took action or modified their position after OGIS’s intervention. For example, a requester conducting family genealogy research requested from the Social Security Administration, a copy of a Social Security form pertaining to a family member. In response, the agency sent the form to the requester, but the subject’s parents’ names had been redacted—blacked out— because the Social Security Administration does not reveal information about a living person and, given their dates of birth, had concluded that the parents might still be alive. The requester filed an appeal and provided death certificates for the parents, but the appeal was denied. An OGIS mediator subsequently contacted a Social Security Administration official on the requester’s behalf to discuss the denial. After reexamining the case, the agency agreed to send an unredacted document to the requester. While 46 cases were initiated in 2012, we included 44 cases in our review. One case was omitted because it involved only OGIS and agency officials, and a second was omitted because the case was not included in the data OGIS provided from which we made our selection. One or both parties indicated increased satisfaction with the outcome of the FOIA process as a result of OGIS’s mediation. For example, a representative of a trade organization, who had requested contract data from the Department of Homeland Security, had received only part of the information requested. The agency withheld substantial information under a FOIA exemption protecting trade secrets. The requester subsequently contacted OGIS, and a mediator contacted the agency’s appeals officer and discussed the relevant case law. In response to this action, the agency reconsidered its decision and provided the information with only minimal redactions. The customer noted that she was “extremely happy with the results of the mediation.” The issue in dispute was clarified, addressed, or resolved after OGIS intervened. For example, a requester asked the Securities and Exchange Commission for all its files of a certain type and later asked OGIS for help because of a perceived delay in the agency’s response. A mediator then contacted an official at the agency, who explained that the requested files were difficult to retrieve because some were paper files that were not indexed and were geographically dispersed. The mediator explained this to the requester, who was initially unwilling to compromise but was open to an OGIS-facilitated discussion with the agency. The agency agreed, and OGIS subsequently facilitated a teleconference between the requester and the agency, during which the two parties agreed that the requester would file a narrower request that the agency could fill promptly. Overall, among these 22 cases, 9 involved a denial, in which an agency declined to release the requested records; 7 involved a delay, in which a requester believed the agency was taking too much time to fill a request; and 3 involved fees, where a requester believed the amount being charged was excessive or that a fee waiver was applicable. The other 3 cases involved: a dispute over whether an appeal had been submitted in a timely manner, a customer disputing that an agency had not found responsive records, and a requester wanting results in a different format. Also, among the cases that OGIS mediated, we determined that 8 did not have a positive result, as explained by the following examples: In four cases, OGIS provided mediation services, but the agency did not change its position on refusing to provide the requested information. In one case, for example, the agency did not change its position that the requester needed to provide a waiver or proof of death for the subject of the request in order for the agency to process the request. In another example, the agency stood by its decision to refer the requester to a publicly available document. In one case, the agency, after its initial meeting with OGIS and the requester, was unwilling to continue to meet on matters related to the FOIA request. In one case, OGIS held discussions regarding the agency not granting the requester free search time as required by FOIA and OMB’s guidance. The agency did not change its position and the requester pursued litigation regarding the matter. In the remaining two cases, OGIS confirmed that the information the requesters were seeking was either exempt from disclosure, or the record did not exist. For example, in one of these cases, the requester had sought a list of active Internal Revenue Service tax-exempt cases in litigation, but had received a “no records” response from the agency. As part of its mediation efforts, OGIS confirmed that the agency did not keep the requested information in any of its records. Of the 14 cases where mediation was not provided, 11 were cases where OGIS agreed with the agency’s decision to deny a request. For example, in one of the cases, a prison inmate requested a copy of the Bureau of Prisons Correctional Services Manual, which addresses the operations of federal prisons. The bureau withheld the manual under a law enforcement exemption, stating that, while there may have been a public interest in the material, that interest did not outweigh the need to keep order in the prison system and avoid inmates using the information to their advantage. The requester then contacted OGIS, and the office responded that the agency’s actions had been consistent with FOIA law and policy and declined to mediate. In another instance, a case was not mediated because the agency declined to cooperate with OGIS. Further, for the remaining 2 cases, OGIS ultimately determined that they were ones in which mediation was not needed. For example, to resolve one of the cases, OGIS only needed to explain an agency letter to a requester. Although it has taken actions to resolve disputes—in many cases having positive results through mediation—the office lacks performance measures and goals needed to gauge the overall success of its mediation services. The Government Performance and Results Act Modernization Act of 2010 requires NARA, like all agencies, to develop an annual performance plan that includes performance goals for its program activities and accompanying performance measures, including timeliness and results-based measures. According to the act, the performance goals should be in a quantifiable and measurable form to define the level of performance to be achieved for program activities each year. Measuring performance allows an agency to track the progress it is making toward goals and gives managers crucial information on which to base their organizational and management decisions. Leading organizations recognize that performance measures can create powerful incentives to influence organizational and individual behavior. However, consistent with its fiscal year 2013 annual report, in which the office states that it has no formal metrics for measuring success, OGIS has not developed measures and goals for its mediation services. While its case management system can track the length of time required to handle a particular case, the office currently has no specific goals related to timeliness in handling requests for assistance. In this regard, in fiscal year 2012, the office had a timeliness goal, derived from NARA’s overall performance plan, of closing cases within 34 working days. However, according to the officials, this goal was dropped because it was not based on the office’s actual experience in handling the cases. OGIS also has no measures or goals pertaining to the results of its mediation cases. For example, it has not established criteria for determining what constitutes success in a case or a goal for what percentage of its cases should have a successful result. OGIS’s Director said that the office is aware of the need for such measures and is making efforts to meet the need. The Director told us that OGIS has engaged a consultant to help review its case management system, identify reasons for differing case closure times, and help develop more measurable milestones. However, OGIS had not implemented measures as of mid- August 2013. Further, the office has begun using an online questionnaire where its customers can provide anonymous feedback on their experiences with OGIS and its staff. While this questionnaire may be useful if enough responses are received, its value as a voluntary, Web-based survey is limited: its respondents are self-selected, responses are anonymous, and comments cannot be linked to specific cases or contexts, thus limiting their usefulness. Until OGIS establishes quantifiable goals and measures of success for its mediation services, the office will not be positioned to determine how effectively it is performing mediation and contributing to the resolution of cases that might otherwise have resulted in potentially costly litigation or gone unresolved. As required by the OPEN Government Act, OGIS has made recommendations to Congress and the President aimed at improving the administration of FOIA. These recommendations have largely focused on improving the internal coordination of government FOIA operations and areas where OGIS’s role could be made more effective. In addition, while it has not issued specific guidance on FOIA implementation, OGIS has collected best practices for improving FOIA processing for federal agencies. Altogether, OGIS has made nine recommendations aimed at improving the FOIA process––five in 2012 and four in 2013. Seven of the recommendations were specific to actions that the office believed it should take (in certain cases in conjunction with agency partners and other stakeholders), while two of the recommendations focused on actions to be taken by other federal agencies. Specifically, OGIS recommended to Congress and the President actions that it had either taken or was planning to take to enhance its own role in administering FOIA, as follows: Work to encourage other departments and agencies to partner with it to expand dispute resolution training for their FOIA professionals so that they can assist their FOIA colleagues in preventing and resolving disputes. Work with other agencies to consider how the FOIA web portal (https://FOIAonline.regulations.gov/),portal, might be useful to them in carrying out their statutory responsibilities and use it to accept FOIA requests and allow responsive documents to be uploaded and posted for the public. Facilitate the coordination of interagency communication for governmentwide FOIA requests among agencies by serving as the central point-of-contact for agencies in sharing information, and also for relaying information to requesters as appropriate. Work with stakeholders from both inside and outside government to review the issues surrounding FOIA fees and fee waivers, which remains a persistent point of contention administratively and in litigation. Develop, with the Chief Information Officers Council, methods for agencies to better handle requesters seeking their own records under the Privacy Act to improve how requesters navigate agency processes to obtain needed assistance. In conjunction with OMB, create a governmentwide Privacy Act routine-use procedure to streamline the way in which agencies share with OGIS information covered by the act. Work with agencies to streamline the process of requesting immigration-related records because of the increased number of requests related to these records. In addition, OGIS recommended that federal agencies take specific actions, as follows: Encourage and support the use of dispute resolution in the agency FOIA processes to prevent and resolve disputes administratively and avoid litigation. Remind their staff of the importance of FOIA and recognize FOIA as a priority (based on the position that many agency employees may be unfamiliar with their own responsibilities under the law). OGIS officials stated that the recommendations were based on the office’s ongoing work with federal agencies and members of the public. They acknowledged that the office had not compiled other information that would be necessary to recommend substantive revisions to underlying FOIA policies or otherwise suggest legislative actions to Congress and the President. However, such information potentially could have been derived if OGIS had taken steps to conduct more comprehensive reviews of agencies’ FOIA policies, procedures, and compliance and had established and implemented results-based measures for its mediation services. According to its documentation, OGIS submitted the nine recommendations over a 2-year period from February 2011 through March 2013. The officials explained that their submission of these recommendations followed periods of interagency review as required under the process overseen by OMB. Specifically, they explained that OGIS had submitted its first two draft recommendations for review in accordance with the OMB Circular A-19 on February 16, 2011. These initial recommendations focused on developing, with the Chief Information Officers Council, methods for agencies to better handle requesters seeking their own records under the Privacy Act and in conjunction with OMB, creating a governmentwide Privacy Act routine-use procedure. Then, over the next 14 months, OMB and NARA had periodic discussions regarding the significant number of interagency comments that OMB had received on the recommendations. Following discussion on the status of the two recommendations at a congressional hearing in March 2012, recommendations to OMB for review. OMB officials said they then worked with OGIS to address interagency comments on the three recommendations, as well as the initial two recommendations. The hearing, entitled “The Freedom of Information Act: Safeguarding Critical Infrastructure Information and the Public’s Right to Know,” was held on March13, 2012, by the Senate Judiciary Committee. After OMB completed its review in mid-April 2012, OGIS informed Congress that its recommendations did not include any substantive revisions to the disclosure requirements of FOIA. OGIS officials subsequently stated that, as a result of the interagency consultation process, OGIS and OMB had agreed that the five recommendations could be addressed administratively and did not require any legislative action. In mid-January 2013, OGIS and OMB officials met to discuss a second set of potential recommendations that the office intended to submit. The office subsequently submitted four recommendations to OMB for Circular A-19 review on March 4, 2013. According to OGIS officials, the review of these recommendations was completed on March 12, 2013, and the recommendations were provided to Congress on March 13, 2013, to support a congressional hearing during Sunshine Week. Although OGIS does not issue specific guidance on FOIA implementation, it collects and shares best practices for improving federal agencies’ processing of FOIA requests. According to OMB, best practices are the processes, practices, and systems identified in public and private organizations that work exceptionally well and are widely recognized as being helpful in improving an organization’s performance and efficiency in specific areas. Best practices can be based on lessons learned from positive experiences or on negative experiences that result in an undesirable outcome. In addition, guidance states that the use of best practices is a principal component of an organizational culture committed to continuous improvement. Toward this end, OGIS collects best practices for improving FOIA processing from several sources, including its reviews of agencies’ annual FOIA reports and mediation case files, as well as anecdotally from persons involved in mediation cases facilitated by the office. OGIS publishes best practices related to key FOIA requirements and guidance in its annual reports, and on its website (https://ogis.archives.gov/) and blog (http://blogs.archives.gov/foiablog/). The website includes a number of links describing various best practices specifically for FOIA requestors and federal agencies. Table 1 describes examples of the best practices OGIS has disseminated. OGIS officials stated that the office updates its blog at least weekly with posts addressing best practices, case studies, and where the public and federal agencies can engage in discussions about FOIA issues. In addition, OGIS uses other mechanisms to improve the administration of FOIA, to include presenting training for FOIA professionals; holding conferences with the American Society for Access Professionals to share best practices; and, at the start of fiscal year 2013, helping to launch the FOIA web portal (https://FOIAonline.regulations.gov/). Since it was established 4 years ago, OGIS has taken actions to implement selected legislative responsibilities, although it has fallen short in certain areas. Specifically, while the office has suggested improvements to a number of agencies’ FOIA regulations and system of records notices, it has not completed a methodology for proactively reviewing agencies’ policies, procedures, and compliance with FOIA requirements and a time frame for doing so. As a mediator between requesters and federal agencies, OGIS has resolved cases that might have otherwise resulted in litigation. However, while we were able to identify instances in which its mediation efforts have had positive results, the office’s overall success in mediating cases is difficult to gauge without goals and performance measures. On the basis of its reviews of agency policy and procedures, and mediation experience, OGIS has made a number of recommendations to Congress and the President and shared best practices to help agencies improve the administration of FOIA. However, addressing the shortfalls that we noted is critical to OGIS effectively complying with its role as required by law. To ensure that OGIS effectively performs its responsibilities under FOIA, as amended by the OPEN Government Act, we recommend that the Archivist of the United States direct the Executive for Agency Services and the Director of OGIS to take the following two actions: Establish a time frame for completing and implementing a methodology that defines, among other things, the scope, schedule, criteria, and evaluation questions for conducting reviews of federal agencies’ FOIA policies, procedures, and compliance. Establish performance measures and goals for OGIS’s mediation services that define success in handling a case and include relevant goals for the number of cases handled successfully, as well as goals for timely management of cases based on past experience. We provided drafts of this report to NARA and OMB for comment. In its written comments, which are reprinted in appendix II, NARA expressed appreciation for our attention to issues facing OGIS and concurred with the two recommendations in the report. NARA also specifically discussed actions that it was taking or planned to take related to our second recommendation. In particular, the agency stated that OGIS has consulted with other mediation and ombudsman offices on how to evaluate its services and will continue to do so. NARA added that it has been difficult to measure success and that the office’s resolution of a dispute is dependent on outside factors that are beyond OGIS’s control, such as the willingness of the parties to participate in voluntary mediation services. Further, NARA stated that it appreciated our suggestions regarding measures for success and would consider these suggestions as the office assesses measures for the upcoming fiscal year. In addition to the aforementioned written comments, we received technical comments, via e-mail, from NARA’s Audit Liaison and OMB’s Audit Liaison, which we have incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees; the Archivist of the United States; Executive for Agency Services, Director of OGIS, and other interested parties. Copies of this report will also be available at no charge on the GAO Web site, at http://www.gao.gov. Should you or your staffs have any questions on the information discussed in this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to assess the actions that the Office of Government Information Services (OGIS) has taken to (1) review agencies’ Freedom of Information Act (FOIA) policies, procedures, and compliance, (2) mediate disputes between FOIA requesters and federal agencies, and (3) recommend policy changes to Congress and the President, and develop and issue guidance and best practices to agencies aimed at improving the administration of FOIA. To assess the actions OGIS has taken to review agencies’ FOIA policies, procedures, and compliance, we analyzed documentation describing the office’s plans and activities for conducting agency FOIA reviews. These included the office’s annual reports for fiscal years 2011 through 2013, quarterly reports, NARA’s annual performance plan for fiscal years 2011 through 2013, and the office’s comments on 18 proposed agency regulations and six Privacy Act system of records notices. We analyzed OGIS’s comments on agency FOIA correspondence, such as closeout letters, and training materials on improving agency correspondence to requesters. We compared the plans and activities to our program evaluation guidance that focuses on assessing the effectiveness of program operations and results. We also analyzed OGIS’s comments on the proposed agency regulations and compared them to the latest version of the agency’s regulations to determine whether they were incorporated. While 46 cases were initiated in 2012, we included 44 cases in our review. We omitted two cases: one because it involved only OGIS and the agency’s FOIA staff, and one because it was not included in the data that OGIS provided, and from which we made our selection. examined the corresponding paper case files as well as data from the office’s automated case tracking system. We developed criteria, after discussions with OGIS, for verifying whether a case involved mediation and for determining the result of the office’s mediation efforts. Specifically, we verified that a case was an example of mediation if one of the following occurred: Other than the initial contact, OGIS had two or more substantive contacts with either party. The office suggested options for changing a position or decision to either party. Either party changed a decision or position (e.g. the agency waived fees or provided additional documents, or the requester narrowed the scope of a request). We considered the office’s mediation efforts to have had a positive result if at least one of the following events occurred: One or both parties took some action or modified their position after OGIS’s intervention (for example, the agency reduced fees or provided further documents). One or both parties indicated increased satisfaction with the outcome of the FOIA process as the result of the office’s mediation. The issue in dispute was clarified, addressed, or resolved. To determine the reliability of data from OGIS’s case tracking system, we performed basic steps to ensure the data provided were valid and reviewed relevant information describing the database. Specifically, we tested for duplicate records, missing values, and out-of-range values in the data received from OGIS. We assessed the reliability of the system used to maintain these data. To determine the reliability of the case data, we independently replicated a report generated by the software and compared it to documents provided by OGIS to determine whether the data matched. Also, we conducted interviews with agency officials to gain an understanding of the process by which data are entered and validated. Based on the results of these efforts, we found the data sources to be sufficiently reliable for our purposes. To assess the office’s actions to recommend policy changes to Congress and the President, we reviewed documentation describing policy recommendations that were made to Congress and the President. We analyzed annual reports on the status of the implementation of these recommendations. In addition, we reviewed the Office of Management and Budget’s (OMB) written responses describing its reviews of OGIS’s policy recommendations, as well as any applicable OMB guidance, such as the Circular A-19. We supplemented our analyses with interviews of the Director of OGIS, the Acting Executive for Agency Services (the NARA organization in which OGIS is located), officials from OMB’s Office of General Counsel, and other cognizant NARA and OGIS officials. To assess OGIS’s actions to provide best practices to federal agencies, we reviewed documentation of OGIS’s agency best practices, case studies, and suggestions regarding FOIA included in the annual reports, and on the website and blog. We also observed OGIS meetings with other agencies, FOIA requesters, and the general public to discuss FOIA topics, such as the administration of fees and access to records through FOIA libraries. We supplemented our analyses with interviews of relevant OGIS officials to discuss the process used to identify best practices and measures established to evaluate their use by federal agencies. We conducted this performance audit from October 2012 through September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributors to this report were Cynthia J. Scott (assistant director), Nancy Glover, Cynthia Grant, Ashfaq Huda, Alina J. Johnson, Ruben Montes de Oca, Freda Paintsil, David Plocher, Glenn Spiegel, and Walter Vance. | The OPEN Government Act of 2007 amended FOIA and established OGIS within the National Archives and Records Administration to provide oversight and assistance to federal agencies in implementing FOIA. To evaluate how effectively the office is meeting its responsibilities, GAO assessed the actions that the office has taken to (1) implement its responsibilities for reviewing agencies' policies, procedures, and compliance with FOIA; (2) mediate disputes between FOIA requesters and federal agencies; and (3) recommend policy changes to Congress and the President and develop and issue guidance and best practices to improve the administration of FOIA. To do so, GAO analyzed documents describing the office's plans and activities for conducting reviews, mediation case files, and documents describing its policy recommendations made to Congress and the President and its guidance and best practices. GAO also interviewed officials at relevant agencies. Since its establishment in 2009, the Office of Government Information Services (OGIS) has provided comments on proposed Freedom of Information Act (FOIA) regulations for 18 of 99 federal agencies that administer FOIA, as well as a number of Privacy Act system of records notices. While OGIS has suggested improvements to a number of those regulations and notices, it has not performed the reviews of regulations and notices in a proactive, comprehensive manner, and has not conducted any reviews of agencies' compliance with the law. In addition, since it was established 4 years ago, the office has not developed a methodology for conducting reviews of agencies' FOIA policies and procedures, or for compliance with FOIA requirements. OGIS is in the early stages of developing a methodology for conducting such reviews, but has not established a time frame for completion. Until OGIS establishes a methodology and time frame for proactively reviewing agencies' FOIA policies, procedures, and compliance, the office will not be positioned to effectively execute its responsibilities as required by the act. OGIS is providing mediation services and is resolving disputes that might otherwise go unresolved or lead to litigation, although not all of its efforts have been successful. OGIS has achieved positive results for about two-thirds of the cases reviewed by GAO where mediation services were provided. For example, in several cases, one or both parties took action or modified their position after OGIS's intervention. Nevertheless, the office lacks quantifiable goals and measures for its mediation activities, as required by law. For example, it does not have goals to measure timeliness or success. Without these important management tools, OGIS cannot determine how effectively its mediation services are in improving the implementation of FOIA. Since April 2012, OGIS has issued nine recommendations to Congress and the President aimed at improving the administration of FOIA. These recommendations focus on areas where OGIS could help agencies improve their FOIA processes as well as areas where its role could be made more effective. These recommendations were based on its ongoing work with federal agencies and with members of the public. In addition, while not required to issue guidance or best practices, the office collects best practices for improving FOIA processing from several sources, including its reviews of agencies' annual FOIA reports and mediation case files, as well as anecdotally from persons involved in mediation cases facilitated by the office. OGIS shares these best practices in its annual reports and on its website and blog. GAO is recommending that OGIS fulfill its statutory responsibilities by establishing (1) a time frame for completing and implementing a methodology for proactively reviewing agencies' policies, procedures, and compliance with FOIA requirements and (2) measures and goals for its mediation services. In written comments on a draft of the report, the National Archives and Records Administration concurred with the recommendations. |
State and DOD provide a variety of security assistance programs to train and equip security forces (military and police) in North Africa. Many of these programs are funded by State and implemented by DOD. DOD manages security assistance under its Theater Security Cooperation umbrella along with a variety of other activities. The European Command, which is the U.S. military entity responsible for these countries’ programs, focuses its security cooperation activities on assisting allies and partner countries to develop the capabilities to conduct peacekeeping, participate in the war on terrorism, and perform contingency operations with U.S. forces. State funds the following programs to train and equip foreign security forces: Antiterrorism Assistance (ATA) provides strategic, operational, and technical training and equipment to foreign law enforcement agencies to assist them in detecting and eliminating terrorist threats and in protecting facilities, individuals, and infrastructure. State implements this program. Foreign Military Financing (FMF) provides grants and loans for the acquisition of U.S. defense equipment, services, and training by foreign governments. The goal of these grants is to enable key allies to improve their defense capabilities and to foster closer military relationships between the United States and recipient nations. DOD implements the program. International Military Education and Training (IMET) provides training to foreign military and related civilian personnel. IMET training is intended to promote professional militaries around the world and strengthen U.S. military alliances. DOD implements the program. International Narcotics Control and Law Enforcement (INCLE) seeks to enhance the law enforcement capabilities of foreign governments in combating criminal, drug, and terrorist threats. INCLE programs support counternarcotics, intelligence, border patrol, and interdiction activities. State implements the program through interagency agreements with other U.S. government agencies, including the Departments of Justice and Homeland Security. DOD funds and implements several programs to train foreign security forces. The Regional Defense Counterterrorism Fellowship Program (CTFP) provides education and training on counterterrorism activities to foreign military and related civilian officials. This training is intended to bolster the capacity of friendly foreign nations to detect, monitor, and interdict or disrupt the activities of terrorist networks. Joint Combined Exchange Training (JCET) permits U.S. special operations forces to train with foreign military forces to enhance readiness through language proficiency, cultural immersion, knowledge of foreign environments, and instructor skills. The training primarily benefits U.S. forces. Benefits to the host nation’s security forces are incidental. The Aviation Leadership Program (ALP) is a U.S. Air Force-funded program that provides undergraduate pilot training to a small number of international students from friendly, less developed countries. Regional Centers for Security Studies provide a forum for bilateral and multilateral communication, and military and civilian exchanges within a region. Activities at five regional centers range from extended academic programs to conferences on topics such as regional security issues, defense planning, and civilian-military relations. DOD’s three service academies conduct traditional academic exchange programs of varying length and content. Up to 60 foreign students may attend one of the service academies as members of an academy class. The goal of the program is to expose future foreign leaders to their U.S. peers and to promote military professionalism. State and DOD also coordinate to provide nonappropriated assistance for foreign security forces. Excess Defense Articles (EDA) is nonappropriated assistance to help build the defense capabilities of friendly countries in the form of excess U.S. defense articles drawn from DOD stocks. Defense articles declared as excess by the military departments can be transferred in an “as-is, where- is” condition to the recipient. Drawdown is nonappropriated assistance that transfers in-stock defense articles and services from DOD’s inventory, as well as from any other U.S. agency of the U.S. government, to foreign countries and international organizations in response to unforeseen military emergencies, humanitarian catastrophes, peacekeeping needs, or counternarcotics requirements. The governments of Algeria, Morocco, and Tunisia are considered stable, although State has reported problems with their human rights practices. Algeria. Algeria has emerged from a period of terrorist and related violence during the 1990s when more than 100,000 lives were lost, according to State. Since then, as Algeria has made progress toward democratization, casualties have declined sharply. Although Algerian government actions have weakened terrorist groups domestically, Algerians have been found among suicide bombers and terrorists captured in Iraq. Terrorist cells operate in the Algerian east and far south and in the Sahel, the area bordering southern Algeria. State’s most recent human rights report stated that the Algerian government had several human rights problems, including impunity of security forces, allegations of abuse and torture of detainees, and arbitrary arrest and prolonged pretrial detention. State also credited the Algerian government for taking steps to strengthen human rights, which resulted in fewer such incidents than in the past. Morocco. The United States views Morocco as a stable, moderate Arab regime; an ally against terrorism; and a free trade partner. King Mohammed VI retains ultimate power, including over the military. In May 2003, Moroccan suicide bombers attacked several sites in Casablanca. In response, the government arrested an estimated 3,000 people and sentenced at least 900 for crimes under counterterrorism laws, according to State. Moroccan-born extremists associated with al Qaeda affiliates were implicated in the March 2004 train blasts in Madrid. According to State’s human rights report, Morocco’s human rights record “remained poor in many areas.” The report highlighted accusations of excessive force and harsh sentences against demonstrators in Western Sahara and torture of human rights activists in that region. Also included among the human rights problems were reports of police impunity, arbitrary arrest, and incommunicado detention. Western Sahara. Morocco and the independence-seeking Popular Front for the Liberation of Saqiat al-Hamra and Rio de Oro (Polisario) have disputed the independence of Western Sahara since the 1970s, when Spain decolonized the territory. Following a long war in Western Sahara between Morocco and the Polisario, the UN brokered a ceasefire that went into effect in 1991, and a UN peacekeeping force remains in the region. Morocco currently occupies 80 percent of Western Sahara. The United States, which does not recognize Moroccan sovereignty over Western Sahara, supports efforts to reach a mutually acceptable resolution under UN auspices; however, the situation remains at an impasse. This issue is the main impediment to improving bilateral relations between Morocco and Algeria, as Algeria backs the Polisario. Tunisia. Tunisia has a stable yet authoritarian government with a dominant majority political party and a president who has been in power since 1987. The Tunisian government harshly suppressed an Islamist opposition movement in the late 1980s and early 1990s. More recently, suspected terrorists bombed a synagogue on the Tunisian island of Djerba in 2002 and Tunisian expatriates have been arrested in Europe and North America on terrorism-related charges. State’s human rights report stated that Tunisia’s human rights record remained poor. Among the human rights problems reported were incidents of torture and abuse of prisoners and detainees, police impunity, and sanctioned attacks by police on citizens who criticize the government. The United States uses security assistance to Algeria, Morocco, and Tunisia to support the broad goals of security cooperation and counterterrorism. Security assistance programs provide these countries a mixture of training and equipment through programs such as IMET, FMF, EDA for foreign military forces, and counterterrorism and other training for domestic security forces. To carry out these security assistance programs, State and DOD have allocated the equivalent of approximately $146.6 million from fiscal years 2002 to 2005. The contributions of these security assistance programs to achieving security cooperation and counterterrorism goals are assessed collectively with those of other activities, such as military-to-military events and economic and humanitarian assistance. In Algeria, Morocco, and Tunisia, the goals for U.S.-provided security assistance programs are to enhance security and political relationships, fight terrorism, improve foreign military capabilities and interoperability, and increase U.S. access for overflight rights and port visits. The security assistance programs in each of these countries may support one or more of these goals. Security assistance programs attempt to achieve these goals by training and equipping foreign security forces. State has a mission performance process in which the posts outline goals for their countries and identify the security assistance and other programs that would support those goals. For example, State has a goal to increase Tunisia’s antiterrorism capabilities. State planning documents list the ATA program, which provides training in airport security and crisis management, as one of the resources it will employ to meet its goal. Additionally, State has a goal to cooperate with Morocco on counterterrorism and provides communications equipment and intelligence officer training, under the FMF and IMET programs, as a means to achieve this goal. Similarly, DOD develops country campaign plans that include country security cooperation goals and implementation activities, which encompass security assistance programs. For example, DOD’s goals in Algeria are to increase military professionalization and interoperability. To achieve these goals, DOD uses security assistance programs, such as IMET and JCET. Additionally, DOD links its goals to State’s mission planning documents. State and DOD collectively allocated approximately $146.6 million through their security assistance programs to Algeria, Morocco, and Tunisia from fiscal years 2002 to 2005. Tunisia was the largest recipient of U.S.-provided security assistance in this region, receiving $74.8 million, although about 40 percent of this came from the estimated value of excess U.S. equipment delivered in fiscal year 2002 under the EDA program. Morocco received approximately $66.9 million, and Algeria received $5 million. Figure 1 illustrates a breakdown of total assistance to each North African country. Figure 2 shows the total allocations by program that Algeria, Morocco, and Tunisia received from fiscal years 2002 to 2005. State and DOD allocated approximately $5 million to Algeria in security assistance from fiscal year 2002 to fiscal year 2005. The IMET and ATA programs were the principal security assistance programs (85 percent of funding) in Algeria. IMET was used to train approximately 263 Algerian security force personnel during this period. Unlike Morocco and Tunisia, Algeria does not receive FMF funding or EDA equipment transfers. Table 1 shows the U.S. agency, program, allocations, and examples of U.S.- provided security assistance. State and DOD allocated approximately $66.9 million in security assistance to Morocco for training and equipment from fiscal years 2002 to 2005. Of U.S. security assistance programs in Morocco, FMF and EDA are the largest, accounting for about $47 million (71 percent) of the total. IMET trained approximately 458 Moroccan security forces. Also, State-funded training was provided in fiscal year 2005 through the INCLE program for border security at ports-of-entry. Morocco is an active user of the EDA program, acquiring hundreds of used U.S. 5-ton and 2.5-ton trucks, which they use for spare parts. Additionally, Morocco uses the FMF program to obtain spare parts to sustain aging equipment. According to DOD officials in Morocco, as the equipment continues to age, it will become unsustainable, and Morocco will need to find resources to replace this equipment. Table 2 shows the U.S. agency, program, allocations, and examples of U.S.-provided security assistance. State and DOD allocated approximately $74.8 million for training and equipment to Tunisia from fiscal years 2002 to 2005. FMF and EDA were the largest security assistance programs in Tunisia, accounting for 80 percent of the country’s total security assistance. EDA value is based on DOD’s estimated value of the equipment at the time of delivery. Tunisia received EDA in fiscal year 2002 only. The United States offered Tunisia 15 UH-1H 1960s-era helicopters in fiscal year 2005, 7 of which are being refurbished as of April 2006 and will be delivered thereafter, according to DOD officials. DOD would like to refurbish one or two additional helicopters, if additional funds can be found. As in Morocco, the equipment becomes unsustainable as it ages, and Tunisia will need to find resources to replace it, according to State and DOD officials. IMET funding was used to train approximately 406 Tunisian security personnel from fiscal year 2002 to fiscal year 2005. State provided ATA training in fiscal years 2003 and 2004, but not in 2005. Table 3 shows the U.S. agency, program, allocations, and examples of U.S.-provided security assistance. For these countries, State and DOD assess whether and how security assistance programs support U.S. foreign policy and security goals through their evaluation of how broad goals, such as counterterrorism, regional stability goals, and security cooperation goals, are being achieved. State assesses these goals in its annual mission planning process. While the goals are rated for the degree to which they are being achieved, the effectiveness of specific programs, such as FMF or IMET, is not assessed. State officials in Tunis and Rabat said that the assessments of goals in country planning documents are qualitative and that the outcomes or results are difficult to measure, requiring professional judgment to determine the progress made from one year to the next. DOD assesses the collective effectiveness of its programs, which include security assistance and other activities. DOD’s unified command for the region, EUCOM, is developing a new evaluation tool to assess how they are achieving their country goals. This tool will attempt to measure the degree to which desired outcomes, such as reduction in terrorist activities, are achieved. EUCOM plans to use these assessments to allocate its resources and set priorities. Although neither State nor DOD conducts assessments for specific security assistance programs, results from some programs are periodically reported to Congress, and some results indicators are monitored for other programs. The ATA program annually reports to Congress on program activities and provides some examples of how these activities were implemented worldwide. For example, the ATA fiscal year 2005 report states that Morocco’s use of ATA cyberterrorism training supported U.S. efforts to arrest a primary terrorism suspect. The IMET program tracks individuals trained through IMET if they rise to important positions within their government. IMET program officials are also developing a survey tool to be administered to foreign trainees to measure whether the training has affected their preparedness for joint military activities with the United States and has instilled respect for U.S. values of democracy, human rights, rule of law, and civilian control of the military. In Morocco and Tunisia, lapses in vetting trainees for human rights abuses occurred in fiscal years 2004 and 2005. We found that these lapses consisted of (1) the absence of vetting files at posts for approximately 438 trainees and (2) the absence of vetting evidence in an estimated 27 percent (127 of 468 trainees) of the vetting files maintained at posts. These lapses resulted from unclear vetting procedures, undefined roles for vetting, and the lack of a monitoring mechanism to ensure posts’ compliance with vetting procedures. State took steps in December 2005 to address the need for clear procedures and defined vetting roles. However, we found that responsible officials at the posts in Morocco and Tunisia did not monitor whether offices within each post were following vetting procedures, and State headquarters did not monitor the efforts of the posts to vet trainees. Each of the annual Foreign Operations Appropriations Acts since 1998 has included a provision, commonly referred to as the Leahy Amendment, that restricts the provision of assistance appropriated in these acts to any foreign security unit when the Secretary of State has credible evidence that the unit has committed gross violations of human rights. DOD’s appropriations acts have contained a similar restriction on DOD-funded training since fiscal year 1999. While the legal provisions restrict funding to “any unit of the security forces of a foreign country,” State policy applies the restrictions to individual members of security forces, as well. To implement these legislative restrictions, State’s guidance calls for posts and State headquarters units to vet individuals or units proposed for training or assistance to determine whether these foreign security forces have committed gross human rights violations. The various State or DOD offices that implement different training programs at each post initiate the vetting process by submitting names of training candidates for vetting by post officials. These offices also receive the results of human rights vetting conducted at each post and State headquarters, and they maintain vetting files for trainees. See table 4 for various offices implementing training in Morocco and Tunisia. See app. II for details on the description of the human rights vetting process. In Morocco and Tunisia, we found two categories of lapses in human rights vetting in fiscal years 2004 and 2005. The first category consisted of approximately 438 trainees for whom posts did not maintain vetting files. The second category consisted of files that were maintained at the posts but lacked evidence of vetting. Based on our review of 273 out of 468 files, we estimate that 27 percent (127 trainees) lacked evidence of vetting. Of the 438 trainees for whom posts maintained no vetting files, post officials stated that no vetting occurred for approximately 148 Moroccan and Tunisian trainees. These trainees included those who attended DOD- implemented IMET and CTFP training courses outside of the United States, as well as attendees of regional centers and service academies. In addition, we found that the two posts did not maintain vetting documentation on approximately 290 trainees and were, therefore, unable to determine whether vetting occurred. These trainees, who may not have been vetted for human rights abuses, attended State-provided training, including all 168 trainees who attended fiscal year 2004 INCLE courses in Morocco, all 42 trainees who attended fiscal year 2004 ATA courses in Tunisia, and some (80) of the trainees who attended fiscal year 2005 ATA courses in Morocco. See table 5 in app. III for more information on the number of trainees and types of training for which no vetting files existed at the two posts. The two posts did maintain vetting files for 468 trainees. However, we estimated that 27 percent (127 trainees) of the files did not contain evidence of human rights vetting. This estimate is based on a stratified random sample of 273 of 468 available files at the two posts. For these files lacking vetting evidence, posts could not locate any documentation indicating that either the posts or State headquarters provided the implementing office with results on vetting. Based on the results of our sample, we estimate that 100 percent of the files for DOD-implemented training in Tunisia had evidence of vetting. In Morocco, however, we estimate that about two-thirds of the files for DOD-implemented training contained no evidence of vetting. We also reviewed all the available files of State-implemented training in Morocco and found that about one-sixth of them contained no evidence of vetting. Table 6 in app. III shows the results of the sample of trainees we reviewed at each post for evidence of human rights vetting. According to agency officials at both posts, lapses in vetting candidates in fiscal years 2004 and 2005 were generally attributable to unclear guidance that had been provided over the past decade. The guidance did not clearly identify all types of training to which the vetting requirement applied. Until December 2005, the guidance had been issued through multiple cables from headquarters to posts dating from January 1994 through February 2005. Moreover, in Tunisia, State officials stated that, in keeping with their understanding of standard State record retention policies, which were distinct from human rights vetting guidance on record retention, they destroyed files that may have contained evidence of vetting for attendees of ATA training courses. Additionally, in Morocco, a State official stated that he did not know if past vetting occurred because staff responsible for implementing training at that time had rotated to a new post. Lapses in vetting occurred in prior years because of weaknesses in agencies’ management controls: lack of clear and consistent vetting procedures at departments and posts; lack of clear roles and responsibilities for vetting foreign officials; and lack of an established system to monitor compliance with these procedures at State and posts. Although State has taken steps to correct the first two weaknesses, State still lacks a mechanism to monitor compliance. To address our prior recommendation for State to establish clear and consistent vetting procedures, State drafted a standard guide to human rights vetting and distributed it to overseas posts in December 2005. This guide clarifies the vetting procedures, outlines key steps in the vetting process, requires each post to assign a single point of contact with responsibility for vetting procedures, and provides required vetting documentation and record retention policy. Moreover, the guide suggests that each post develop standard vetting operating procedures that take into consideration its needs and circumstances. In Morocco and Tunisia, State officials established post-specific vetting procedures. For example, the procedures at both posts require that the office implementing training prepare a standard memorandum and send it to other offices within the post to request vetting of training candidates. According to these officials, the issuance of a written guide has clarified post officials’ understanding of vetting requirements under State’s policy. For example, the two posts did not always maintain the records of completed vetting results in fiscal years 2004 and 2005. The new State guidance and posts’ standard operating procedures now specify a requirement to maintain these records for 3 years. Furthermore, in response to our prior recommendation that State establish clear roles and responsibilities at posts for human rights vetting, State has required that each post assign a point of contact with responsibility over human rights vetting. Specifically, State’s December 2005 guide specified that this official would have responsibility for oversight of vetting procedures. At the posts in Morocco and Tunisia, an official from the political affairs section serves as the designated point of contact responsible for human rights vetting. As we found in Southeast Asian countries, post officials in Morocco and Tunisia, along with officials from State headquarters office, do not monitor posts’ compliance with State’s human rights vetting procedures. However, our internal control standards state that an organization should ensure that ongoing monitoring occurs as part of normal operations to assess the quality of performance over time. State’s December 2005 guide states that each post’s point of contact should have oversight of vetting procedures, with the Chief of Mission responsible for ensuring that vetting procedures are in place and being followed. However, neither post had established specific activities to carry out this oversight responsibility. For example, the points of contact did not regularly verify with the State and DOD offices implementing training at posts that all relevant trainees were vetted. Also, they did not monitor whether these offices were following vetting procedures, such as maintaining documentation of completed vetting of trainees. Furthermore, as of June 2006, no headquarters office within State is charged with monitoring posts’ compliance with State’s human rights vetting procedures. State’s December 2005 guide specifically states that no single bureau is tasked with monitoring human rights vetting procedures. According to State, some oversight is provided through the established channel of periodic post inspections conducted by the Office of the Inspector General (OIG). However, as of May 2006, assessments of posts’ compliance with State’s human rights vetting process were not part of State OIG’s post inspections. In March 2006, State officials requested the OIG to include reviews of human rights vetting procedures in post inspections. In May 2006, a State OIG official stated that the OIG workplan for inspection would incorporate a check that posts are vetting candidates appropriately. However, inspections of a post would be conducted approximately once every 5 or 6 years, according to a State OIG official. This periodic inspection of posts’ compliance does not meet our standard for ongoing monitoring. Without a monitoring system in place, State has no means of determining whether posts are complying with required procedures intended to ensure that trainees do not have records of human rights abuses. Consequently, State lacks the information it needs to ensure that all posts are following procedures to prevent foreign security forces with suspected human rights records from receiving U.S. assistance. To comply with the Arms Export Control Act, DOD established the Golden Sentry program to monitor countries’ use of U.S.-origin defense articles provided through government-to-government transfers. This program requires systematic monitoring, such as conducting physical inventories, of only the most sensitive defense articles. Morocco and Tunisia do not have any sensitive U.S.-origin equipment subject to this systematic monitoring, and Algeria does not participate in any programs involving government transfers of U.S.-origin equipment, such as foreign military sales or EDA. Monitoring of non-sensitive defense articles is done in conjunction with other assigned duties with no reporting requirements or additional resources. DOD officials in Rabat have not conducted any end- use monitoring in Western Sahara. Additionally, according to State and based on our work, there have been no allegations of unauthorized use of U.S.-origin equipment in Tunisia, Morocco, and the Western Sahara that would trigger greater scrutiny of end use. In compliance with the Arms Export Control Act of 1976, as amended,DOD established an end-use monitoring program called Golden Sentry to ensure the proper end-use monitoring of government-to-government transfers. To make optimum use of the limited resources available for such monitoring purposes, the Golden Sentry program requires different levels of monitoring for different types of defense articles. For those articles deemed sensitive by Golden Sentry such as man-portable air defense systems and night vision devices, systematic monitoring, including physical inventory and inspection procedures, is required. In addition, other conditions or events can affect the level of monitoring that may occur. For example, allegations of a country’s misuse, a country’s development of ties with countries prohibited from receiving U.S. exports, or unusual political or military upheaval can result in greater scrutiny. The monitoring of nonsensitive defense articles and services, such as trucks and spare parts, is referred to as routine end-use monitoring. This routine end-use monitoring is performed by DOD officials in conjunction with other assigned duties. Because DOD applies its resources to end-use monitoring of sensitive items, it does not expend additional resources nor require specific reporting on routine monitoring that is performed incidental to its normal business contacts in these countries. Only routine end-use monitoring is required in Morocco and Tunisia because these countries do not have any sensitive U.S.-origin equipment. The U.S. government gives these countries excess equipment through the EDA program and sells them material to sustain their aging stocks of U.S.- origin equipment with the help of FMF grants. Algeria does not obtain any defense articles from the U.S. government. In accordance with DOD and EUCOM guidelines for routine end-use monitoring, DOD officials at the posts in Morocco and Tunisia stated that they visit a sample of host country bases while conducting other business, such as meetings, exercises, or exchange events, at those locations. These visits help DOD officials confirm the proper use and condition of non-sensitive U.S.-origin equipment. Additionally, according to DOD officials from EUCOM, DSCA, and at the posts in Rabat and Tunis, there have been no allegations of unauthorized use of U.S.-origin equipment, including in Western Sahara, that would trigger greater scrutiny. According to State, the United States has not placed any special restrictions on Morocco’s use of equipment in Western Sahara beyond those provided for in the Arms Export Control Act and the Foreign Assistance Act. Since DOD officials in Morocco do not generally conduct other business in the Western Sahara, they have not conducted end-use monitoring activities involving Morocco’s use of equipment in Western Sahara, according to a DOD official in Rabat. This official and a DSCA official responsible for DOD’s end-use monitoring program noted that, given the absence of sensitive defense articles or allegations of misuse, DOD has no reason to commit resources to inspections there. According to State and other officials, State representatives do, however, visit Western Sahara on other business including fact finding and humanitarian activities. In addition, a State official stated and DOD guidance indicate that, should an allegation of misuse arise, procedures exist for investigation. In addition, the commanding general of the UN peacekeeping mission in Western Sahara stated that there had been no allegations of Moroccan military misuse of U.S.-origin equipment in the Western Sahara. Representatives of the human rights organizations we spoke with also reported that they had no reports of misuse. Security assistance is used as a tool to advance U.S. foreign policy and security goals, including respect for human rights. In 2005, we reported that U.S. agencies did not have adequate assurance that U.S. training funds were used to train and equip only foreign security forces with no violations of human rights. Although State has taken steps to ensure more consistent human rights vetting of foreign security forces receiving U.S.- provided training, it still lacks a mechanism to monitor whether or not posts are following its guidance, which is intended to ensure that trainees do not have records of human rights abuses. State’s guide, issued in December 2005, assigned responsibility for monitoring the vetting process to points of contact at U.S. posts but did not provide them with guidance in carrying out this responsibility. Posts’ points of contact in Morocco and Tunisia were not monitoring posts’ compliance with vetting procedures, and State headquarters lacks assurance that posts are following its vetting policy. This suggests that additional action is needed to strengthen the monitoring element of internal controls. Although State OIG inspections of posts once every 5 years may be a means of monitoring whether posts follow vetting guidelines, internal control standards recommend ongoing monitoring in the course of normal operations. A routine monitoring mechanism would provide greater assurance that all individuals are properly vetted for human rights issues before receiving U.S. assistance and that any lapses in the proper screening of recipients of U.S. assistance could be corrected. To provide assurance that foreign candidates of U.S. security assistance programs comply with existing legislative restrictions and State policies on human rights, we recommend that the Secretary of State, in consultation with the Secretary of Defense, further strengthen the process of human rights vetting of foreign security forces by establishing a systematic monitoring mechanism that will ensure that State’s vetting procedures are carried out at overseas posts. Specifically, we recommend the following two actions: The point of contact responsible for human rights vetting at each post should verify that the various offices implementing U.S. training at the post comply with State’s vetting policy. Posts should report the results of their monitoring efforts to a designated State headquarters unit to provide State with assurance of posts’ compliance with its human rights vetting policy. We provided a draft of this report to the Secretaries of Defense and State for their review and comment. DOD did not comment on our draft. State provided a written response that is reprinted in appendix IV and technical comments, which we incorporated in the report as appropriate. In commenting on our draft and in a subsequent e-mail, State concurred with our recommendations and indicated that they are taking steps to implement them. State also noted that our review did not uncover any evidence that the U.S. government has trained any individual or unit that has committed gross violations of human rights. However, our review only focused on whether State and the posts in Rabat and Tunis vetted trainees. We did not collect data on whether any individual or unit trained by the United States, whether vetted or not, had committed human rights violations. We are providing copies of this report to the Secretaries of Defense and State and interested congressional committees. We will also make copies available to others upon request. In addition, this report will be available 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) 512-8979 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To determine the goals of U.S. security assistance and how these goals are assessed, we interviewed officials from the Department of Defense (DOD) and the Department of State (State) in Washington, D.C., responsible for overseeing security assistance programs. We also interviewed DOD officials at the U.S. European Command in Stuttgart, Germany; U.S. Embassy officials in Rabat, Morocco, and Tunis, Tunisia; and foreign government officials in Rabat. We did not include Algeria in our site visits because its level of participation in U.S. security assistance programs was significantly lower than Morocco’s and Tunisia’s. Additionally, we reviewed State’s Mission Performance Plans and DOD’s Country Campaign Plans for Algeria, Morocco, and Tunisia, as well as a variety of other State and DOD documents to determine how U.S. security assistance programs were linked to State and DOD goals. We obtained data on the nature and extent of the activities funded by these programs in Algeria, Morocco, and Tunisia from program officials and State and DOD documents. We reviewed the reliability of funding data provided by State and DOD by comparing it with similar data obtained from other sources to check for completeness, consistency, and reasonableness. We also interviewed program officials responsible for managing the data to assess how it was developed and maintained. We found the data sufficiently reliable for representing the nature and extent of program funding and activities. To assess U.S. agencies’ implementation in Morocco and Tunisia of State’s policy to screen foreign security forces to ensure compliance with congressional human rights funding restrictions, we reviewed relevant statutes and implementing guidelines. These include the fiscal years 2004 through 2006 Foreign Operations Appropriations Acts and the DOD Appropriations Acts, and the DOD Security Assistance Management Manual. We also reviewed program policy and procedures issued by State and DOD officials in Washington, D.C., and at the posts in Rabat and Tunis. To understand human rights vetting requirements and processes, we interviewed relevant officials in Washington, D.C., the U.S. European Command, and the two posts to discuss vetting requirements and processes. We also reviewed the recommendations made in our July 2005 report on human rights vetting in Southeast Asia. Furthermore, we communicated with a State Office of Inspector General (OIG) official to determine the extent to which State OIG has oversight of human rights vetting at posts. To obtain a general understanding of the human rights situation in Morocco and Tunisia, we met with State human rights officers and representatives of nongovernmental organizations involved with human rights issues. To determine the extent to which the two posts complied with human rights vetting policy in fiscal years 2004 and 2005, we asked the relevant State and DOD officials in Washington, D.C., and at each post to determine the number of foreign security force personnel receiving training implemented at the posts in fiscal years 2004 and 2005. We further asked post officials to identify the total number of vetting files maintained at the post for trainees in this time frame. To identify the approximate number of trainees for whom posts did not maintain vetting files and, therefore, who may not have been vetted, we used training data provided by agency reports as well as State and DOD officials. For vetting files that were available at the posts, we drew a stratified random probability sample of 273 of 468 trainee vetting files available at the U.S. posts in Morocco and Tunisia. With our probability sample, each member of the study population had a nonzero probability of being included, and that probability could be computed for any member. We stratified the population by country and by agency implementing training into the Morocco DOD, Morocco State, and Tunisia DOD case files. Each sample case file was subsequently weighted in the analysis to account statistically for all the case files in the population, including those who were not selected. We reviewed the files for compliance with State human rights vetting policy. To conduct the file review, we used a data collection instrument to systematically capture whether key steps in the post’s human rights vetting process occurred, such as whether the political affairs office at each post was involved. We did not collect data on whether any individual or unit trained by the United States, whether vetted or not, had committed human rights violations. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as 95 percent confidence intervals (e.g., plus or minus 7 percentage points). These are intervals that would contain the actual population values for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. To examine U.S. agencies’ efforts to monitor the use of U.S.-origin defense articles provided to these countries, we reviewed relevant federal laws governing the use of arms exports, including the Arms Export Control Act of 1976, as amended, and the Foreign Assistance Act of 1961, as amended, and reviewed DOD end-use monitoring guidance. We interviewed DOD officials responsible for end-use monitoring at the Defense Security Cooperation Agency (DSCA), EUCOM, and the posts in Rabat and Tunis to determine what monitoring activities took place in these countries, whether these countries have any sensitive defense articles requiring systematic monitoring under DOD guidelines, and whether there have been any allegations of misuse of U.S.-origin equipment. Algeria does not receive U.S.-origin defense articles from the U.S. government. We also interviewed State human rights officers in Rabat, Tunis and Washington, D.C. as well as representatives of Human Rights Watch and Amnesty International to determine if there have been any allegations of misuse involving U.S.-origin defense articles. Furthermore, we spoke with the commander of the United Nations peacekeeping force in Western Sahara regarding Morocco’s military presence there. We also received intelligence briefings from EUCOM and DIA officials. To determine U.S. policy on the use of U.S.-origin equipment by Morocco in Western Sahara, we interviewed State and DOD officials in Washington, D.C., and at the post in Morocco and reviewed relevant State and DOD congressional testimony regarding Western Sahara. We conducted this review from October 2005 to July 2006 in accordance with generally accepted government auditing standards. Agency vetting of candidates for human rights concerns in Morocco and Tunisia typically includes the following steps. First, the office at the post implementing the training programs receives names of training candidates and reviews background information from the host government. Second, the implementing office forwards the names of training candidates to the point of contact at State’s political affairs office at the post for screening, which includes searches using paper and electronic files, for evidence of the candidates’ involvement in human rights violations. The political office may also consult human rights nongovernmental organizations for any information they have on the candidates. The implementing office also circulates the candidates’ names to other relevant offices within the post, such as State’s regional security office and consular affairs office, for vetting. These offices respond to the implementing office with their vetting results. The point of contact in the post’s political affairs office sends the training candidates’ names via cable to the relevant regional bureau, such as the Bureau of Near Eastern Affairs, to request human rights screening by State headquarters. The regional bureau checks candidates’ names against bureau files, and then forwards these names to other bureaus at State headquarters for further vetting. These bureaus—including the Bureaus of Democracy, Human Rights, and Labor; Intelligence and Research; and Political-Military Affairs—screen candidates’ names using paper and electronic files available to them and then report vetting results to the regional bureau. Finally, the regional bureau communicates State headquarters’ vetting results via cable to the post to inform the point of contact and the implementing office whether credible evidence of gross human rights violations existed for training candidates. implemented ACES in February 2005, officials at posts and State headquarters informed us that ACES does not contain entries for Morocco and Tunisia because they had no derogatory information on specific individuals to report as of June 2006. We obtained the estimated number of trainees for whom posts lacked vetting files using data provided by State and DOD training reports and agency officials. See Table 5 for more information on the types of training which lacked vetting files. Our review of a sample of human rights vetting files showed that an estimated 27 percent had no evidence of vetting. Details by the implementing office and country are shown in Table 6. In addition, Muriel Forster, Assistant Director; Lynn Cothern; Howard Cott; David Dornisch; James Krustapentus; Victoria Lin; Mary Moutsos; and Sidney Schwartz made key contributions to this report. | Algeria, Morocco, and Tunisia are important U.S. allies in the war on terrorism. The United States provides these countries with security assistance, however, Congress restricts funding when credible evidence exists that foreign security units have committed gross human rights violations. GAO (1) describes the goals of U.S. security assistance to these countries and examines U.S. agencies' assessment of this assistance, (2) assesses U.S. agencies' implementation in Morocco and Tunisia of State's policy to screen foreign security forces to ensure compliance with congressional human rights funding restrictions, and (3) examines agencies' efforts to monitor the use of U.S.-origin defense articles provided through U.S. security assistance programs in the three countries, including Western Sahara, to ensure that they are not misused or diverted. GAO visited U.S. posts in Morocco and Tunisia and analyzed trainee files to determine compliance with human rights vetting policy. The goals of the U.S. security assistance programs in Algeria, Morocco, and Tunisia are to support counterterrorism and broader security cooperation goals, such as maintaining regional stability and security, building the military capacity of foreign partners, and promoting interoperability with U.S. forces. To support these goals, the Departments of State (State) and Defense (DOD) have allocated approximately $146.6 million, from fiscal years 2002 to 2005, to train and equip security forces in these countries. DOD and State assess these programs together with other related activities through evaluations of security cooperation, counterterrorism, and other country goals. State policy requires human rights vetting of individuals and units of foreign security forces receiving U.S.-provided training. In Morocco and Tunisia, GAO found lapses in the vetting of trainees during fiscal years 2004 and 2005. These lapses include more than 400 trainees for whom no vetting files existed at the posts. In addition, even though posts maintained vetting files on 468 trainees, GAO estimates that 27 percent of these files did not have evidence of vetting. The lapses in vetting trainees resulted from unclear guidance on vetting procedures, undefined roles and responsibilities for vetting, and the lack of a systematic monitoring mechanism to ensure that procedures were followed. Although State has issued a guide to clarify procedures and has required posts to assign an official responsible for vetting, it does not monitor whether posts are following vetting procedures. Algeria, Morocco, and Tunisia do not have any sensitive U.S.-origin defense articles subject to DOD's systematic monitoring requirements, such as physical inventory and inspection requirements. According to DOD officials and human rights organizations, no allegations of unauthorized use of U.S.-origin equipment have been made that would call for greater scrutiny of end use by these countries. |
The safety and quality of the U.S. food supply is governed by a highly complex system stemming from at least 30 laws related to food safety that are collectively administered by 15 agencies. The two primary food safety agencies are USDA and FDA. USDA is responsible for the safety of meat, poultry, processed egg products, and, as soon as recently proposed regulations are finalized, catfish. FDA is responsible for virtually all other food, including seafood. In fiscal year 2009, budget obligations for FDA’s Foods Program were $685 million and budget obligations for FSIS were approximately $975 million. Federal food safety activities include inspecting domestic food-processing facilities and imported food at ports of entry, visiting foreign countries or firms to inspect and evaluate foreign food safety systems, analyzing samples collected at food-processing facilities to identify possible contamination, rulemaking and standard setting, and developing guidance for industry, among other things. Appendix II summarizes the federal agencies’ food safety responsibilities and main authorizing statutes. The federal food safety system is supplemented by the states, which may have their own statutes, regulations, and agencies for regulating and inspecting the safety and quality of food products. The existing food safety system, like many other federal programs and policies, evolved piecemeal, typically in response to particular health threats or economic crises. Existing statutes give agencies different regulatory and enforcement authorities for different food products. For example, the 2008 Farm Bill gave USDA responsibility for inspecting catfish, but left general responsibility for seafood safety with FDA, making the system more fragmented. According to USDA officials, USDA estimates it will spend no more than $5 million in fiscal year 2011 and did not request funding for fiscal year 2012 for its catfish inspection program. Three major trends also create food safety challenges. First, a substantial and increasing portion of the U.S. food supply is imported. Second, consumers are eating more raw and minimally processed foods. Third, segments of the population that are particularly susceptible to food-borne illnesses, such as older adults and immune-compromised individuals, are growing. Creation of the FSWG by the President in March 2009 elevated food safety as a national priority, demonstrated strong commitment and top leadership support, and was designed to foster interagency collaboration on this crosscutting issue. However, the FSWG has not developed a governmentwide performance plan that provides a comprehensive picture of the federal government’s food safety efforts. The FSWG is co-chaired by the Secretaries of Health and Human Services and Agriculture. It also includes officials from FDA, FSIS, the Centers for Disease Control and Prevention (CDC), the Environmental Protection Agency, the Department of Homeland Security, the Department of Commerce, the Department of State, and several offices in the Executive Office of the President, including OMB. Both FDA and FSIS have created executive positions to focus agency efforts on food safety, and officials from both agencies told us that the FSWG has increased interagency collaboration. However, while creating the FSWG is a positive first step, we have reported that the continuity of food safety coordination efforts can be hampered by changes in executive branch leadership. As a presidentially appointed working group, the FSWG’s future is uncertain, and the experience of the former President’s Council on Food Safety, which disbanded less than 3 years after it was created, illustrates that this type of approach can be short lived. Nevertheless, through the FSWG, federal agencies have taken steps designed to increase collaboration in some areas that cross regulatory jurisdictions––in particular, improving produce safety, reducing Salmonella contamination, and developing food safety performance measures. Produce safety. Preventing contamination of fresh produce is an FSWG priority. In 2009, FDA issued draft guidance for industry on produce safety to minimize food safety hazards and contamination of leafy greens, tomatoes, and melons. FDA has also publicly announced that it is developing a proposed regulation setting enforceable standards for fresh produce safety at farms and packing houses, and FDA and AMS officials told us the agencies are collaborating on the rulemaking process, as AMS establishes quality and condition standards the food industry can voluntarily adopt for marketing purposes through marketing agreements. Specifically, an AMS employee who USDA describes as having extensive experience working with the produce industry for over 20 years has been temporarily assigned to work as a Senior Policy Analyst in FDA’s Office of Foods from October 2009 to March 2011 to help develop the regulation. The AMS employee told us she is providing FDA with information about practices on farms and in packing houses that FDA officials are using to inform their rulemaking. She is also helping FDA leverage existing AMS- industry relationships to conduct outreach to farms and packing houses before the produce safety regulation goes into effect. In addition, AMS has publicly announced that it is developing a proposed national marketing agreement for leafy greens that will include food safety standards. The purpose of the proposed marketing agreement is to enhance the quality of fresh leafy green vegetable products through the application of good agricultural and handling practices, and to improve consumer confidence, among other things. Based on our review of Federal Register documents and interviews with AMS and FDA officials, we found that AMS is coordinating with FDA to ensure that the standards in the proposed marketing agreement are consistent with the standards FDA is setting in the produce safety regulation. Salmonella contamination. According to FSIS, FDA, and OMB officials, FSIS and FDA worked together to establish complementary performance goals under the High Priority Performance Goal initiative—a White House management initiative—for reducing illness caused by Salmonella. FSIS officials told us that staff from FSIS and FDA communicated on a regular basis to coordinate efforts to develop their respective agencies’ goals, as they are closely intertwined. Salmonella contamination can occur in poultry and egg products, which are under FSIS’s regulatory jurisdiction, and shell eggs, which are primarily under FDA’s jurisdiction. Both agencies set goals to reduce illness from Salmonella within their own areas of egg safety jurisdiction by the end of 2011. According to the FSIS officials, FSIS and FDA coordinated on ensuring that the goals complemented one another, utilized the same datasets, and covered the same time period so that the agencies measure their progress consistently. FSIS’s goal is to reduce the rate of illness due to Salmonella in FSIS- regulated products to 5.3 cases per 100,000 people by 2011, a reduction of approximately 22,600 illnesses below the current baseline with an associated cost reduction of $404 million. FDA’s goal is a 10 percent decrease by 2011 over the 2007-2009 average baseline rate of Salmonella Enteritidis illness in the population. The agencies have taken additional actions to address Salmonella. Specifically, in May 2010, FSIS announced new performance standards that poultry establishments must meet for Salmonella and released a compliance guide for industry. In July 2009, FDA issued a final rule requiring shell egg producers to implement measures to prevent Salmonella Enteritidis from contaminating eggs and, in August 2010, issued draft guidance for producers on implementing the rule. Food safety performance measures. FSWG members have proposed 21 performance measures for assessing the federal government’s progress toward meeting its crosscutting food safety goals. For example, to assess progress in preventing harm to consumers from unsafe food, one of the performance measures the FSWG is proposing is to track the prevalence of selected foodborne hazards in key commodity groups. As a next step, FSIS and FDA are beginning to set quantitative targets for the measures. For example, one of FSIS’s proposed quantitative targets is to reduce the prevalence of Salmonella Enteritidis in FSIS prepasteurized egg products from 14.12 percent (the fiscal year 2009 baseline) to 12.71 percent by fiscal year 2015. FDA is developing its own quantitative targets. FSWG and agency documents show that both agencies, with support from CDC, are coordinating to pilot-test a framework for developing the quantitative targets for Salmonella Enteritidis that covers multiple agencies’ oversight jurisdictions. FSIS officials told us this framework could identify data gaps and help target areas where more attention is needed. An FDA official told us that the agencies plan to use this framework to assess progress toward other food safety goals, but could not estimate when the agencies will finish developing a complete set of quantitative targets for the food safety performance measures. In addition, we found that federal food safety agencies are taking actions in two other areas. First, FDA is leading an effort involving other federal agencies including CDC, USDA, and the Department of Homeland Security, to increase the inspection, laboratory, and outbreak-response capacities of state and local food safety agencies. FDA issued a draft paper describing its vision and established working groups of federal, state, and local government representatives to address issues such as national standards for food regulatory programs and standardized laboratory practices and procedures, among others. It has also hosted two national meetings that were attended by public health and food safety officials from federal, state, local, and territorial government agencies. Second, in February 2011, federal food safety agencies established a Multi-Agency Coordination group intended to improve the response to outbreaks of foodborne illness, an FSWG priority. According to agency documents, the group will be used to coordinate the response of federal agencies, and state, local, and tribal governments, in managing large-scale foodborne illness outbreaks, prioritizing the allocation of critical resources, and making policy decisions. It is co-chaired by USDA and the Department of Health and Human Services and participating federal agencies include FDA, CDC, FSIS, AMS, the Food and Nutrition Service, the Animal and Plant Health Inspection Service, the Foreign Agricultural Service, the Environmental Protection Agency, and the Departments of Homeland Security, State, and Justice. However, while the FSWG has taken steps to increase interagency collaboration on food safety, it has not developed a governmentwide performance plan that provides a comprehensive picture of the federal government’s food safety efforts. When we added food safety oversight to our high-risk list in 2007, we said that what remains to be done is to develop a governmentwide performance plan for food safety that is mission based, results oriented, and provides a cross-agency perspective. We also said this plan could be used to help decision makers balance trade-offs and compare performance when resource allocation and restructuring decisions are made. Officials from OMB, FDA, and USDA told us the FSWG’s July 2009 “key findings” represent the governmentwide plan for food safety. The key findings identify the FSWG’s three core principles for improving the safety of the U.S. food supply—prioritizing prevention, strengthening surveillance and enforcement, and improving response and recovery—and outline a number of goals and actions the agencies are taking, or plan to take, to improve food safety. The key findings are mission based and offer a cross-agency perspective. For example, both FSIS and FDA are contributing to goals for reducing illness from Salmonella and E. coli, and multiple federal agencies are contributing to goals for improving the response to outbreaks of foodborne illness. Some of the goals are results oriented, such as FSIS’s goal to have 90 percent of poultry establishments meeting its new standards to reduce Salmonella in turkeys and poultry by the end of 2010, and FDA’s goal to reduce foodborne illness from shell eggs by approximately 60 percent by issuing a final rule to control Salmonella during egg production. However, most of the goals are not results oriented and do not include performance measures, focusing instead on specific actions the agencies plan to take in the near term. For example, to reduce illness from E. coli, FSIS’s goal is to issue improved instructions to its workforce and increase its sampling. It is not clear the extent to which these one-time actions will help reduce illness from E. coli. Further, it is not clear how the key findings align with the 21 performance measures for food safety proposed by the FSWG. Our prior work has identified results oriented goals and performance measures as standard elements of performance plans. Because the FSWG’s key findings generally lack results oriented goals and performance measures, they do not provide a concrete statement of the federal government’s expected performance for food safety that can be used for subsequent comparison with its actual performance. Identifying performance gaps can help decision makers target scarce resources. In addition, the key findings do not include information about the resources that are needed to achieve the FSWG’s goals. A discussion of the strategies and resources needed to achieve annual goals is also a standard element of performance plans. The key findings also do not address the entire food supply; for example none of the goals specifically addresses food imports, which represent 60 percent of fresh fruits and vegetables and 80 percent of seafood. Although performance plans are to be updated on an annual basis, OMB officials told us there are currently no plans to update the key findings, which were issued in 2009. Those officials also told us that, instead, the intent was to integrate the FSWG’s planning into the agencies’ budgeting processes, which include developing performance goals. While individual agency documents provide important and useful information, they do not provide a broader and more integrated picture of food safety oversight throughout the federal government. Without a governmentwide performance plan for food safety, decision makers do not have a comprehensive picture of the federal government’s performance on this crosscutting issue. Further, performance plans provide an opportunity for agencies to identify factors that influence the accomplishment of their goals and discuss the strategies they plan to take to leverage or mitigate the influence such factors can have on achieving results. For example, a governmentwide plan for food safety could recognize that the federal agencies’ food safety oversight authorities differ and recognize and address other external factors, such as the actions of state and local governments, which influence the accomplishment of federal food safety goals. Recent legislation reinforces the need for and importance of governmentwide planning. The GPRA Modernization Act of 2010, which updates the requirements for strategic plans and performance plans, also recognizes the importance of governmentwide planning on crosscutting issues. In addition, the recently enacted FDA Food Safety Modernization Act calls for coordination among federal agencies. Specifically, the Act directs the Secretary of Health and Human Services to improve coordination and cooperation with the Secretaries of Agriculture and Homeland Security to target food inspection resources and to submit annual reports to Congress describing those efforts and providing other information about FDA’s inspections. The Act also requires the Secretaries of Health and Human Services and Agriculture, in consultation with the Secretary of Homeland Security, to prepare a National Agriculture and Food Defense Strategy. It also requires the Secretary of Health and Human Services, in coordination with the Secretaries of Agriculture and Homeland Security, to submit a comprehensive report to Congress that identifies programs and practices that are intended to promote the safety and security of the food supply and prevent foodborne outbreaks. The information provided in those reports could help inform a governmentwide performance plan for food safety. Moreover, we have reported that establishing mutually reinforcing or joint strategies is a key practice that can help enhance and sustain interagency collaboration among federal agencies. Such strategies help in aligning the collaborating agencies’ activities, core processes, and resources to accomplish a common outcome. In this current fiscal environment, we and others have called for agencies to leverage scarce resources for food safety and other issues. Our past work on other interagency planning may provide models for governmentwide planning on food safety. While FDA and USDA have collaborated on setting food safety goals for Healthy People—a multiagency initiative to improve public health—they are long-term goals, set every 10 years, and are not linked to resources. We have reported on interagency planning for sharing health resources for military service members and veterans and managing wildland fires. Health resource sharing. The Department of Veterans Affairs (VA) and Department of Defense (DOD) collaborate to use federal health resources, such as space in medical facilities, under the Veterans Administration and Department of Defense Health Resources Sharing and Emergency Operations Act. In addition, the VA/DOD Joint Executive Council develops a joint strategic plan to shape, focus, and prioritize the coordination and sharing efforts, as directed by Congress and recommended by a presidential task force. The council has developed a new joint strategic plan each year since 2003, which is included in the council’s annual report to the VA and DOD Secretaries on the status of implementing its collaboration and sharing activities. We reported that, according to DOD, the joint strategic plan outlines actionable objectives, assigns accountability, and establishes performance targets. Wildland fire management. Five federal agencies that share responsibility for wildland fire management—the Forest Service at USDA and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service at the Department of Interior—have long coordinated their fire suppression efforts. The intergovernmental Wildland Fire Leadership Council, which was recommended by GAO and established by the Secretaries of Agriculture and the Interior in 2002, seeks to support implementation of federal fire management policy by coordinating agency policies and providing strategic direction. In reports dating back to 1999, we have recommended that the agencies develop a cohesive strategy that identifies options and funding for preventing and responding to fires. At the direction of Congress, the council began developing a cohesive wildland fire management strategy in 2010 that is required to address fire suppression, prevention, and resource allocation issues. We, the National Academy of Sciences, the Produce Safety Project, and the former President’s Council on Food Safety have identified options to reduce fragmentation and overlap in food safety oversight in the form of alternative organizational structures (see app. III), but a detailed analysis of their advantages and disadvantages and the potential challenges that could arise if they are implemented has yet to be conducted. In 2001, we first suggested that Congress consider commissioning the National Academy of Sciences or a blue ribbon panel to conduct a detailed analysis of alternative organizational structures for food safety and reiterated the suggestion over the years, most recently in the 2011 high-risk list update. Some of the alternative organizational structures that we and others have identified include: Single food safety agency. All aspects of food safety at the federal level could be consolidated into a single food safety agency, either housed within an existing agency or established as an independent entity. This consolidation would bring oversight of all foods under a single administrator and consolidate tasks that are currently dispersed throughout multiple federal agencies, such as inspections, risk assessment, standard setting, research, and surveillance. Food safety inspection agency. Food safety inspection activities, but not other activities such as surveillance, could be consolidated under USDA or FDA. As we reported in the past, any new inspection system should employ a unified risk-based approach, which would require Congress to modify the current legislative structure. Data collection and risk analysis center. Data collection and risk analysis could be consolidated into a single center that would disseminate the results of its analyses to the food safety agencies. For example, this center could consolidate food safety surveillance data collected from a variety of sources and analyze it at the national level to support risk-based decision making. While the center would be independent from the regulatory agencies to give its analyses scientific credibility, it would also consult with the agencies to understand their needs, but would not preempt any agency’s authority to develop its own food safety management approach. Coordination mechanism. Centralized, executive leadership could be provided for the existing organizational structure using a coordination mechanism with representatives from the agencies, similar to the FSWG. However, unlike the FSWG, the coordination mechanism would be led by a central chair who would be appointed by the President and have control over resources. While a detailed analysis of the alternatives has not been conducted, organizations have offered some preliminary observations on some of their benefits. For example, in its strategic plan, the former President’s Council on Food Safety stated that consolidation could eliminate duplication and fragmentation, create a centralized leadership, clarify lines of authority, and facilitate priority setting and resource allocation based on risk. Similarly, in its 2010 report Enhancing Food Safety: The Role of the Food and Drug Administration, the National Academy of Sciences concluded that the core federal food safety responsibilities should reside within a single entity having a unified administrative structure, clear mandate, dedicated budget, and full responsibility for oversight of the entire food supply. In its report, the National Academy of Sciences also stated that centralizing data collection and risk analysis would eliminate the need for each agency to develop its own comprehensive expertise in risk and decision analysis; promote communication, collaboration, and data sharing among federal agencies; and could be a first step toward accomplishing the more challenging goal of consolidating all federal food safety activities into a single agency. We recognize that reorganizing federal food safety responsibilities would be a complex process. Further, our work on other agency mergers and transformations indicates that reorganizing food safety could have short- term disruptions and transition costs. We reported that a merger or transformation is a substantial commitment that could take years before it is completed, and therefore must be carefully and closely managed. In particular, the experience of major private sector mergers and acquisitions has been that productivity and effectiveness actually decline initially, in part because attention is concentrated on critical and immediate integration issues and diverted from longer-term mission issues. Our work on seven other countries’ experiences between 1997 and 2004 in consolidating their food safety systems found that while the extent to which those countries consolidated their food systems varied considerably, they faced similar challenges in deciding whether to place the new agency within the existing health or agriculture agency or establish it as a stand-alone agency and in determining what responsibilities the new agency would have. We also reported that the countries experienced benefits, such as improved public confidence in their food safety systems. In addition, each country modified its existing legal framework to give legal authority and responsibility to the new food safety agency. Some European Union (EU) countries were further prompted to consolidate in order to comply with new EU food safety legislation that became effective, in large part, in January 2006. The EU adopted comprehensive food safety legislation in 2004 intended to create a single, transparent set of food safety rules applicable to both animal and nonanimal products. We and other organizations have regularly paired proposals for alternative food safety organizations with calls for comprehensive, unified, risk-based food safety legislation. Existing statutes give agencies different regulatory and enforcement authorities, and we have reported that legislation governing the agencies’ authorities, jurisdictions, and inspection frequencies is not the product of strategic design as to how to protect public health. In May 2004, we reported that a critical step in designing and implementing a risk-based food safety system is identifying the most important food safety problems across the entire food system from a public health perspective and concluded that comprehensive, uniform, and risk-based food safety legislation is needed to provide the foundation for this approach. The National Academy of Sciences also concluded that to create a science-based food safety system current laws must be revised, and recommended that Congress change federal statutes so that inspection, enforcement, and research efforts can be based on risks to public health. While the new food safety law strengthens a major part of the food safety system and expands FDA’s oversight authority, it does not apply to the federal food safety system as a whole or create a new risk- based food safety structure. In February 2011, we reiterated our suggestion for comprehensive, unified, risk-based food safety legislation. We are encouraged by the executive branch’s attention to food safety through the FSWG and its initial efforts designed to improve interagency collaboration on this very important crosscutting issue. However, food safety remains fragmented and much work remains to be done on several of the FSWG initiatives. Further, the collaboration that has begun under the FSWG may be short lived, putting some of the longer-term efforts, such as developing results-oriented food safety goals and measures, at risk of not being completed. Because food safety oversight faces ongoing challenges, it is important that this issue be given sustained attention; as we have previously reported, the continuity of food safety coordination efforts can be hampered when executive branch leadership changes. Thus, it is critical that the primary food safety agencies engage in comprehensive, governmentwide planning to increase interagency collaboration under the current system. Such a plan, paired with comprehensive risk-based food safety legislation and a detailed analysis of alternative organizational structures for food safety oversight, could be an important tool for addressing fragmentation in federal food safety oversight. However, without an annually updated governmentwide performance plan for food safety that contains results-oriented goals and performance measures and a discussion of strategies and resources used by the agencies with food safety responsibilities, decision makers do not have a comprehensive picture of the federal government’s performance on this crosscutting issue. Further, without such information, decision makers may be hampered in their efforts to make key resource allocation and restructuring decisions. In order to improve collaboration among federal agencies on food safety oversight and provide an integrated perspective on this crosscutting issue we are making the following recommendation. The Director of the Office of Management and Budget, in consultation with the federal agencies that have food safety responsibilities, should develop a governmentwide performance plan for food safety. The performance plan should include results-oriented goals and performance measures for food safety oversight throughout the federal government, as well as a discussion about strategies and resources. It should be updated on an annual basis. We provided USDA, the Department of Health and Human Services, and OMB with drafts of this report for review. OMB declined to comment on the draft report. USDA and Health and Human Services provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Agriculture, Director of the Office of Management and Budget, Commissioner of the Food and Drug Administration, 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 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 key contributions to this report are listed in appendix IV. A new statutory requirement mandates that GAO identify programs, agencies, offices, and initiatives with duplicative goals and activities within departments and governmentwide. Under that mandate this review examines: (1) steps, if any, that the Food Safety Working Group (FSWG) has taken to increase collaboration among federal food safety agencies, and (2) options we and others have identified to reduce fragmentation, overlap, and potential duplication in food safety oversight. To complete our work we reviewed food safety reports and legislation, and interviewed officials from the Department of Agriculture (USDA), the Food and Drug Administration (FDA), and the Office of Management and Budget (OMB). To address the first question we also collected and analyzed information about the FSWG, its activities, and its plan for food safety. We also collected documentation about the FSWG’s activities from the agencies, the Federal Register, and budget documents. We assessed the FSWG’s “key findings,” which FSWG officials told us represent the governmentwide plan for food safety, against GAO’s criteria for performance plans. To identify options for reducing fragmentation, overlap, and potential duplication, we identified alternative organizational structures for food safety by reviewing reports by GAO, the National Academy of Sciences, the Produce Safety Project, and the former President’s Council on Food Safety. We also reviewed reports by GAO about federal agency and private sector mergers and organizational transformations. We did not independently verify the foreign laws discussed in this report. We conducted this performance audit from July 2010 to March 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. G & CoopveOAee A. Responsible for: Ensuring tht the ntion’ dometic nd imported commercisupply of met, poltry, egg prodct, nd ctfi safe, wholeome, nd correctly labeled nd pckged, nd for enforcing the Hne Method of Saughter Act of 1978, as mended. Reponle for providing volntry fee-for-ervice inpection for exotic nd other edile nim. Main authorizing statutes: Poltry Prodct Inpection Act, Pub. L. No. 85-172, 71 St. 441 (1957) (codified as mended t 21 U.S.C. ss. 451-472); Federl Met Inpection Act, ch. 2907, 34 St. 1256, 1260 (1907) (codified as mended t 21 U.S.C. ss. 601-695); Egg Prodct Inpection Act, Pub. L. No. 91-597, 84 St. 1620 (1970) (codified as mended t 21 U.S.C. ss. 1031-1056). See o, Hne Method of Saughter Act of 1978, Pub. L. No. 95-445, 92 St. 1069 (codified as mended t 7 U.S.C. ss. 1902, 1904, 21 U.S.C. ss. 603, 610, 620); Federl Anti-Tmpering Act, Pub. L. No. 98-127, . 2. 97 St. 831, 831 (1983) (codified as mended t 18 U.S.C. . 1365); Agricltl Mrketing Act of 1946, ch. 966, tit. II, . 203, 60 St. 1087, 1087 (codified as mended t 7 U.S.C. . 1622). See o NtionSchool Lnch Act, ch. 281, 60 St. 230 (1946) (codified as mended t 42 U.S.C. ss. 1751-1770), as mended y Child Ntrition nd WIC Reauthoriztion Act of 2004, Pub. L. No. 108-265, . 118, 118 St. 729, 752 (codified as mended t 42 U.S.C. . 1762(h)). Responsible for: Preventing the introdction or dissemintion of plnt pe. Reponle for preventing the introdction or dissemintion of livetock pe or dias. Main authorizing statutes: Agricltl Bioterrorim Act of 2002, Pub. L. No. 107-188, tit. II, subtit. B, 116 St. 647 (codified as mended t 7 U.S.C. . 8401); Animl Helth Protection Act, Pub. L. No. 107-171, tit. X, 116 St. 494 (2002) (codified as mended t 7 U.S.C. ss. 8301-8322); Plnt Protection Act, Pub. L. No. 106-224, tit. IV, 114 St. 438 (2000) (codified as mended t 7 U.S.C. ss. 7701-7721). Responsible for: Eablihing quality ndrd, inpection procedre, rketing of grin nd other relted prodct. Main authorizing statutes: United Ste Grin Sndrd Act, ch. 313, St. 482 (1916) (codified as mended t 7 U.S.C. ss. 71-87k). G & CoopveOAee A. Responsible for: Eablihing quality nd condition ndrd for, mong other thing, diry, frit nd vegetable, livetock. Main authorizing statutes: Agricltl Mrketing Act of 1946, ch. 966, tit. II, 60 St. 1087 (codified as mended t 7 U.S.C. ss. 1621-1638d). See o e.g., Periable Agricltl Commoditie Act, 1930, ch. 436, 46 St. 531 (codified as mended t 7 U.S.C. . 499- 499); FederSeed Act, Ch. 615, 53 St. 1275 (1939) (codified as mended t 7 U.S.C. ss. 1551-1611). Ntrition, Food Safety, nd Quality food supply i safe nd ecre nd tht food meet foreign nd dometic regtory reqirement. Main authorizing statutes: 7 U.S.C. ss. 1622, 2204, 3101, 3121, 3318, ; o e.g., 7 U.S.C. ss. 136i-2, 391, 7654. Responsible for: Providing ly of the economic issu ffecting the safety of the U.S. food supply. Main authorizing statutes: 7 U.S.C. ss. 1622, 2204, 3101, 3121, 3318, ; o e.g., 7 U.S.C. ss. 136i-2, 391, 7654. Responsible for: Providing titicl d, inclding gricltl chemicusage d, relted to the safety of the food supply. Main authorizing statutes: 7 U.S.C. ss. 1622, 2204, 3101, 3121, 3318, ; o e.g., 7 U.S.C. ss. 136i-2, 391, 7654. Ntionl Integrted Food Safety Rerch Inititive niverity tem nd other prtner orgniztion tht demontrte n integrted pproch to olving prolem in pplied food safety rerch, edtion, or extenion. Main authorizing statutes: 7 U.S.C. ss. 361-361i, 3121, 3151, 3155, 3318, 3319, 6971(f); o e.g., 7 U.S.C. ss. 450i, 3902. Responsible for: Ensuring thll dometic nd imported food, exclding mend poltry prodct, re safe, wholeome, sanitry, nd properly labeled. G & CoopveOAee A. Responsibilities and main authorizing statutes Act of 1994, Pub. L. No. 103-417, 108 St. 4325; Food nd DrModerniztion Act of 1997, Pub. L. No. 105-115, 111 St. 2296; Public Helth Secrity nd Bioterrorim Prepredness nd Repone Act of 2002, Pub. L. No. 107-188, tit. III, 116 St. 594; Sanitry Food Trporttion Act of 2005, Pub. L. No. 109-59, tit. VII, . 7202, 119 St. 1891, 1911; FDA Food Safety Moderniztion Act. Pub. L. No. 111-353, 124 St. 3885 (2011). See o, Act of Feuary 15, 1927 (Federl Import Milk Act), ch. 155, 44 St. 1101 (codified as Amended t 21 U.S.C. 141-149); Fir Pckging nd Labeling Act, Pub. L. No. 89-755, 80 St. 1296 (1966) (codified as mended t 15 U.S.C. ss. 1451-1461); Federl Anti-Tmpering Act, Pub. L. No. 98-127, . 2. 97 St. 831, 831 (1983) (codified as mended t 18 U.S.C. . 1365); Peticide Monitoring Improvement Act of 1988, Pub. L. No. 100-418, . 4702, 102 St. 1411, 1412 (codified as mended t 21 U.S.C. . 1401). Responsible for: Preventing the trmission, dissemintion, nd preof foodorne illness to protect the public helth. Main authorizing statutes: Public Helth Service Act, ch. 373, 58 St. 682 (1944) (codified as mended t 42 U.S.C. ss. 201-300bbb). food for safety nd quality Responsible for: Providing volntry, fee-for-ervice exmintion of Main authorizing statutes: Agricltl Mrketing Act of 1946, ch. 966, tit. II, . 203, 205, 60 St. 1087, 1087 (codified as mended t 7 U.S.C. ss. 1622, 1624). See o Act of My 25, 1900 (Lcey Act), ch. 553, 31 St. 187 (codified as mended in prt t 16 U.S.C. . 3371). Polltion Prevention nd Toxin; Peticide Progrm; Safe Drinking Wter tht preent nreasonable rk of injry to helth or the environment. Reponle for issuing regtion to eablih, modify, or revoke tolernce for peticide chemicl reid. Reponle for etting ntionl drinking wter ndrd of quality nd consulting with FDA efore FDA promlgte regtion for ndrd of quality for ottled wter. Main authorizing statutes: Toxic Subsnce Control Act, Pub. L. No. 94-469, 90 St. 2003 (1976) (codified as mended t 15 U.S.C. ss. 2601-2697) Federl Inecticide, Fngicide, nd Rodenticide Act, ch. 125, 61 St. 163 (1947) (codified as mended t 7 U.S.C. ss. 136-136y), as mended y the Food Quality Protection Act of 1996, Pub. L. No. 104-170, 110 St. 1489; 21 U.S.C. . 346, Safe Drinking Wter Act of 1974, Pub. L. No. 93-523, 88 St. 1660 (codified as mended t 21 U.S.C. . 349 nd 42 U.S.C. ss. 300f throgh 300j-26). G & CoopveOAee A. Responsibilities and main authorizing statutes Responsible for: Regting, enforcing, nd issuing permit for the prodction, labeling, nd ditribution of lcoholic everge. Main authorizing statutes: Federl Alcohol Adminitrtion Act, ch. 814, St. 977 (1935) (codified as mended t 27 U.S.C. ss. 201-219). Responsible for: Inpecting import, inclding food prodct, plnt, nd live nim, for complince with U.S. lnd assting ll federgencie in enforcing their regtion t the order. Main authorizing statutes: Triff Act of 1930, 19 U.S.C. ss. 1202-1654. See o Homelnd Secrity Act of 2002, Pub. L. No. 107-296, . 421, 116 St. 2135, 2182. Responsible for: Enforcing prohiition int fdvertiing for, mong other thing, food prodct. Main authorizing statutes: Federl Trde Commission Act, ch. 311, 38 St. 717 (1914) (codified as mended t 15 U.S.C. ss. 41-58). The 200 Farm Bill amended the Federal Meat Inspection Act to give USDA responsibility for the inspection of catfish. The amendments specified that they would not apply until USDA issues final regulations implementing them, a process that was not yet complete as of February 2011. GAO, Food Safety and Security: Fundamental Changes Needed to Ensure Safe Food. GAO-02-47T. Washington, D.C.: October 10, 2001. Institute of Medicine and National Research Council, Enhancing Food Safety: The Role of the Food and Drug Administration. The National Academies Press. Washington, D.C.: 2010. Institute of Medicine and National Research Council, Ensuring Safe Food: From Production To Consumption. The National Academies Press. Washington, D.C.: 1998. President’s Council on Food Safety, Food Safety Strategic Plan. Washington, D.C.: January 19, 2001. Batz, Michael and J. Glenn Morris, Jr., Building the Science Foundation of a Modern Food Safety System: Lessons From Denmark, The Netherlands, and The United Kingdom on Creating a More Coordinated and Integrated Approach to Food Safety Information. A report for the Produce Safety Project. Washington, D.C.: May 10, 2010. In addition to the contact named above, José Alfredo Gómez (Assistant Director), Annamarie Lopata (Analyst-in-Charge), Kevin Bray, Diana Goody, Tesfaye Negash, Alison O’Neill, and Katherine Raheb made key contributions to this report. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Live Animal Imports: Agencies Need Better Collaboration to Reduce the Risk of Animal-Related Diseases. GAO-11-9. Washington, D.C.: November 8, 2010. Food Safety: Agencies Need to Address Gaps in Enforcement and Collaboration to Enhance Safety of Imported Food. GAO-09-873. Washington, D.C.: September 15, 2009. Seafood Fraud: FDA Program Changes and Better Collaboration among Key Federal Agencies Could Improve Detection and Prevention. GAO-09-258. Washington, D.C.: February 19, 2009. Food Safety: Selected Countries’ Systems Can Offer Insights into Ensuring Import Safety and Responding to Foodborne Illness. GAO-08-794. Washington, D.C.: June 10, 2008. Oversight Of Food Safety Activities: Federal Agencies Should Pursue Opportunities to Reduce Overlap and Better Leverage Resources. GAO-05-213. Washington, D.C.: March 30, 2005. Food Safety and Security: Fundamental Changes Needed to Ensure Safe Food. GAO-02-47T. Washington, D.C.: October 10, 2001. Agency Performance Plans: Examples of Practices That Can Improve Usefulness to Decisionmakers. GAO/GGD/AIMD-99-69. Washington, D.C.: February 26, 1999. Agencies’ Annual Performance Plans Under The Results Act: An Assessment Guide to Facilitate Congressional Decisionmaking. GAO/GGD/AIMD-10.1.18. Washington, D.C.: February 1998. Managing For Results: Using the Results Act to Address Mission Fragmentation and Program Overlap. GAO/AIMD-97-146. Washington, DC: August 29, 1997. | For more than a decade, GAO has reported on the fragmented nature of federal food safety oversight and how it results in inconsistent oversight, ineffective coordination, and inefficient use of resources. In 2007, GAO added this issue to its high-risk list. In March 2009, the President established the Food Safety Working Group (FSWG) to coordinate federal efforts and establish food safety goals to make food safer. Section 21 of Public Law 111-139 mandated that GAO identify programs, agencies, offices, and initiatives with duplicative goals and activities. This review examines: (1) steps, if any, that the FSWG has taken to increase collaboration among federal food safety agencies, and (2) options we and others have identified to reduce fragmentation, overlap, and potential duplication in food safety oversight. GAO reviewed information about the FSWG and alternative organizational structures for food safety, and conducted interviews. Creation of the FSWG elevated food safety as a national priority, demonstrated strong commitment and top leadership support, and was designed to foster interagency collaboration on this cross-cutting issue. The FSWG includes officials from the Food and Drug Administration (FDA), the U.S. Department of Agriculture (USDA), the Office of Management and Budget (OMB), and other federal agencies. Through the FSWG, federal agencies have taken steps designed to increase collaboration in some areas that cross regulatory jurisdictions--in particular, improving produce safety, reducing Salmonella contamination, and developing food safety performance measures. However, the FSWG has not developed a governmentwide performance plan for food safety that provides a comprehensive picture of the federal government's food safety efforts. When GAO added food safety oversight to its high-risk list in 2007, it said that what remains to be done is to develop a governmentwide performance plan for food safety that is mission based, results oriented, and provides a cross-agency perspective. Officials from OMB, FDA, and USDA told us that the FSWG's July 2009 "key findings" represent the governmentwide plan for food safety. However, most of the goals outlined in the key findings are not results oriented and do not include performance measures. Further, the FSWG has not provided information about the resources that are needed to achieve its goals. Our prior work has identified results oriented goals and performance measures and a discussion of strategies and resources as standard elements of performance plans. GAO and other organizations have identified options to reduce fragmentation and overlap in food safety oversight in the form of alternative organizational structures, but a detailed analysis of their advantages, disadvantages, and potential implementation challenges has yet to be conducted. GAO has suggested that Congress consider commissioning the National Academy of Sciences or a blue ribbon panel to conduct a detailed analysis of alternative organizational structures for food safety. Some of the alternative organizational structures include a single food safety agency, a food safety inspection agency, a data collection and risk analysis center, and a coordination mechanism led by a central chair. GAO recognizes that reorganizing federal food safety responsibilities would be a complex process that could have short-term disruptions and transition costs. GAO and other organizations have regularly paired proposals for alternative food safety organizations with calls for comprehensive, unified, risk-based food safety legislation. New food safety legislation that was signed into law in January 2011 strengthens a major part of the food safety system; however, it does not apply to the federal food safety system as a whole or create a new risk-based food safety structure. GAO recommends that the Director of OMB, in consultation with the federal food safety agencies, develop a governmentwide performance plan for food safety that includes results oriented goals and performance measures for food safety oversight and a discussion about strategies and resources. OMB declined to comment on a draft of this report. USDA and Health and Human Services provided technical comments. |
As you know, among its responsibilities for aviation safety, FAA’s Aircraft Certification Service (Aircraft Certification) grants approvals (called type certificates) for new aircraft, engines, and propellers. Certification projects, which involve the activities to determine compliance of a new product with applicable regulatory standards and to approve products for certificates, are typically managed by one of Aircraft Certification’s local Figure offices (generally known as aircraft certification offices, or ACOs).1 lists the key phases in FAA’s process for issuing certificates for aviation products. As depicted in the figure, both the applicant company and Aircraft Certification staff are involved in each phase. Studies published since 1980, our prior work, industry stakeholders, and experts have long raised questions about the efficiency of FAA’s certification processes and varying interpretations and applications of its regulations in making compliance decisions during certification. Over time, FAA has implemented efforts to address these issues, but as we reported in July 2014,demand and its overall workload has increased. In 2013, FAA published a detailed implementation plan for addressing the six certification process recommendations, and, in January 2015, published a detailed implementation plan for addressing the six regulatory consistency recommendations. they persist as FAA faces greater industry As of April 2015, FAA has made progress in addressing the Certification Process Committee’s recommendations, but as we reported in January 2015, challenges remain that could affect successful implementation of the recommendations. FAA is implementing its plan for addressing the 6 certification process recommendations, which involves completing 14 initiatives. According to an April 2015 update that FAA provided to us, 13 initiatives were completed or were on track to be completed, and one will not meet planned milestones. Figure 2 illustrates the evolving status of the 14 initiatives based on the update reported by FAA. As figure 2 above indicates, 5 of the 14 certification process initiatives are related to improving FAA’s organization designation authorization (ODA) program. As of April 2015, FAA had completed three of the five ODA- related certification process initiatives, while the remaining two are expected to be completed by the end of 2015. In January 2015, we noted that industry stakeholders had emphasized the need for FAA to expand its use of the ODA program to better leverage its available resources in other needed areas (e.g., staff and other resources for processing foreign approval applications—which will be discussed later in this statement). For example, one aircraft manufacturer told us it is a practical necessity for FAA to expand its ODA program to (1) better utilize private sector expertise to keep pace with the growing aviation industry, (2) allow more aerospace products to reach the market sooner, and (3) increase the efficiency of the agency’s scarce resources. According to the General Aviation Manufacturers Association (GAMA), the key strength of ODA is FAA’s ability to delegate, at its discretion, certain certification activities and test data reviews to qualified individuals or specific manufacturers’ employees. In doing so, FAA can leverage its resources by delegating more of the lower priority work during the certification process, thereby enabling FAA to better concentrate its limited staff resources on the most pressing aspects of certification projects. Another manufacturer noted that without expanded use of the program by FAA, the additional cost associated with maintaining an ODA has begun to outweigh the benefits of having the authorization. As we found in July 2014, industry union representatives we spoke to also reported concerns about the lack of FAA resources to effectively expand the program. While one labor union agreed with the concept of ODA, representatives had concerns related to expanding the program in other areas because they contended that oversight of the program required significant FAA resources. Furthermore, the representatives told us that due to staffing shortages and increased workload, FAA did not have enough inspectors and engineers to provide the proper surveillance of the designees who had already been granted this authority. However, as we reported in January 2015, it is too soon for us to determine whether FAA’s initiatives adequately address the recommendations as intended, and in this case, specifically for expanding the use of the ODA program. According to the January 2015 regulatory consistency implementation plan, FAA closed two recommendations—one as not implemented and one as implemented in 2013—and plans to complete the remaining 4 by July 2016. Table 1 provides a summary of the recommendations and FAA’s plans for addressing them. As we found in January 2015, while FAA has made some progress, it is too soon for us to determine whether FAA’s planned actions adequately address the recommendations. However, in that report, we also found that challenges remain that could affect the successful implementation of FAA’s planned actions. Industry representatives continued to indicate a lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees’ recommendations, particularly the regulatory consistency recommendations. However, FAA noted that the processes for developing and updating its plans for addressing the certification process and regulatory consistency recommendations have been transparent and collaborative, and that FAA meets regularly with industry representatives to continuously update them on the status of the initiatives and for seeking their input. We also reported in January 2015 that several industry representatives told us that FAA had not effectively collaborated with or sought input from industry stakeholders in the agency’s efforts to address the two sets of recommendations, especially the regulatory consistency recommendations. For instance, some stakeholders reported that FAA did not provide an opportunity for them to review and comment on the certification process implementation plan updates, and did not provide an opportunity for them to review and offer input on the regulatory consistency implementation plan. However, FAA reported meeting with various industry stakeholders in October 2014 to brief them on the general direction and high-level concepts of FAA’s planned actions to address each regulatory consistency recommendation. Since we reported in January 2015, FAA officials met with stakeholders of the Regulatory Consistency Committee in March 2015 to brief them and further clarify the plan to implement the regulatory consistency recommendations. According to FAA, they are planning to conduct quarterly briefings with the Committee stakeholders, starting in June 2015, to provide updates on the progress for addressing the four remaining recommendations. FAA officials also noted that while the implementation plan lists a completion date of March 2016 for the recommendation for developing the Master Source Guidance System— which FAA calls the Dynamic Regulatory System—this completion date is specifically for FAA’s efforts to determine the feasibility of including Office of Chief Counsel letters in the system. In terms of completing the development of the system, the officials told us they are currently ahead of the schedule outlined in the implementation plan and are working on finalizing the design concept for the new system. Once this process is completed, they would be able to provide a more accurate completion date for deployment of the system. According to one Committee stakeholder, it is important that FAA remain committed to creating the Master Source Guidance System, which was the Committee’s primary recommendation. In January 2015, we reported that, according to GAMA, the U.S. has historically been viewed as setting the global standard for the approval of aviation products internationally. Once U.S. aviation companies obtain a type certificate from FAA to use an aviation product in the United States, the companies often apply for approvals for the same products for use in other countries. In 2012, the U.S. aerospace industry contributed $118.5 billion in export sales to the U.S. economy, with this sector remaining strong in the European markets and growing in the emerging markets of Asia and the Middle East. Some countries accept the FAA approval outright as evidence that the product is safe for use in their country. Some other countries, however, do not accept the FAA certification and conduct their own approval processes for U.S. products, which can be lengthy, according to some U.S. industry stakeholders. These stakeholders have raised concerns that such practices provide no additional safety benefit and result in U.S. companies facing uncertainty and costly delays in delivering their products to foreign markets. FAA has taken steps to address these concerns, but FAA’s authority to address some of the challenges is limited because each country retains control of its basic regulatory framework for approving aviation products and ensuring the safety of those products for use in their countries—effectively a recognition of the sovereignty of each country. As counterparts to FAA, other countries’ civil aviation authorities—which we will refer to as foreign civil aviation authorities (FCAA)—approve domestically-manufactured aviation products for use in their respective countries. FCAAs also approve U.S. aviation products for use in their respective countries. These approvals are typically conducted within the parameters of bilateral aviation safety agreements (BASA), which are negotiated between FAA and other FCAAs. partnership agreements that provide a framework for the reciprocal approval of aviation products imported and exported between the U.S. According to FAA, it has 21 BASAs that affect 47 countries, including one BASA with the European Aviation Safety Agency that covers the European Union (EU) member nations. and other countries.approvals of U.S. aviation products from FCAAs. Representatives of the 15 selected U.S. aviation companies we interviewed for our January 2015 statement reported that their companies faced challenges related to process, communications, and cost in obtaining approvals from FCAAs. The processes involved included FCAAs’ individual approval processes as well as the processes spelled out in the relevant BASAs. In our January 2015 statement, we identified some efforts FAA is making to address these challenges, such as holding regular meetings with some bilateral partners—i.e., countries for which FAA has a BASA in place—and setting up forums in anticipation of issues arising. Reported FCAA process challenges. Of the 15 companies we interviewed, representatives from 12 companies reported mixed or varied experiences with FCAAs’ approval processes, and 3 reported positive experiences. Thirteen companies reported challenges related to delays, 10 reported challenges with approval process length, and 6 reported challenges related to FCAA staffs’ lack of knowledge or uncertainty about the approval processes, including FCAA requests for data and information that, in the companies’ views, were not needed for approvals. FAA has taken actions aimed at alleviating current and heading off future challenges related to foreign approval processes. For example, in September 2014, FAA—along with Brazil, Canada, and the EU—established a Certification Management Team to provide a forum for addressing approvals and other bilateral relationship issues. FAA also recently established a pilot program that allows a U.S. company to work concurrently with multiple FCAAs for obtaining approvals and to identify key FCAA approval needs and ensure adequate FAA support. Reported issues related to some BASAs. Although representatives from 11 of the 15 U.S. companies and the 3 foreign companies we interviewed reported being satisfied with the overall effectiveness of having BASAs in place or with various aspects of the current BASAs, representatives of 10 U.S. companies reported challenges related to some BASAs lacking specificity and flexibility, 2 raised concerns that there is a lack of a formal dispute resolution process, and 1 noted a lack of a distinction between approvals of simple and complex aircraft. Companies suggested several ways to address these issues, including updating BASAs more often and making them clearer. FAA has taken action to improve some BASAs to better streamline the approval process that those countries apply to imported U.S. aviation products. For instance, according to FAA officials, they meet regularly with bilateral partners to address approval process issues and are working with these partners on developing a common set of approval principles and to add specific dispute resolution procedures in the agreements with some countries. FAA officials also indicated that they are working with longstanding bilateral partners—such as Brazil, Canada, and the EU—to identify areas where mutual acceptance of approvals is possible. Reported Challenges in Communicating with FCAAs. Representatives from 12 U.S. companies reported challenges in communicating with FCAAs. Representatives from six U.S. companies reported, for example, that interactions with developing countries can be confusing and difficult because of language and cultural issues. Representatives from two companies noted that they hire local representatives as consultants in China to help them better engage the Civil Aviation Administration of China (CAAC) staff with their approval projects and to navigate the CAAC’s process. One company’s representative also reported having better progress in communications with FCAAs in some Asian countries, such as India Japan, and Vietnam, when a local “third-party agent” (consultant) is involved because it provides a better relationship with the FCAAs’ staff. Representatives from three companies also reported that, in general, some FCAAs often do not respond to approval requests or have no back-ups for staff who are unavailable. They noted that potential mitigations could include a greater FAA effort to develop and nurture relationships with FCAAs. According to FAA officials, they are working with the U.S.-China Aviation Cooperation Program to further engage with industry and Chinese officials. Reported Challenges Related to Foreign Approval Costs. Representatives from 12 of the 15 U.S. companies and 2 of the 3 foreign companies indicated challenges with regard to approval fees charged by FCAAs. They specifically cited EASA—the EU’s counterpart to FAA—and the Federal Aviation Authority of Russia. For example, they noted that EASA’s fees are very high (up to 95 percent of the cost of a domestic EASA certification)—especially relative to the amount levied by other FCAAs—are levied annually, and are unpredictable because of the unknown amount of time it takes for the approval to be granted. The fees are based on the type of product being reviewed for approval and can range from a few thousand dollars to more than a million dollars annually. Representatives from two companies also noted that EASA lacks transparency for how the work it conducts to grant approvals aligns with the fees it levies for recovering its costs. FAA officials indicated to us that a foreign approval should take significantly less time and work to conduct than the work required for an original certification effort—roughly about 20 percent—and that they have initiated discussions with EASA officials about making a significant reduction in the fees charged to U.S. companies. However, recently, FAA indicated that it is more important to work with EASA to ensure its fees are commensurate with the actual costs of the services being provided and those incurred by EASA. As mentioned previously, FAA provides assistance to U.S. companies by facilitating the application process for foreign approvals of aviation products. Although FAA seeks to provide an efficient process, companies we interviewed for our January 2015 statement reported challenges that they faced related to FAA’s role in this process. FAA-related challenges cited by the companies we interviewed fell into three main categories: process, resources, and staff expertise. Process for facilitating foreign approvals. Most of the U.S. companies in our selection (12 of 15) reported challenges related to FAA’s process for handling foreign approvals. These included concerns about foreign approvals not being a high enough priority for FAA staff, a lack of performance measures for evaluating BASAs, and an insufficient use of FAA’s potential feedback mechanisms. For example, representatives of three companies told us that sometimes FAA is delayed in submitting application packets to FCAAs because other work takes priority; one of these companies indicated that sometimes FAA takes several months to submit packets to FCAAs. In another example, representatives of four companies cited concerns that BASAs do not include any performance measures, such as any expectations for the amount of time that it will take for a company’s foreign approval to be finalized. With regard to FAA using feedback mechanisms to improve its process for supporting foreign approvals, representatives of one company told us that applicant companies are not currently asked for post-approval feedback by FAA, even though it would be helpful in identifying common issues occurring with foreign approvals. Available resources. Most of the U.S. companies in our selection (10 of 15) reported challenges related to the availability of FAA staff and other resources. These include limited FAA travel funds and limited FAA staff availability to process foreign approval applications. According to FAA officials, FAA is responsible for defending the original type certification and, more broadly, for handling any disputes that arise with FCAAs during the foreign approval process. In doing so, FAA is also responsible for working with an FCAA in an authority- to-authority capacity, and communications should flow through FAA to the applicant company. However, representatives of five companies noted that due to a lack of FAA travel funds, FAA staff are generally not able to attend key meetings between U.S. companies and FCAAs conducted at the beginning of the foreign approval process. These representatives noted that this can complicate the process for companies, which then have to take on a larger role in defending the original type certificate issued for a product. Representatives of two companies also noted that when there is limited FAA staff availability at the time a foreign approval application is received, it contributes to delays in obtaining their approvals. In fact, the Certification Process Committee made recommendations to encourage FAA to include the expansion of delegation in its efforts for improving the efficiency of its certification process. As previously discussed, FAA does have initiatives under way related to expanding the use of delegation, but concerns continue to exist about the lack of FAA resources to effectively do so. Staff expertise. Some of the U.S. companies in our selection (7 of 15) reported issues related to FAA staff expertise. These issues cited included limited experience on the part of FAA staff in dispute resolution as well as limited expertise related to intellectual property and export control laws. For example, representatives of three companies told us that FAA staff sometimes lack technical knowledge due to having little or no experience with some aviation products, while a representative of another company argued that increased training for FAA staff in dispute resolution could be very helpful, especially for disputes involving different cultural norms. In another example, representatives of two companies described situations in which FAA staff were ready to share information with an FCAA that the applicant company considered proprietary, until the company objected and other solutions were found. In January 2015, we found that FAA has initiatives under way aimed at improving its process for supporting foreign approvals that may help address some of the challenges raised by the U.S. companies in our review. Specifically, FAA’s current efforts to increase the efficiency of its foreign approval process could help address reported challenges related to FAA’s process and its limited staff and financial resources. For example, FAA is planning to address its resource limitations by focusing on improving the efficiency of its process with such actions as increasing international activities to support U.S. interests in global aviation, and by implementing its 2018 strategic plan, which includes the possibility of allocating more resources to strengthening international relationships. FAA has also initiated efforts to improve the robustness of its data on foreign approvals, to further improve the efficiency of its process for supporting these approvals. With more complete data, FAA aims to track performance metrics, such as average timeframes for foreign approvals, and to better evaluate its relationships with bilateral partners. As we concluded in January 2015, to its credit, FAA has made some progress in addressing the Certification Process and Regulatory Consistency Committees’ recommendations, as well as in taking steps to address challenges faced by U.S. aviation companies in obtaining foreign It will be critically important for FAA to follow approvals of their products.through with its current and planned initiatives to increase the efficiency and consistency of its certification processes, and its efforts to address identified challenges faced by U.S. companies in obtaining foreign approvals. Given the importance of U.S. aviation exports to the overall U.S. economy, forecasts for continued growth of aviation exports, and the expected increase in FAA’s workload over the next decade, it is essential that FAA undertake these initiatives to ensure it can meet industry’s future needs. It is also important that FAA continue to demonstrate that it is making progress on these important initiatives, as well as enhance its data tracking for monitoring the effectiveness of its bilateral agreements and partnerships. Going forward, we will monitor FAA’s progress, highlight the key challenges that remain, and identify potential steps that FAA and industry can take to find a way forward on the issues covered in this statement as well as other issues facing the industry. As we noted in our October 2013 statement, however, some improvements to the certification processes will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. findings in these areas will assist this Subcommittee as it develops the framework for the next FAA reauthorization act. We are hopeful that our Chairwoman Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other members of the Subcommittee may have. GAO-14-142T. For future contacts regarding this statement, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Relations can be found on the last page of this statement. Individuals making key contributions to this testimony statement include Vashun Cole, Assistant Director; Jessica Bryant-Bertail; Jim Geibel; Josh Ormond; Amy Rosewarne; and Pamela Vines. Other contributors included Kim Gianopoulos, Director; Dave Hooper; Stuart Kaufman; and Sara Ann Moessbauer. 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. | FAA issues certificates for new U.S.-manufactured aviation products, based on federal aviation regulations. GAO has previously reviewed the efficiency of FAA's certification process and the consistency of its regulatory interpretations. As required by the 2012 FAA Modernization and Reform Act, FAA chartered two aviation rulemaking committees in April 2012—one to improve certification processes and another to address regulatory consistency—that recommended improvements in 2012. FAA also assists U.S. aviation companies seeking approval of their FAA-certificated products in foreign markets. FAA has negotiated BASAs with many FCAAs to provide a framework for the reciprocal approval of aviation products. However, U.S. industry stakeholders have raised concerns that some countries conduct lengthy processes for approving U.S. products. This testimony focuses on (1) FAA's reported progress in implementing the aviation rulemaking committees' 2012 recommendations regarding its certification process and the consistency of its regulatory interpretations and (2) the challenges that selected U.S. companies reported they have faced when attempting to obtain foreign approvals of their products, and how FAA is addressing some of the reported challenges. It is based on GAO products issued from 2010 to 2015, selectively updated in April 2015 based on FAA documents and information from FAA officials and selected industry stakeholders. The Federal Aviation Administration (FAA) has made progress in addressing the Certification Process and the Regulatory Consistency Committees' recommendations, but as GAO reported in January 2015, challenges remain that could affect successful implementation of FAA's planned actions. FAA is implementing 14 initiatives for addressing 6 certification process recommendations. According to an April 2015 FAA update, 13 initiatives have been completed or are on track to be completed, and 1 will not meet planned milestones. In January 2015, FAA published a detailed implementation plan for addressing six regulatory consistency recommendations. According to the plan, FAA closed two recommendations—one as not implemented and one as implemented in 2013—and plans to complete the remaining four by July 2016. While FAA has made some progress, it is too soon for GAO to determine whether FAA's planned actions adequately address the recommendations. However, industry stakeholders indicated concerns regarding FAA's efforts, including concerns about a lack of communication with and involvement of stakeholders as FAA implements the two committees' recommendations. Since GAO reported in January 2015, FAA has been addressing these concerns. In January 2015, GAO also reported that representatives of 15 selected U.S. aviation companies that GAO interviewed reported facing various challenges in obtaining foreign approvals of their products, including challenges related to foreign civil aviation authorities (FCAA) as well as challenges related to FAA. Reported FCAA-related challenges related to (1) the length and uncertainty of some FCAA approval processes, (2) the lack of specificity and flexibility in some of FAA's bilateral aviation safety agreements (BASA) negotiated with FCAAs, (3) difficulty with or lack of FCAA communications, and (4) high fees charged by some FCAAs. Although FAA's authority to address some of these challenges is limited, FAA has been addressing many of them. For example, FAA created a certification management team with its three major bilateral partners to provide a forum for addressing approval process challenges, among other issues. FAA has also taken action to mitigate the challenges related to some BASAs by holding regular meetings with bilateral partners and adding dispute resolution procedures to some BASAs. |
MCC, a government corporation, is managed by a chief executive officer (CEO), whom the President appoints with the advice and consent of the Senate, and is overseen by a Board of Directors. The Secretary of State serves as board chair, and the Secretary of the Treasury serves as vice- chair. MCC’s model is based on a set of core principles deemed essential for effective development assistance, including good governance, country ownership, focus on results, and transparency. According to MCC, country ownership of an MCC compact occurs when a country’s national government controls the prioritization process during compact development, is responsible for implementation, and is accountable to its domestic stakeholders for both decision making and results. In keeping with the MCC principle of country ownership, MCC enters into a legal relationship with partner country governments. During the 5-year compact implementation period the partner government vests responsibility for day-to-day management, including monitoring and evaluation of the progress of compact projects, to accountable entities in recipient countries (the entities’ name is usually formed from “MCA” plus the country’s name—for example, MCA-Cape Verde). MCC provides the frameworks and guidance for compact implementation, monitoring, and evaluation that MCAs are to use in implementing compact projects. To promote transparency, MCC makes information available on its Web site throughout the life of a compact, such as project budgets and descriptions, projected outcomes, and quarterly updates on financial and program progress. This transparency enables stakeholders to review the information that contributed to MCC investment decisions, track program progress against targets, and, once programs reach completion, see clearly which programs did or did not achieve their goals. The Cape Verde and Honduras compacts were among the first countries that MCC selected as eligible for assistance and the first to reach the end of the 5-year implementation period. The two compacts varied in the type and size of projects funded, but each devoted more than half of compact funds to infrastructure projects such as roads and ports. Each compact also included a smaller agricultural development project such as farmer training or construction of agricultural infrastructure. MCC and the government of Cape Verde signed a 5-year compact in July 2005, which entered into force in October 2005 and ended in October 2010. The compact, for which MCC committed $110.1 million in funding at compact signature, consisted of three projects. Figure 1 shows Cape Verde compact funding by project at signature and compact end. Table 1 shows the Cape Verde projects’ planned activities and funding allocations at compact signature. MCC and the government of Honduras signed a 5-year compact in June 2005, which entered into force in September 2005 and ended in September 2010. The compact, for which MCC committed $215 million in funding at compact signature, consisted of two projects. Figure 2 shows Honduras compact funding by project at signature and compact end. Table 2 shows the Honduras projects’ planned activities and funding allocations at compact signature. Each fiscal year, MCC identifies countries that are candidates for assistance. MCC uses per capita income data to identify two pools of candidate countries: low-income and lower-middle-income countries. MCC’s Board of Directors then uses quantitative indicators to assess a candidate country’s policy performance to determine eligibility. If the policy performance of a country declines during implementation of a compact, the board can suspend or terminate the compact. After MCC selects a country as eligible, the country begins a four-phase process that can lead to a compact’s entry into force: (1) the eligible country develops and submits a compact proposal; (2) MCC conducts a due diligence review of the proposed projects; (3) MCC and the country negotiate and sign the compact after MCC board approval; (4) MCC and the country complete preparations, including developing disbursement plans, for the compact to enter into force. After the compact enters into force, compact implementation begins, and funds are obligated and disbursed. Following MCC’s internal reorganization in October 2007, MCC revamped its compact development process to include greater initial engagement with eligible countries and assistance to countries in conducting needed studies and establishing management structures. MCC compacts are to be designed so that projects are sustainable over 20 years. During the compact development process, MCC is to assess the mechanisms in place to enhance sustainability, including the policies and practices that will enable MCC investments to continue to provide benefits. For instance, as part of compact proposals submitted to MCC, partner countries are required to identify risks to project sustainability and describe measures needed to ensure that project benefits can be sustained beyond the period of MCC financing. Partner countries are to consider a number of issues affecting sustainability, including environmental sustainability; institutional capacity for operations and maintenance; and for proposed infrastructure projects, recent funding, performance, and expected expenses for operations and maintenance. Furthermore, during compact implementation, MCC tracks progress against key policy reforms and institutional improvements that were included in the compact to enhance project impact and sustainability. For each compact, countries are required to create a monitoring and evaluation plan, which is one aspect of MCC’s efforts to assess a compact’s results. MCC developed guidelines in 2006 to assist eligible countries in the preparation of the monitoring and evaluation plan and issued an updated policy in 2009. According to MCC’s 2009 monitoring and evaluation policy, the policy applies to new or revised monitoring and evaluation plans developed after issuance of the policy in May 2009. According to MCC’s 2006 guidelines for monitoring and evaluation plans, performance monitoring helps track progress toward compact goals and objectives, as well as serves as a management tool. In addition, according to MCC’s 2009 monitoring and evaluation policy, the plan’s monitoring component outlines the performance indicators by which compact results will be measured. The plan’s monitoring component also establishes a performance target for each indicator and the expected time the target will be achieved. For example, the number of kilometers completed may be an indicator for road construction projects and a numeric target is set to be completed by compact end. In response to MCC’s experiences with early compacts, MCC has learned that plans may change during compact implementation and that it may be necessary to modify programs after the execution of a compact agreement. Recognizing that MCC has a responsibility to ensure that program modifications are promptly and transparently assessed based on adequate due diligence and consultation, in August 2010, MCC adopted a policy to establish a single process for evaluating and approving such modifications. The agency updated this policy in March 2011. A rescoped compact project or activity refers to any change in the scope or substance of a compact program, including the modification, addition or elimination of a project, activity or subactivity that may entail potential alterations to the intended beneficiary group. In response to such changes, MCC allows for modifications to associated indicators and targets. According to MCC policy issued in 2009, indicators in the monitoring and evaluation plan can be modified by (1) adding a new indicator, (2) removing an existing indicator, or (3) changing a descriptive quality of an existing indicator. The policy also outlines several reasons for adding or changing indicators. For instance, an indicator may be removed because a change to the project renders the indicator irrelevant or the cost of collecting data for an indicator outweighs its usefulness. End-of-compact targets associated with these indicators can also be changed, including increasing or decreasing targets. MCC’s 2009 policy also outlines specific circumstances under which targets may be changed, including changes in scope of the activity or exogenous factors such as natural disasters or political turmoil. Ultimately, the justification for deleting or modifying an indicator or target must be adequately documented in revised monitoring and evaluation plans. Figure 3 shows a timeline of the MCC monitoring and evaluation plans for the Cape Verde and Honduras compacts. For both countries, only final monitoring and evaluation plans, issued in October and December 2010 for Cape Verde and Honduras, respectively, were subject to MCC’s 2009 monitoring and evaluation policy. MCC hires independent researchers to evaluate the impact of compact projects, and the monitoring and evaluation plan outlines aspects of planned impact evaluations, including questions, methodologies, and data collection. These analyses compare projects’ final results with an estimate of what would have happened without the project, measuring changes in individual, household, or community income and well-being that result from a particular project. During its due diligence review of each compact proposal, MCC analyzes proposed projects’ estimated impact on the country’s economic growth and poverty reduction. Specifically, MCC calculates a projected economic rate of return (ERR)—that is, the expected annual average return to the country’s firms, individuals, or sectors for each dollar that MCC spends on the project. In calculating project ERRs, MCC uses information such as MCC’s expected annual expenditures for the project and the projected annual benefits to the country. In calculating expected project benefits, MCC projects the sustainability of investments over a relatively long term, typically 20 years, and includes assumptions about the probability that necessary maintenance will be completed. MCC establishes a minimum acceptable ERR, referred to as a hurdle rate, that compact projects should achieve to be eligible for funding. It uses this, as well as other information gathered during the due diligence process, to inform its internal decisions to fund proposed projects and compacts. According to MCC’s 2006 guidelines for monitoring and evaluation plans, the economic analysis links to the development of indicators and targets for monitoring compact results. Furthermore, according to MCC’s 2009 policy on monitoring and evaluation of compacts, monitoring and evaluation plans should be directly linked to economic analyses. The variables from the ERR analysis of benefit streams should be used as performance indicators and targets in the monitoring and evaluation plan. MCC’s 2009 policy also states that when MCC is considering changes to targets that are linked to the ERR analysis, modified targets should be analyzed to assess whether they maintain the integrity of the original ERR. If the new ERR is below the minimum acceptable ERR for the compact, the target change will require additional MCC approval. MCC’s implementation process for infrastructure contracts and projects requires that the MCAs have individual project directors—for example, a roads director—who oversee the activities of outside implementing entities, project management consultants, design engineers, independent construction supervisors, and project construction contractors. In general, MCAs deliver infrastructure projects through a design-bid-build approach in which a design engineer develops technical plans and specifications that are used by a construction contractor, hired under a separate MCA procurement action, to build the works. Independent construction supervisors contracted by the MCA conduct oversight of day-to-day construction and the activities of the project construction contractors to ensure compliance with contract requirements. Independent construction supervisors play an important role in ensuring construction quality by performing such tasks as approving construction materials, overseeing testing, and inspecting completed work. In addition to MCA’s independent construction supervisor, MCC employs its own independent engineering consultants to monitor progress of the construction works as managed by the MCA and to assess its quality. MCC met some key original targets and many of its final targets for the Cape Verde and Honduras compacts. Additionally, MCC took steps to provide for the sustainability of the projects, but the governments of both Cape Verde and Honduras may have difficulty maintaining the infrastructure projects in the long term due to the lack of funding, among other challenges. MCC rescoped each of the three projects under the Cape Verde compact, reducing some key targets. MCC met or exceeded some key original targets and met many final targets by the compact’s end. Table 3 shows the performance results for key indicators for the Cape Verde compact projects. For more detail on the Cape Verde compact results, see appendix II. Port of Praia. MCC disbursed $54.9 million to fund reconstruction of a wharf, a new container yard, and a new access road. MCC and MCA- Cape Verde reduced the activity’s original scope as a result of inaccurate early planning concerning design details and construction materials that led to cost increases and implementation delays. They split the activity into two phases, with MCC funding the first and the Cape Verde government funding the second. The first phase of construction represents about one-third of the total expected cost of both phases of port construction, and nearly 100 percent of the works for phase 1 were completed by compact end. MCA-Cape Verde established a management structure consistent with MCC’s requirements to ensure work met quality standards and functions as intended. The Cape Verde government is funding construction of the second phase—expansion of another wharf and construction of a new breakwater. Figure 4 shows the locations and photographs of the two phases of the port activity. Roads and bridges. MCC disbursed $27.7 million to fund the rehabilitation of three roads and construction of four bridges. MCC’s original targets included the rehabilitation of five roads totaling 63 kilometers and four bridges. However, MCA-Cape Verde found that the World Bank-funded designs were of poor quality and decided to revise them to a higher standard, which led to increased costs. As a result of the increased costs, MCC and MCA-Cape Verde reduced the scope of the activity, and MCC exceeded the final target of 39.3 kilometers of road rehabilitated. MCA-Cape Verde established a management structure consistent with MCC’s requirements to ensure work met quality standards and functions as intended. Water management and soil conservation. MCC disbursed $6 million to build water management infrastructure in three watersheds. MCC met its original key target of constructing 28 reservoirs, and 40 percent of its key original target and 76 percent of its final target for the volume of water available. When environmental concerns were identified during implementation, MCC rescoped the activity from a combination of wells and reservoirs to reservoirs only. According to MCC officials and stakeholders, rescoping and implementation delays reduced the amount of water available by compact end. Agribusiness development services. MCC disbursed $5 million for the agribusiness development services activity. Midway through the compact implementation period, MCA-Cape Verde determined that the Cape Verde agricultural ministry lacked the capacity to train farmers. It hired a contractor to train ministry staff, delaying implementation of the activity. By the compact’s end, MCC achieved about 13 hectares under improved or new irrigation, or 11 percent of the original target of 121 hectares and 12 percent of the final target of 111 hectares. Access to credit. MCC disbursed $600,000 to make a credit line available to microfinance institutions (MFI) for agricultural loans in the three watersheds. The MFIs provided $617,000 in loans, or 103 percent, of the key original and final target of $600,000. Partnership to mobilize investment. MCC disbursed about $400,000 to fund the creation of a credit bureau during the compact closeout period in January 2011. However, MCC had initially allocated $5 million for this activity but eliminated some funding and associated indicators when MCC, the World Bank, and the government of Cape Verde were unable to agree on the sectors that should receive investment. Financial sector reform. MCC disbursed $1.4 million to fund technical assistance to MFIs and support financial sector policy reforms, and exceeded its key original and final target. MCC rescoped some activities under the Honduras compact, reducing certain key targets. MCC met a key original target for the Honduras compact, and met or exceeded most of its final targets by the compact’s end. Table 4 shows the performance results for key indicators for the Honduras compact projects. For more detail on the Honduras compact results, see appendix III. CA-5 highway. MCC disbursed approximately $90.3 million to reconstruct four sections of a major highway in Honduras. MCC completed two sections of highway, totaling about 50 kilometers, or 45 percent of the original compact target. The disbursement also partially funded the reconstruction of a third section, which MCA-Honduras did not complete by the end of the compact, and the relocation and design costs for reconstruction of a fourth section of the CA-5 highway activity. MCA- Honduras established a management structure consistent with MCC’s requirements to ensure work met quality standards and functioned as intended. MCA-Honduras officials identified three factors that affected their ability to achieve targets for this activity and resulted in a new estimated cost of $219 million for all four sections of highway: Contract bid amounts. Increases in project costs above initial estimates as a result of unit price increases for items such as asphalt, as well as additions to project scope and design, such as added travel lanes, were a principal cause of cost increases, according to MCC officials. Land acquisition costs. Due diligence studies conducted prior to construction did not include the cost of the full-market value of acquiring land and relocating households and businesses adjacent to roads. The original allocation increased from $3.1 million to about $20.2 million. Contract modifications. Contract modifications raised construction contract costs by about 6 percent primarily as a result of insufficient road designs that required work beyond that included in the contract plans. Remaining work on a third and a fourth sections is being funded with a loan of about $130 million from the Central American Bank for Economic Integration (CABEI) and is expected to be completed by the middle of 2012. Figure 5 shows the locations of the CA-5 highway activities. Secondary roads. MCC disbursed $27.7 million to upgrade key secondary roads. MCC met its revised target for the construction of 65.5 kilometers of secondary roads, 72 percent of the original target of 91 kilometers. According to MCA-Honduras officials, the scope was reduced because updated estimated costs to upgrade the planned roads, after the first contract was bid, exceeded original estimates by 80 percent. MCA- Honduras established a management structure consistent with MCC’s requirements to ensure work met quality standards and functioned as intended. Weight control system. MCC disbursed almost $90,000 for a vehicle weight control activity but eliminated the activity when the Honduras compact was partially terminated due to Honduras’ political situation. Farmer training and development. MCC disbursed approximately $26.6 million through the farmer training and development activity. MCC funded the training of 6,029 farmers to harvest high-value horticultural crops, meeting its final target of 6,000, or 82 percent of the original target of 7,340. According to MCC, this target was reduced to provide additional technical assistance to those trained to increase the sustainability of the assistance provided. A number of farmers stated that, as a result of the training, they began growing different types of crops and using new techniques, which led to larger volumes and higher quality, and, thus, increased income. Farm-to-market roads. MCC disbursed approximately $20.1 million to upgrade farm-to-market roads. By the end of the Honduras compact, MCC had funded the reconstruction of 495 kilometers of farm-to-market roads—33 percent of the original target of about 1,500 kilometers and 99 percent of the final target of 499 kilometers. The farm-to-market roads activity was rescoped because the Honduran quality, environmental, and social standards on which the cost estimates were based did not meet compact requirements, which increased the cost from $14,300 to $42,000 per kilometer. In addition, according to MCC officials, the change in target to reconstruct fewer kilometers was based on MCC’s decision to improve the durability and life of the roads by adding drainage structures to reduce water damage, which increased the per-kilometer cost. Farmer access to credit. MCC disbursed $12.8 million for the farmer access to credit activity. The activity consisted of three components designed to increase the supply of credit to rural borrowers—a $6 million agricultural credit trust fund designed to provide loans to financial institutions for rural lending, technical assistance to strengthen financial and nonfinancial institutions, as well as expansion of the national property registry. Initial lack of interest in the trust fund among traditional banking institutions and a delay in demand for credit among farmers led MCA to refocus the activity on smaller sources of credit and to expand beneficiaries to nonprogram farmers, agribusinesses, and other producers and vendors in the horticultural industry. By compact completion, the trust fund had disbursed $10.7 million in loans—37 percent of the original target for the value of loans disbursed and 178 percent of the revised target. Agricultural public goods grant facility. MCC disbursed $8.8 million to fund 15 small competitive grants to enhance and accelerate the development of market-based commercial agriculture. MCC exceeded a key original and final target for this activity. Specifically, grants for irrigation projects connected 967 farmers to the community irrigation system—almost 250 percent of the target of 392 farmers. MCC took steps to provide for the sustainability of compact projects, but certain activities in Cape Verde and Honduras face challenges to long- term sustainability. MCC’s efforts included establishing specific conditions for compact funding disbursements. However, the governments of both Cape Verde and Honduras may have difficulty maintaining infrastructure projects in the long term due to the lack of funding, among other challenges. In addition, decisions to limit certain design features present challenges to maintaining rehabilitated roads. For noninfrastructure projects, steps taken by MCC enhanced the sustainability of some activities, but sustainability challenges remain for other activities. Infrastructure project. MCC took steps to enhance the sustainability of its infrastructure project investments by establishing specific conditions for compact funding disbursements. However, as can be seen in the following examples, in some cases the Cape Verde government has not been able to meet or has partially met these conditions, calling into question the long-term sustainability of the infrastructure project activities. MCC included privatization of port operations as a condition of the compact. The Cape Verde government agreed and developed a law enabling the port authority to enter into contracts with private operators. However, because the port is incomplete, the solicitation of such contracts has been delayed. The second phase of construction is expected to continue until March 2013. As a result, MCC no longer has leverage over the government to ensure this condition is met. MCC set a condition of the compact that the government of Cape Verde would establish and adequately fund a road maintenance account. In 2003, the government established a road institute that has since developed its capacity to raise revenue for maintenance work. However, government officials reported that the funds currently meet less than 50 percent of road maintenance requirements. In the case of the MCC-funded roads and bridges activity, decisions made to control costs and limit the environmental impacts of construction—such as reducing the amount of earthwork to remove steep roadside slopes and installing or repairing fewer drainage structures— contributed to road maintenance requirements. The additional requirements may stress the Cape Verde government’s ability to perform maintenance. Figure 6 depicts areas of erosion damage along one of the MCC-funded rehabilitated roads, and Cape Verde government-funded repairs, that we observed during our visit. Watershed management and agricultural support project. MCC took steps to enhance the sustainability of activities completed under the watershed management and agricultural support project. Although these steps increased sustainability of certain activities, other activities face challenges. In January 2009, the government of Cape Verde established a water- fee structure for the three watersheds to fund infrastructure maintenance to meet an MCC condition for funding disbursements. MCA-Cape Verde also worked with community water management organizations, now responsible for maintenance, to develop water management plans. However, as of December 2010, water fees had not yet been collected in one of the three watersheds. The MCA-Cape Verde contractor took steps to promote the sustainability of the agribusiness development services activity, including helping to establish and train farmers associations and developing training materials for the Cape Verde agricultural ministry—which plans to continue training farmers. However, the contractor reported that ministry field staff do not have time to train farmers, given their workloads. According to the contractor, ministry staff have multiple responsibilities, including involvement in multiple donors’ agriculture-related projects. MCA-Cape Verde determined that all MFIs performed well under the access to credit activity, and MCC converted the loans to grants at the end of the compact, which will sustain agricultural loan efforts for at least 2 years. Private sector development project. MCC required the Cape Verde Chambers of Commerce, the implementers of a new credit bureau, to secure a private sector partner and private sector investments to help support the bureau before MCC provided funding to the chambers. Private ownership may provide an incentive to enhance the sustainability of the credit bureau. Transportation project. To enhance the sustainability of its transportation project investments, MCC conditioned compact funding disbursements on the government meeting increased road maintenance funding levels and included a vehicle weight control activity in the project. However, the funding levels that the government achieved may not be sufficient to fund all road maintenance needs. In addition, the weight control activity was terminated. Both issues call into question the long- term sustainability of the infrastructure project activities. According to the compact, the key issue for sustainability of the transportation project is routine, periodic, and emergency road maintenance, such as sealing cracks, repainting the pavement markings, cleaning ditches and drainage structures, repairing potholes, resurfacing, and clearing landslides. As a condition of compact funding, MCC and the Honduran government agreed to increase funding levels for maintenance, which the government met, increasing funding from $37 million in 2005 to $64 million in 2010. However, this funding is to maintain all Honduran roads, not specifically compact-funded roads and does not ensure road maintenance after 2010. According to MCC officials, they expect that the Honduran government will maintain the MCC-funded sections of CA-5 and some of the key secondary roads but are concerned that it may not be at the level required to maximize the roads' lifespan. Contractors and construction supervisors also expressed concerns that the roads will be adequately maintained. According to transportation ministry officials and documents, the government’s maintenance allocation for 2010 represents less than half of the road maintenance allocation required by Honduran law and is about 30 percent of the amount officials estimate is needed to maintain the roads. The extent to which the Honduran government implements the vehicle weight control activity, which MCC eliminated in 2009 in response to the political situation, also affects sustainability. According to government officials, a large number of truckers exceed legal weight limits. Without enforcement of weight limits on the CA-5 and other MCC-funded roads, the roads will deteriorate faster and require additional maintenance. In addition, decisions to limit certain design features may present challenges to maintaining the reconstructed roads. We observed quality deficiencies—erosion, roughness, and landslides—that will likely increase the amount and cost of maintenance needed over time (see fig. 7). Failure to perform needed maintenance will result in road deterioration decreasing the road-user cost benefits expected from the improved roads. Most of these deficiencies could have been mitigated during project design and construction. For example, the project designer could have included the International Roughness Index (IRI) measures in the contract documents as a performance specification, requiring the contractor to meet IRI targets set by MCC and MCA-Honduras—which would decrease long-term maintenance and road-user costs. Additionally, landslides and their associated maintenance costs could have been minimized if more detailed geotechnical analysis evaluating slope stability had been conducted during design. Such analysis would have enabled designers to include landslide stabilization and prevention measures in the construction plans. A more detailed geotechnical study regarding slope stability was completed for portions of CA-5 section 2 after a landslide occurred. Rural development project. MCC took steps to increase the sustainability of activities under the rural development project. The sustainability of some activities was enhanced by these steps, but for other activities challenges remain. The contractor for the farmer training activity involved the private sector in program activities, including buyers, wholesalers, and input and equipment service providers to increase sustainability. The farmer training activity also helped farmers form associations to increase the sustainability of techniques and production practices. However, according to the contractor and Honduran farmers, some program farmers, who began receiving assistance late in the compact, are expected to face difficulty sustaining new techniques without the support of technicians. In many cases, responsibility for maintenance of upgraded farm-to- market roads resides with the municipalities where the roads are located. However, according to MCA-Honduras officials, the municipalities lack equipment, expertise, and funding for road maintenance. MCA-Honduras took steps to increase the sustainability of the farmer access to credit activity in Honduras by enabling the agricultural credit fund to continue for 5 years beyond the end of the compact. In addition, according to the activity contractor, the financial products developed with the technical assistance are self-sustaining and self- financing. Local organizations supported the implementation of the agricultural public goods grants, which will help improve the activity’s sustainability, according to MCA-Honduras officials. For example, local communities with new irrigation works were trained in the maintenance of such systems and put in place fee structures to fund maintenance costs. Impact evaluations and ERR analyses assist MCC in estimating the impact of compact projects on long-term economic growth. MCC funds independent impact evaluations, which contribute to understanding whether an investment achieved its intended impact. According to MCC officials, these evaluations have been delayed because of delays in project implementation and a change in approach to the timing of the evaluations. MCC’s ERR provides a means of estimating the proposed projects’ impact on a country’s economic growth relative to costs over a relatively long time period, typically 20 years. However, updated ERRs were not always well-documented or linked to revised targets. In addition, MCC has not issued guidance for re-estimating ERRs at compact completion or in subsequent years. Cape Verde. MCC plans to conduct impact evaluations, but project implementation delays have slowed progress. Port activity. MCC has delayed contracting for an impact evaluator for the infrastructure project’s port activity until the completion of phase 2 of port construction in 2013. According to the 2010 Cape Verde monitoring and evaluation plan, it is unclear whether the originally planned impact evaluation is feasible, and MCC may revise the evaluation design if necessary. Roads and bridges activity. MCC has not yet engaged an impact evaluator for the infrastructure project’s roads and bridges activity. According to the 2010 Cape Verde monitoring and evaluation plan, if the collected baseline data do not support the planned evaluation design, MCC would accept a revised evaluation design. Watershed management and agricultural support project. MCC engaged an impact evaluator in the last year of implementation of the watershed management and agricultural support project, and slower than expected project implementation has delayed final data collection for the impact evaluation. According to the independent evaluator hired to assess the project, designing the evaluation after compact implementation may limit the quality of the results by, for instance, hindering the collection of quality baseline data. Baseline data were collected before project implementation, but the impact evaluator has cited concerns about the quality of this data. According to MCC officials, MCC plans to address these concerns about the quality of baseline data through additional data collection. Private sector development project. The private sector development project, which was significantly rescoped, will not be assessed using a quantitative evaluation since the technical assistance provided did not lend itself to a quantitative evaluation; however, a qualitative evaluation has been completed. Honduras. Project delays and challenges in implementing originally planned impact evaluation designs have slowed progress of some impact evaluations. MCC initially anticipated completing impact evaluations for the Honduras compact projects by the end of the compact. However, according to MCC officials, MCC modified its approach to impact evaluations so that evaluations are completed after the end of the compact. Transportation project. The impact evaluation for the transportation project began before project implementation, but delays in road construction led to delays in collecting necessary data and completing the evaluation. According to the impact evaluator, other than some delays in final data collection, the transportation impact evaluation was planned with a robust design and has been implemented as planned. Farmer training and development activity. Challenges encountered in implementing the original evaluation design led to potential limitations in the results. As a result, MCC added a supplemental design to enhance the methodology. Specifically, the impact evaluator had identified a certain group of farmers to participate in the program and serve as a sample for the evaluation. However, the activity contractor chose not to train a large portion of the selected group, reducing the sample size for the evaluation and potentially limiting the results. According to MCC, the challenge in implementing the original evaluation design arose because the contractor was focused on achieving targets set in the contract, instead of implementing the activity in parallel with the evaluation methodology, which was not outlined in the contract. MCC noted that this experience highlighted the importance of incorporating impact evaluation designs into implementation plans and contracts and the need to anticipate and manage potential tradeoffs. Farmer access to credit activity. According to the impact evaluator, the assessment of the farmer access to credit activity was complicated by changes that took place during implementation, such as the expansion of the activity beyond an exclusive focus on program farmers, as well as the delay in program implementation. By the time changes were made to the activity, no baseline data had been collected. Subsequently, MCA-Honduras hired a third-party contractor to collect qualitative data. However, when the impact evaluator’s contract ended at the end of the compact, these data had not been analyzed and an evaluation report had not been completed as originally intended. Agricultural public goods grants facility activity. The impact evaluator conducted an economic rate of return calculation by comparing the costs and benefits that resulted from the agricultural public goods grants facility activity. For example, the report compared the expected costs and benefits as a result of certain grant activities with the estimated costs and benefits had the grant activity not been implemented. The evaluator produced a final report on the impact of a selection of the 15 public goods grants. MCC updated its ERR analyses for the Cape Verde and Honduras compacts when project activities changed significantly during implementation. However, the updated ERR analyses were not always well-documented or supported. In addition, the analyses were not consistently updated when projects or activities were rescoped or when key targets were revised, as stated in MCC guidance and policy documents. Updated ERR analyses were not well-documented or supported for projects constituting almost 50 percent of compact funds in Cape Verde and more than 65 percent of compact funds in Honduras. For Cape Verde, MCC increased its ERR for the port improvement activity from 23 percent to 29 percent as the investment cost tripled. In re-estimating the ERR, MCC relied on a new model prepared by a French engineering consulting firm. The model incorporated efficiency gains leading to benefits to consumers and firms, such as reduced wait times and other cost savings. The analysis assumes that these benefits also have an economywide effect. However, MCC does not have documentation for the modeling of the economywide effect. As a result, it is unclear how the analysis incorporates the project’s effect on the overall economy. If the economywide effect is not taken into account, the activity ERR drops from 28.6 percent to 9.3 percent, which is below MCC’s hurdle rate of 10 percent cited in the MCC Cape Verde restructuring memo. However, according to an MCC official, the prevailing hurdle rate was 4.8 percent, and thus the investment remained well above the minimum standard established for Cape Verde. Furthermore, the extent to which consumers will benefit from the project is also not clear. For Honduras, the original economic analysis for the transportation project established an ERR of 24 percent. Updates of the monitoring and evaluation plan in 2008 and 2010 cite an ERR of 12 percent. However, documentation for the underlying quantitative analysis supporting the updated ERR is not available. Updated ERR analyses do not always reflect changes in key targets revised after decisions about project rescoping have been made. For Cape Verde, when each of the three projects was rescoped, MCC updated all relevant ERR analysis. However, the updated ERR analysis does not reflect the values or numerical ranges of key updated targets in the monitoring and evaluation plan. For example, the revised targets for the watershed management and agricultural support project include a revised volume of available water of 627,500 cubic meters, but in the updated ERR analysis, total water capacity is 17,000 cubic meters. In addition, the revised targets for the project include a farmer productivity target of 9.4 to 14.3 tons of crops per hectare, which overlaps only slightly with the range for farmer productivity of 13 to 20 tons of crops per hectare in the updated ERR analysis. For Honduras, where both compact projects were rescoped, MCC did not update the projected ERRs for the transportation and rural development projects to reflect all changes. For example, for the transportation project, MCC eliminated the weight control activity but did not update the project level ERR in the revised monitoring and evaluation plan to reflect this rescoping. In addition, the projected ERR for the farm-to-market roads activity was updated in the revised monitoring and evaluation plans, but this update was not incorporated in revising the rural development project level ERR. Moreover, MCC revised key targets, but the ERR analyses do not reflect those revisions. For example, the original ERR analysis for the farmer training and development activity of the rural development project is based on 14,400 hectares of high-value crops at the end of the compact. The 2008 and 2010 monitoring and evaluation plans establish revised targets of 11,830 and 8,400 hectares, respectively, at compact completion but do not revise the ERR. MCC officials stated that when key indicators and targets were modified, MCC assessed the effects of these changes on ERRs using the existing models but did not formally document those assessments. MCC officials also attributed the lack of consistent linkage between ERR analyses and key revised targets to the fact that economist staffing shortages limited their ability to update the economic analysis every time key indicators and targets were modified. MCC has not developed guidance for re-estimating project ERRs at compact completion or in subsequent years. Although MCC does not have guidance that requires re-estimation of ERRs, it plans to update ERRs for its investments in Cape Verde and Honduras. Since the initial ERR analysis is an estimate of the expected total increase in incomes over a typical 20-year period attributable to a proposed MCC-funded project relative to the total costs, ERR analysis at compact completion can provide updated estimates based on actual project costs. Further, for projects or activities that have been rescoped, revised estimates of benefits can be included in the ERR analysis. In addition, when data on actual benefits accrued to project beneficiaries are collected by impact evaluations, these data can also be used to re-estimate the ERRs. According to MCC officials, MCC requires independent evaluators to calculate ERRs at compact completion, but guidance is currently not available to guide this analysis. In the case of the sole Honduras ERR calculated at compact completion to date by an independent evaluator, in the absence of guidance, the evaluator prepared the ERR analysis in such a way that it cannot be compared to the initial ERR estimate. Furthermore, even though the original ERRs are estimated over a 20-year period, according to MCC officials, MCC has not yet determined whether it will re-estimate the returns as additional benefit data from impact evaluations or other sources become available. Without an accurate estimate of the compacts’ projected benefits, the extent to which the compacts further MCC’s goal of poverty reduction, economic growth, and transformative development cannot be accurately evaluated. Reductions in project scope and other factors are likely to reduce re- estimated ERRs. In one instance where MCC has revised the ERR at compact completion—the farmer training and development activity in Honduras—the revised ERR was lower than originally predicted, at 14.6 percent versus 21 percent. For any further re-estimates of Cape Verde and Honduras ERRs, several factors would likely contribute to lower estimates of returns on investments than originally predicted—as seen in the following examples. Reductions in projects’ or activities’ original scopes while MCC investments remained largely unchanged would lower expected benefits. For example, for the Honduras transportation project, MCC reduced the scope of the secondary roads construction activities to align actual costs with project allocations and terminated the weight control activity. Similarly, in Cape Verde, MCC funded about one-third of the port improvement activity. Measured results that lagged behind project or activity targets would lead to lower benefits than originally projected. For example, the original ERR analysis of the rural development project in Cape Verde assumed that the project would lead to 111 hectares under drip irrigation; however, by compact completion, about 13 hectares were under drip irrigation. Factors subsequent to compact completion Cost overruns for MCC-funded projects not finished by compact completion would lead to lower ERRs. Costs for the Cape Verde port improvement activity, which was not finished by compact completion, are currently estimated at about $148 million. These costs exceed both the estimated investment costs of about $106 million for the activity in the updated ERR analysis and the cost contingency of 20 percent included in the updated analysis, totaling approximately $127 million. Factors affecting long-term sustainability, such as maintenance of the physical infrastructure and future training to prevent depreciation of acquired skills and human capital, can affect estimated benefits. For example, according to MCA-Honduras officials, the sustainability of many of the farm-to-market roads constructed for the Honduras rural development project is in question because the municipal governments responsible for maintaining the roads lack equipment and expertise. If less than optimal maintenance is achieved, estimated benefits will be reduced, which would lead to lower ERRs. MCC made significant investments in support of sustainable economic growth in Cape Verde and Honduras and will benefit from lessons learned during implementation of these compacts, which were among the first to enter into force. As we previously reported, insufficient planning, escalation of construction costs, and insufficient MCC review have led to project delays, scope reductions, and cost increases. MCC directed the majority of funding in the Cape Verde and Honduras compacts to infrastructure projects, and for the economic benefits of these investments to be realized, the projects must be properly sustained over the planned 20-year benefit period. To promote sustainability, MCC took steps to require partner countries to plan to efficiently operate and maintain the infrastructure, including privatization of port operations in Cape Verde and the provision of road maintenance funding in Cape Verde and Honduras. The partner countries made progress meeting MCC’s requirements in these areas, but they continue to face funding and other challenges that are key to sustainability. At the same time, MCC lost its ability to influence country decisions regarding sustainability once the compacts ended. In addition, MCC and MCA made design decisions that did not include measures to minimize landslides and erosion and did not include international roughness criteria among the contract specifications, which will result in higher long-term maintenance costs. In light of road maintenance funding deficits in both countries, these decisions put the sustainability of MCC-funded roads at risk. MCC’s ERR projections serve as the foundation and economic justification for MCC’s investments. MCC guidance and policy statements indicate that key indicators and targets used for monitoring and MCC’s ERR analyses should be directly linked. However, indicators and targets changed significantly over the 5-year implementation period, sufficient to alter the foundation of the initial ERR projection. In some instances, the lack of documentation on updated ERR analyses makes it difficult to know whether the revised ERR results are accurate and reliable. In other cases, MCC updated its ERRs during compact implementation, but the ERR analyses were not clearly linked to the revised targets in the monitoring and evaluation plans. Although MCC updated ERR projections in response to changes in implementation, it currently does not have guidance for re-estimating ERRs at compact completion or during the 20- year period when compact benefits are realized. Looking forward, if MCC plans to update ERRs at or following compact completion as a means of assessing project benefits relative to actual costs, it will be critical to use a consistent methodology that reflects final compact results and costs. Without an accurate representation of the compacts’ projected benefits, MCC, Congress, and other key stakeholders and beneficiaries cannot accurately evaluate the extent to which the compacts further MCC’s goals of poverty reduction and economic growth. We recommend the MCC Chief Executive Officer take the following three actions: To maximize the sustainability of MCC-funded infrastructure projects and to reduce the amount of maintenance required after compact completion, work with partner countries to make project planning, design, and construction decisions that reduce long-term maintenance needs and costs. To enhance the accuracy of MCC’s ERR projections, ensure, during compact implementation, that updated ERR analyses are well-documented and supported and that key revised indicators and targets are reflected in updated ERR analyses; and develop guidance for re-estimating ERRs at compact completion and during the long-term period when compact benefits are realized to ensure that updated estimates reflect the most recent and reliable information available for MCC’s compact investments and outcomes. In written comments on a draft of this report, MCC agreed with the intent of our recommendations and committed to developing specific actions to implement them. With respect to the first recommendation on the sustainability of MCC-funded infrastructure projects, MCC acknowledged the importance of maintenance and sustainability of its investments. MCC stated that, when designing projects, it works with partner countries to ensure that institutions and systems are in place to provide for the projects’ long-term sustainability. In addition, MCC said that it looks to strike a proper balance between its initial capital investments and ongoing operations and maintenance costs. While MCC said that it pays considerable attention to minimizing operations and maintenance costs, MCC also stated that some maintenance-related measures raised in our report—such as slope protection along reconstructed roads—may not be justified in all cases. MCC further commented that financing maintenance is a challenge in both developed and developing countries. MCC agreed with both aspects of our second recommendation to enhance the accuracy of MCC’s ERR projections. MCC agreed that, when project design and scope changes are proposed during compact implementation, updated ERR analyses should be adequately documented and the consistency between the updated ERR analyses and targets should be maintained. With respect to the third recommendation to develop guidance for reestimating ERRs following compact completion, MCC acknowledged the importance of measuring ERRs over the life of its projects and stated that it is committed to developing guidance to continue monitoring the results of compacts and measuring long-term impacts of MCC investments. MCC also highlighted other positive contributions of the Cape Verde and Honduras compacts beyond the results achieved for key indicators and targets. Specifically, MCC stated that policy reforms in Cape Verde and new legislation in Honduras are expected to have positive lasting impacts in these countries. In addition, MCC noted that in response to implementation challenges, MCC was able to leverage its resources and obtain additional financing to support the completion of compact activities. Finally, MCC emphasized that country-led implementation of its compacts fosters good governance and effective administration of development assistance. We have reprinted MCC’s comments in appendix IV. We also incorporated technical comments from MCC in our report where appropriate. We are sending copies of this report to the Millennium Challenge Corporation and interested Congressional Committees. 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) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The fiscal year 2008 Consolidated Appropriations Act, Public Law 110- 161, mandated that GAO review the results of Millennium Challenge Corporation’s (MCC) compacts. For the purpose of this engagement, we reviewed MCC compact results in Cape Verde and Honduras, the first compacts to complete the 5-year term at the initiation of our review. We examined the extent to which MCC (1) achieved performance targets and longer-term sustainability for projects in the Cape Verde and Honduras compacts and (2) assessed progress toward the compacts’ goals of income growth and poverty reduction. We focused our review more heavily on infrastructure activities, which represented a higher portion of compact funds in both countries. We specifically focused on the port activity and roads and bridges activity in Cape Verde, and the CA-5 highway and secondary roads activities in Honduras. To assess the extent to which MCC achieved expected performance targets and longer-term sustainability for compacts in Cape Verde and Honduras, we analyzed MCC documents, interviewed MCC officials and stakeholders, and observed project results in both countries. We reviewed the compact agreement for Cape Verde and Honduras, as well as MCC guidance on measuring and reporting compact results, including the agency’s Framework for Results, Policy for Monitoring and Evaluation of Compact and Threshold Programs, Guidance on Quarterly MCA Disbursement Request and Reporting Package, Common Indicators Directive, and guidelines for monitoring and evaluation plans. We interviewed MCC officials in Washington, D.C., regarding their processes for overseeing compact activities. We traveled to Santiago and Santo Antão islands in Cape Verde in December 2010 and Tegucigalpa, Honduras, in November 2010. We interviewed MCC and Millennium Challenge Account (MCA) officials in both countries regarding the results of each compact activity, including the quality and sustainability of the projects. We visited infrastructure projects in both countries, including visits to the port and to roads and bridges in Cape Verde, and to the CA-5 highway, and secondary and farm-to-market roads in Honduras. We met with project construction contractors, independent construction supervisors, and MCA project management consultants. We interviewed contractors and grantees of noninfrastructure activities and held meetings with beneficiaries of certain projects. For Cape Verde, we interviewed the contractor and two grantees for the access to credit activity, the contractor for the credit bureau activity under the private sector development project, and the contractor and eight beneficiaries of the watershed management and agricultural support project, including the farmer training activity. For Honduras, we interviewed the contractor and more than 30 beneficiaries of the farmer training and development activity, contractors and several financial institutions participating in the farmer access to credit activity, and three grantees in the agricultural public goods grants activity. In addition, we interviewed officials from the governments of Cape Verde and Honduras about compact implementation, results, and sustainability, including Cape Verde’s Ministry of Environment, Rural Development and Marine Resources, Port Authority, and Ministry of Infrastructure, Transport and Telecommunications, and Honduras’ Ministry of Transportation, Ministry of the Presidency, Ministry of Agriculture, and Ministry of Finance. We also reviewed final reports submitted to MCA by contractors and grantees on compact activities. We reviewed three versions of the monitoring and evaluation plans for each country to identify the performance indicators and associated targets to be achieved by compact end. MCC used these performance indicators and targets to track progress and assess results of compact activities; thus, we used these indicators and targets as criteria for assessing MCC results achieved. To track progress toward compact goals, MCA is required to compile and submit a performance indicator tracking table on a quarterly basis as part of its quarterly disbursement request package sent to MCC. This tracking table displays performance targets and progress on all performance indicators included in a country’s monitoring and evaluation plan. A complete indicator tracking table provides detailed information that shows cumulative past performance, recently completed performance, and the remaining annual targets for each performance indicator. We collected and analyzed all available indicator tracking tables for both countries to account for the actual results achieved against each performance target throughout the compact. We met with MCA staff in Cape Verde and Honduras about the steps they took to ensure that data used to track program results were valid, reliable, and timely, including conducting periodic data checks and hiring independent evaluators to review the reliability of data. We determined that these data were sufficiently reliable for the purposes of our review. In assessing and reporting MCC’s results, we compared actual results achieved at the end of the compact for each performance indicator to the original and, in some cases, the revised targets associated with each indicator. Given that there were three versions of the monitoring and evaluation plan for each country, we considered the original target to be the one listed the first time a performance indicator was introduced and the final target the one listed in the final 2010 monitoring and evaluation plan. In addition, in some cases, MCC revised the name or characterization of a performance indicator while the definition and type of measurement remained constant. In these cases, we chose to report the original target as that associated with the original or parent indicator, and the final target as that associated with the revised indicator. Given that MCC tracked several performance indicators for each compact project, we chose to report on a selection of key indicators that most closely represented the goal of each compact activity. For example, we reported the volume of available water for the water management and soil conservation activity in Cape Verde but did not report the value of irrigation construction contracts signed. In addition, we considered which performance indicators MCC selected to report on in its public communications about compact results. We did not report results for indicators that MCC eliminated and stopped tracking during the life of the compact, but we reported on such eliminated indicators in discussions of canceled or rescoped activities. To examine the extent to which infrastructure projects met performance targets, met quality standards, and were sustainable, we interviewed MCA officials, project construction contractors, independent construction supervisors, project management consultants, the Cape Verde port design engineer, and officials with the Honduran ministries of transportation and finance. We also reviewed documents prepared by MCA officials, project construction contractors, independent construction supervisors, project management consultants, MCC independent engineers, and government officials, including monthly reports, special studies, testing reports, and daily inspections. Lastly, we conducted site inspections of projects that accounted for a majority of the MCC-provided infrastructure funding in Cape Verde and Honduras to verify the extent to which projects had been completed and to observe whether there were any visual deficiencies in construction. These interviews, document reviews, and site visits were used to determine if the MCAs had implemented MCC’s quality assurance framework, if there was supporting documentation to verify that quality testing had been undertaken, if any quality deficiencies were encountered during construction, if any quality deficiencies remain, and whether the infrastructure projects would be sustainable. We were not able to view actual work in progress or visit testing facilities for most infrastructure contracts because the work had already been completed. To examine the extent to which MCC assessed progress toward the compacts’ goals of income growth and poverty reduction, we reviewed MCC’s monitoring and evaluation guidance, Guidelines for Economic and Beneficiary Analysis, three versions of the monitoring and evaluation plans for each country, monitoring information MCC and MCA collected, data quality reviews, final reports prepared by contractors and grantees, documents related to impact evaluation contracts, impact evaluation design reports, final impact evaluations, and original and revised economic rate of return (ERR) analyses. We also interviewed MCC officials in Washington, D.C., regarding their processes for overseeing compact activities, developing monitoring plans, and carrying out assessments of progress toward the compacts’ goals. During site visits, we interviewed MCC and MCA officials in Santiago and Santo Antão islands in Cape Verde and Tegucigalpa, Honduras, about monitoring procedures and data quality activities for compact projects. We also interviewed officials from the national statistical agencies in Cape Verde and Honduras, contractors, partner government agencies, and project contractors involved in data collection activities, as well as contractors implementing impact evaluations and other analysis. To assess MCC’s results framework, we analyzed the connection between the ERR estimates and related statements in the economic impact section of the monitoring and evaluation plans, the values of the variables that should translate into indicator targets in those plans, and the underlying economic analyses provided in support of the expected economic impact statements made in those plans. In addition, we studied the evaluation components of the plans and compared them with the evaluations’ actual proposed designs and implementation to assess the extent to which the evaluations accurately reflected the designs envisioned in the plans, the likelihood that MCC would be able to gather reliable information on actual benefits attributable to the compact, and the ability of MCC to update the ERRs as that information becomes available. We reviewed MCC’s evolving guidance for ERR and monitoring and evaluation analyses. We also examined spreadsheets MCC provided in support of their updated calculations. To further discuss MCC’s approaches and to clarify aspects of the economic impact analysis, we interviewed MCC economists, impact evaluators, and other officials regarding MCC’s monitoring and evaluation framework and estimated economic impact. MCC enters into a legal relationship with partner country governments, which vest responsibility for day-to-day management of compact project implementation to the MCA, including monitoring and evaluation activities such as setting and revising targets, but such MCA actions require MCC’s direct oversight and approval. Therefore, throughout this report, we attribute all decisions related to project rescoping and compact targets to MCC. Finally, some of the reports and documents referenced above were written in Portuguese or Spanish. We translated these documents internally and created English summaries to enable our analysis. We conducted this performance audit from September 2010 to July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Located off the coast of West Africa, Cape Verde is a group of 10 islands, with a population of about 500,000. Cape Verde was classified as a lower-middle income country with a per capita income of $3,010 for fiscal year 2011. U.S. development assistance accounts for about 9 percent of total assistance to Cape Verde over the last 10 years, making the United States its third-largest donor. MCC and the government of Cape Verde signed a 5-year compact in July 2005, which entered into force in October 2005 and ended in October 2010. The compact, for which MCC provided $110.1 million in funding at compact signature, consisted of three projects. The infrastructure project was aimed at increasing integration of internal markets and reducing transportation costs. Activities include upgrading and expanding a major port and rehabilitating five roads and constructing four bridges. Expected beneficiaries of this project include consumers, importers and exporters, shippers, and residents. The watershed management and agricultural support project was aimed at increasing agricultural productivity in three targeted watershed areas on three islands. Activities include the development of water management infrastructure and activities to increase the productive capacity of farmers. Expected beneficiaries of this project include individual farmers, farm households, and government and private sector participants. The private sector development project was aimed at spurring private sector development on all islands. Activities include investments in the private sector and technical assistance to microfinance institutions. Expected beneficiaries include individuals and companies, urban and rural poor, and existing microfinance institutions. In addition, the compact included funding for program administration and monitoring and evaluation activities to support administration and implementation of the compact, program management, and reporting. Table 5 shows the Cape Verde projects’ planned activities, objectives, and beneficiaries as of compact signature. MCC allocated $53.7 million to fund infrastructure improvements at the Port of Praia—Cape Verde’s largest port, accounting for approximately 50 percent of the total volume of port traffic—to support the country’s goal of expanding the facility to promote continued economic development. The activity was planned to address constraints such as a lack of space for wharf-side cargo handling and lack of a breakwater to protect against waves that can impair stevedoring operations. The activity was planned with five components: 1. construction of a new cargo village—container storage yard—on a plateau above the wharves; 2. reconstruction of a wharf (wharf 2), including demolition of existing 3. construction of a new access road to connect the wharves to the cargo village (lower access road) and public road system (upper access road); 4. expansion of a wharf (wharf 1) to extend its length and build a new storage yard on reclaimed land; and 5. construction of a new breakwater. MCC disbursed $54.9 million for the port activity. MCC met a key final target and eliminated some indicators for this activity (see table 6 for key performance results for the port activity). After determining during the activity’s planning and design that it would not be able to fund all planned port improvements, MCC and MCA-Cape Verde reduced the activity’s scope by splitting it into two phases, with MCC funding the first phase (components 1, 2, and 3) and the Cape Verde government funding the second phase (components 4 and 5). MCA-Cape Verde completed most of phase 1 in October 2010, and the Cape Verde government expects to complete phase 2 by March 2013. Phase 1. MCA-Cape Verde funded phase 1 of the port activity at $45.3 million. MCA-Cape Verde deleted the construction of some buildings from the contract scope to keep costs within funding limits, and the Cape Verde government subsequently funded construction of the buildings at approximately $16 million through a loan from a Portuguese bank. Phase 2. The Cape Verde government funded phase 2 of the activity (components 4 and 5) at approximately $87 million through a loan from the Portuguese government. Work is to be completed over a 30- month period ending in March 2013 in accordance with the design initially funded by MCC. Inaccurate early planning of the port activity led to cost increases and implementation delays. Cost increases. Costs increased as a result of inaccurate early planning assumptions concerning design details and construction materials. For example, the cargo village and access road were built in different locations than initially planned, and according to MCC, relocating these components resulted in significant cost increases. In addition, initial plans specified the use of a detached breakwater to protect the wharves, but subsequent analysis and model testing showed the need for an attached breakwater, which was more expensive to construct. Also, initial plans were based on an incorrect assumption that quarry materials would be available at minimal cost from government-owned quarries. However, by the time implementation began, the government no longer controlled the quarries, and materials had to be procured from private sources, increasing the activity’s cost. Implementation delays. Rescoping the port activity contributed to implementation delays that resulted in MCA-Cape Verde using more than half of the 5-year compact implementation period for planning, design, and contract procurement actions before awarding a construction contract. As a result, implementation of the phase 1 components did not begin until year 3, when MCC had originally intended to have completed these components, and completion of phase 2 components is not expected until March 2013, approximately 29 months after compact end. To provide management control and ensure quality for the port activity, MCA-Cape Verde established an organization consistent with MCC’s management structure for infrastructure projects. The management organization for the Cape Verde port activity consisted of a project manager for MCA-Cape Verde; project managers for the activity’s implementing entity, the Cape Verde transportation ministry; an MCA- contracted independent construction supervisor; an MCA-contracted design engineer; and an MCC-contracted independent engineering consultant. Work completed for the port activity was performed according to contractual requirements, generally met quality standards, and should enable the infrastructure to function for the duration of its design life, according to the construction supervisor’s progress reports and members of the management organization. However, a defect in construction of the shore protection structure built for the lower access road posed a threat to the road’s stability, which MCC took steps to remedy. According to the design engineer, in May 2009 the construction contractor expressed concerns about building an underwater trench included in the design for the shore protection structure, claiming that the seafloor was uneven and consisted of materials that were not shown on design documents. However, at the construction supervisor’s direction, the contractor attempted to install the structure as specified in the design and completed work in July 2010. Subsequently, the design engineer determined that the underwater trench was not properly constructed and did not provide an adequate foundation for the shore protection structure. To address this issue, MCC contracted the U.S. Army Corps of Engineers to inspect the as-built condition of the trench and develop alternatives for correcting the construction defects. In its initial assessment, the U.S. Army Corps of Engineers estimated that the cost of remedying the construction defects would range from approximately $1 million to $2.8 million. Costs for repairs to the underwater trench will be shared by the construction contractor and the Cape Verde government, according to an agreement between the two parties and MCA-Cape Verde in January 2011. MCC determined that privatizing operations at the Port of Praia was critical to the sustainability of the port activity and included privatization of the port operations as a condition for disbursement of compact funding. MCC reasoned that privatization was needed to enable the port to handle current and projected traffic in a manner that would lead to improved financial performance. Although the government of Cape Verde agreed to this condition and developed a law to enable the port authority to enter into contracts with private operators, the port authority has been delayed in soliciting contracts for port operations services because construction of the port is incomplete, with phase 2 work expected to continue until March 2013. MCC reports that the port authority has taken initial steps in developing model contracts for port operations, but it no longer has leverage over the port authority to ensure that this condition is met. MCC allocated $25 million to fund the rehabilitation of five roads on Santiago Island and construction of four bridges on Santo Antão Island. The activity was intended to support Cape Verde’s goal of improving mobility on the two islands by closing road network gaps to ensure more reliable access both to intra-island markets and services and provide transportation linkages on the targeted islands. MCC disbursed $27.7 million for the Cape Verde roads and bridges activity by compact completion. MCC met revised targets for the roads rehabilitation, after reducing the scope of the planned roads, and met its targets for the bridges construction (see table 7 for key performance results for the roads and bridges activity). MCC reduced the scope of road rehabilitations but maintained the scope of bridge construction work after redesigns of original plans led to increased costs. Roads. MCA-Cape Verde awarded a $12.6 million contract to rehabilitate five roads, totaling 62.2 kilometers, in April 2006. Subsequent redesign of the road plans, to more accurately reflect the extent of work required, increased the cost of the contract to $18.5 million and extended the contract completion date from 30 months to 44 months after the May 2006 work start date. To keep the work within funding limits, MCC and MCA-Cape Verde reduced the scope of planned rehabilitation to three roads totaling 39.6 kilometers. Work was completed for the first road (Road 1) in June 2009; for the second (Road 4) in July 2009; and for the third (Road 2) in January 2010. Bridges. MCA-Cape Verde awarded a $3.4 million contract in November 2006 to build the four bridges. Subsequent redesigns of the planned construction, intended to make the bridges more durable, increased the contract value to $5.8 million and extended the completion date from 12 months to 34 months after the December 2006 work start date. Bridge work was completed in October 2009. Figure 8 shows the locations of the planned roads, with photographs of the rehabilitated roads, on Santiago Island. Figure 9 shows the four bridges that were constructed on Santo Antão Island. On beginning work for the Cape Verde roads and bridges activity, MCA- Cape Verde found that the designs did not accurately represent the extent of work required. For example, inadequate topographic information in the road designs resulted in designs that did not accurately reflect the amount of earthwork involved in improving the roads. Revisions to the designs allowed for improvements to make the structures more durable: additional drainage culverts, concrete lining of ditches, rip-rap placement to protect roads from erosion and landslides, and increased bridge heights to provide more clearance for water. To provide management control and ensure quality for the Cape Verde roads and bridges activity, MCA-Cape Verde established an organizational structure consistent with MCC’s management structure for infrastructure projects. The management organization for the Cape Verde roads and bridges activity consisted of a project manager for MCA-Cape Verde; a project manager for the activity’s implementing entity, the Cape Verde transportation ministry; two MCA-contracted independent construction supervisors, one for roads and one for bridges; and an MCC- contracted independent engineering consultant, who provided oversight on both the roads and bridges construction contracts. In general, work on the roads and bridges activities met quality requirements. However, the new infrastructure is subject to damage from sometimes harsh environmental conditions, and the Cape Verde government faces challenges in funding needed maintenance and ensuring the infrastructure’s sustainability. Quality of roads. Work completed for the roads activity was performed according to contractual requirements, generally met quality standards, and should enable the infrastructure to function for the duration of its design life, according to the construction supervisor’s progress reports and members of the activity’s management organization. However, the mountainous terrain through which the roads were built presents hazards such as landslides and erosion from storm water runoff. According to the construction supervisor, the low volume of traffic for which the roads were built influenced decisions to limit some design features, such as removing steep roadside slopes and installing or repairing drainage structures and retaining walls, to control costs. For example, in consideration of limiting costs and reducing environmental impacts, the construction supervisor authorized less earthwork than had been proposed by the construction contractor when the road activity was being redesigned. This resulted in the exposure of some road sections to potential damage from landslides and water runoff because they are adjacent to steep slopes. We observed areas along Road 2, in particular, where the road structure had failed, apparently as the result of insufficient drainage or weakened retaining structures that were unable to withstand water flows during rain storms. We also observed repair efforts by the Cape Verde government’s road maintenance contractor that illustrate how sustained attention to maintenance will be needed to keep the road network functional (see fig. 6 on page 27). Quality of bridges. Work completed for the bridges activity was performed according to contractual requirements, met quality standards, and should enable the infrastructure to function for the duration of its 50- year design life, according to the construction supervisor’s progress reports and the MCA-Cape Verde project manager. The construction supervisor’s final report noted that the bridges may have been overdesigned, with more concrete and reinforcing steel than required for structural stability. The report also indicated that the type of cement used in the concrete mix was different, and less resistive to corrosion, than the type originally specified. To protect the bridges from corrosion, due to their proximity to the ocean shore, the construction contractor applied a waterproofing treatment to the concrete that was used to construct the bridges. However, use of this waterproofing treatment creates a new maintenance requirement for the Cape Verde government to manage. MCC determined that stable maintenance financing was critical to sustaining its roads and bridges activity and established this as a condition for disbursement of compact funds. Over the course of the compact, the Cape Verde government’s road institute developed its capacity for collecting user fees that it directed to funding maintenance for the national road network. However, according to Cape Verde government officials, the agency lacks adequate funds for road maintenance. For example, road institute officials indicated that lack of funds for road maintenance is the greatest challenge facing the agency, and other Cape Verde government officials told us that current funding for road maintenance would meet less than half of requirements. MCC disbursed approximately $6 million for the water management and soil conservation activity, which was designed to improve natural resource management and increase agricultural productivity in three watersheds—Faja (São Nicolau Island), Mosteiros (Fogo Island), and Paul (Santo Antão Island)—through the construction of water management and distribution infrastructure. MCC met some key original and final targets for the water management and soil conservation activity (see table 8 for key performance results for the water management and soil conservation activity). Because the activity was rescoped and construction delayed, the agency expects that agricultural productivity will be delayed. For example, MCC did not meet its original or final target for the volume of water available in the three watersheds at compact end. MCC achieved approximately 353,000 cubic meters for the volume of available water in the three watersheds at compact end, which was about 40 percent of the original target of approximately 875,000 cubic meters and about 76 percent of the final target of approximately 466,000 cubic meters. According to MCC, since the water was delayed, the agency does not expect immediate changes in agricultural productivity. Responding to environmental concerns identified during implementation, MCC rescoped the activity from a combination of wells and reservoirs to only reservoirs, which delayed completion and operation of water management infrastructure as well as the adoption of drip irrigation. Following a 2-year delay in constructing water management infrastructure, not all reservoirs were operational at compact end. As of January 2011, MCC reported all 28 reservoirs constructed were operational. MCC officials, the contractor, and some farmers we met with in Cape Verde said that farmers were slow to adopt drip irrigation because of the delay in the construction of infrastructure and the low water availability. MCC also reported that, for fully functional water systems, adoption of drip irrigation was slow, partially due to the completion of works coinciding with the rainy season. For example, during our visit to one reservoir in the Paul watershed in December 2010, we found that five of the seven available drip irrigation connections were hooked up to farm plots. Figure 10 shows a connected farm plot. MCC and the government of Cape Verde took some initial steps to enhance the sustainability of completed water management infrastructure. For instance, in January 2009, the government of Cape Verde’s National Water Council established a water-fee structure for the three watersheds. MCC reported that it was actively engaged with the government to develop the water-fee policy, which was a condition required for MCC disbursements. In addition, communities and water users are responsible for maintenance of the water management infrastructure. The Cape Verde agricultural ministry and an MCA-Cape Verde contractor also worked with local community water associations, composed of farmers and other water users, to develop water management plans for each watershed. However, during our visit to Cape Verde, we found that the National Water Council had not begun collecting water fees in one of the three watersheds. MCC disbursed approximately $5 million for the agribusiness development services activity, which consisted at compact signature of several activities to increase the productivity and marketing of agricultural products by farmers and agribusinesses, including training of farmers, technical assistance in postharvest agricultural techniques, and construction of postharvest packing and quality control centers. MCC did not meet key original targets and most final targets for the agribusiness development services activity (see table 9 for key performance results for the agribusiness development services activity). For example, MCC reported that 553 farmers were trained in at least three out of five subject areas by compact end, achieving 69 percent of the target of 800 trained farmers. MCC rescoped the agribusiness development services activity following implementation challenges, and the contractor reported challenges in implementing the activity and achieving targets. Small agribusiness sector. MCC reported that it eliminated the activity’s focus on the agribusiness sector after finding that sector in Cape Verde to be small, but continued to work with the broader agricultural sector. Limited training capacity of Cape Verde agricultural ministry staff. MCA-Cape Verde reported that it had originally planned for the Cape Verde agricultural ministry to implement the farmer training activity; however, when it found that the ministry did not have the capacity to train farmers, it hired a contractor to assist in implementation of the farmer training activity and other aspects of the agribusiness development services activity. Limited authority of contractor over Cape Verde agricultural ministry staff. The contractor reported that its inability to directly train farmers and lack of authority over ministry field staff trainers made it difficult to meet the training targets. Limited targeting of farmer trainings. The contractor reported that using the Cape Verde agricultural ministry’s farmer training list, which was not targeted, resulted in a significant portion of time and resources spent on beneficiaries that had little interest in the training and saw little value in attending training sessions. We spoke with several farmers in one watershed in Cape Verde who said the training had been helpful, but most were unable to specify which training they had taken, new information they had learned, or new techniques they had applied on their farms. The MCA-Cape Verde contractor took steps to promote sustainability of agribusiness development activities, and the Cape Verde agricultural ministry has expressed interest in continuing certain activities beyond the end of the compact, but MCC and the contractor have expressed concern about the sustainability of some activities. For example, the contractor took steps to promote the sustainability of the agribusiness development services activity after compact completion, including developing training materials for the Cape Verde agricultural ministry, helping establish and train farmers associations, and implementing a farm-to-market pilot project for testing postharvest practices along the produce value chain. The Cape Verde agricultural ministry reported that it will continue training farmers through its extension centers using training materials developed under the compact activity. However, the contractor reported that even after receiving training under the compact, all ministry field staff did not have the capacity to train farmers, given their work loads. For example, the contractor stated that ministry field staff had multiple responsibilities, including involvement in multiple donors’ agriculture-related programs. The Cape Verde agricultural ministry has also taken steps to privatize management of the postharvest center, including a commitment in February 2010 to finance the costs of operating the postharvest center and advertisement in June 2010 for a private management team. However, the postharvest center was not in operation as of December 2010 and had not yet been privatized. According to MCC officials, the ministry did not contract with a private management team and has established a government management team to manage operations for the next 2 years. MCC reported that it has flagged privatization of the postharvest center as an issue critical to the sustainability of the project. MCC stated that it has received assurances from the ministry that it intends to privatize operations, but MCC is unclear about the timeline. MCC disbursed $600,000 for the access to credit activity, which was designed to meet demands in the three watersheds for financing drip irrigation, working capital, and agribusiness development. MCC exceeded key original and final targets for the access to credit activity (see table 10 for key performance results for the access to credit activity). For example, four eligible microfinance institutions (MFI) accessed the $600,000 MCC credit line to provide $617,000 agricultural loans. MCC and the contractor stated that they were optimistic about continued demand for drip irrigation credit once water management infrastructure was fully operational and the rainy season ended. According to MCC, as a result of the strong performance of the four MFI loan portfolios, MCC converted its loans to each MFI into grants at the end of the compact, enhancing the sustainability of agricultural credit efforts. Following an evaluation of the MFIs’ operational and financial performance, MCA-Cape Verde determined that all four MFIs were eligible for conversion of MCC loans under the credit line to grants. MCC converted its loans into grants by the end of 2010. Two MFIs reported that they had not previously provided loans in the agricultural sector in certain locations, but following a positive experience with the MCC credit line, they anticipate continued growth of these loan portfolios. MCC did not require that an oversight entity monitor the MFIs’ use of grant funds for agricultural purposes beyond the end of the compact, but the agency included limited oversight terms in the grant conversion that may promote sustainability. The agency specified in its grant terms that funds are to be used solely for agribusiness and drip irrigation credit and are subject to MCC audit for the first 2 years. MCC disbursed about $400,000 for the partnership to mobilize investment activity, which was intended to help the Cape Verde government identify, prioritize, design, and implement interventions to increase investment in priority sectors. MCC had not funded private sector investments in priority sectors for the partnership to mobilize investment activity by the end of the compact, but had funded the creation of a private credit bureau during the administrative closeout period (see table 11 for key performance results for the partnership to mobilize investment activity). MCC had initially allocated $5 million for this activity, but MCC, the World Bank, and the government of Cape Verde were unable to agree on which priority sectors should receive investment support. Therefore, MCC reallocated funds from this activity to the compact’s infrastructure project. However, MCC funded technical assistance to support the creation of a private credit bureau. In January 2011, after the end of the compact and during the administrative closeout period, the Chambers of Commerce signed a contract with an investment partner to create a private credit bureau. Upon signature of this contract, MCA-Cape Verde provided $250,000 to the Chambers of Commerce to invest in the credit bureau. MCC took steps to support the new credit bureau’s operational and financial sustainability by requiring a private sector partnership and private sector investments to be in place before MCC provided support for the activity. Private ownership may provide an incentive to enhance the sustainability of the credit bureau. MCC disbursed $1.4 million for the financial sector reform activity, which consisted of technical assistance to support the development of microfinance institutions and government efforts to expand access to the primary market for government securities. MCC met or exceeded its original and final targets, but eliminated a key target for the financial sector reform activity (see table 12 for key performance results for the financial sector reform activity). For example, MCC met or exceeded its targets for MFI operational and financial self- sufficiency. According to MCC officials, technical assistance to the government of Cape Verde under the compact also helped produce financial sector reforms, but MCC eliminated funding for financial software to implement reforms following procurement delays. Under this activity, MCC funded technical assistance to eight MFIs in several areas, including accountability and internal controls, lending methodologies, and client services, to support their operational efficiency and financial sustainability. According to two MFI representatives we spoke with during our visit to Cape Verde, the assistance they received helped professionalize MFI credit agents and provided them with technical competence to develop and market loan products for the agricultural sector. The MFIs that received technical assistance achieved operational and financial self-sufficiency, which will enable them to continue their agricultural loan operations. In addition, according to MCC, the Cape Verde government agreed to fund the software with country funds and completed the financial sector reforms, showing strong country ownership and commitment to compact goals. Honduras, with a population of about 7.2 million, was classified as a low- income country with a per capita income of $1,820 for fiscal year 2011. U.S. development assistance accounts for about 13 percent of total assistance to Honduras over the last 10 years, making the United States its fourth-largest donor. MCC and the government of Honduras signed a 5-year compact in June 2005, which entered into force in September 2005 and ended in September 2010. The compact, for which MCC provided $215 million in funding at compact signature, consisted of two projects. The transportation project was aimed at reducing transportation costs between targeted production centers and national, regional, and global markets. Activities include reconstructing portions of highways and secondary roads. Expected beneficiaries include road users and urban and rural businesses. The rural development project was aimed at increasing the productivity and business skills of farmers who operate small and medium-size farms and their employees. Activities include providing technical assistance to farmers in the production of high-value crops and constructing and improving selected farm-to-market roads. Expected beneficiaries include trained farmers, their communities, and the agricultural sector. The compact also included funding for program administration, to support compact implementation and program management, and for monitoring and evaluation to measure the impact of compact activities. Table 13 shows the Honduras compact’s planned activities, objectives, and beneficiaries, as of compact signature. MCC allocated $96.4 million to reconstruct 109 kilometers of the CA-5 highway. The northern portion of the CA-5 highway connects Tegucigalpa—the capital of Honduras—to Puerto Cortes on the north coast, providing the primary route for import and export traffic between Puerto Cortes and the major production and consumption centers in and around San Pedro Sula, Comayagua, and Tegucigalpa. Figure 5 shows the locations of the CA-5 highway activities. MCC disbursed $90.3 million for the CA-5 highway reconstruction activity by contract completion. MCC did not meet its target for kilometers of highway upgraded, completing 49.5 kilometers, or 45 percent of the target (see table 14 for key performance results for the CA-5 highway activity). MCC originally planned to fund all reconstruction included in four contracts for the four sections of the CA-5 highway. However, while completing final design, acquiring right-of-way, and beginning to award contracts, MCC determined that, because estimated costs had increased, it would be unable to complete the 109 kilometers within the 5-year compact timeframe and within the funding allocation of $96.4 million. Consequently, the Honduras government, working with MCC, arranged for a loan from the Central American Bank for Economic Integration (CABEI) to fund up to $130 million of the CA-5 reconstruction, and MCC reduced its allocation to $89.3 million. This brought total funding for the CA-5 reconstruction to $219 million, more than double the original estimate. The $219 million MCC and CABEI allocated for the CA-5 reconstruction included $20.2 million—$19 million from MCC and $1.2 million from CABEI—for land acquisition and relocation costs; $195 million—$70.3 million from MCC and $124.8 million from CABEI—for construction supervision and construction contract costs; and $3.4 million from CABEI for other consulting and administrative costs. Varying amounts of the $195 million in construction supervision and construction contract work were completed in each section of the highway by the end of the compact. Section 1. After completing the design for section 1 of the CA-5 highway, MCC lacked sufficient funding to construct the 24.3-kilometer section. Construction began in June 2010 with about $75 million in CABEI funds and was about 5 percent complete when the compact ended. MCC expects section 1 to be completed by June 2012. However, in March 2011, MCC officials stated that additional work added to the contract may require MCA-Honduras to extend that date. Section 2. Construction began in February 2009 on the $68 million, 33.3-kilometer section 2 of the CA-5 highway and was about half completed when the compact ended. MCC allocated about $21 million (31 percent) and CABEI allocated about $47 million (69 percent) for section 2, with MCC’s allocation covering the cost of about 10 kilometers of constructed road. Construction was scheduled to be completed by March 2011, but MCA-Honduras is considering extending the completion date to September 2011 because of additional construction work, rain, and other delays. Sections 3 and 4. Reconstruction is 100 percent complete for 49.5 kilometers of the highway’s two northernmost sections—sections 3 and 4—with about $52 million allocated to the activities. This amount included MCC funding of about $49 million (94 percent) and CABEI funding of about $3 million (6 percent). See figure 11 for before and after pictures of section 4. Contract bid amounts, land acquisition costs, and contract modification costs exceeded MCC’s estimates, causing overall costs for reconstructing the CA-5 highway to exceed allocations for the activity and preventing MCC from achieving its original target, according to MCA-Honduras officials. Construction contract bid amounts. Construction contract bid amounts for reconstructing each section of the CA-5 highway were significantly higher than MCC’s initial estimates, owing in part to requests from the Honduras government for changes in scope and changes in design, according to MCA-Honduras officials. Section 1. The construction contract bid for section 1 exceeded estimated costs by 15 percent. Section 2. The construction contract bid for section 2 exceeded estimated costs by 112 percent. The original design was to increase the road from two to three lanes in some areas. However, the Honduras government requested that the entire section have four lanes, increasing the travel lane pavement area by 43 percent. Section 3. The construction contract bid for section 3 exceeded estimated costs by 11 percent, after the Honduras government requested a third lane for passing to improve traffic flow in a few areas with steep inclines. Section 4. The construction contract bid for section 4 exceeded estimated costs by about 75 percent. The Honduras government requested that four lanes be installed in some portions of the section and that concrete, rather than asphalt, be used for the pavement. In addition, according to MCA-Honduras officials, 12 kilometers of a special base treatment were added to support the concrete pavement. Land acquisition costs. The additional costs of acquiring right-of- way for the additional lanes and relocating adjacent housing and businesses exceeded initial estimates by almost 600 percent. According to MCA-Honduras officials, the original estimate for land acquisition and relocation was $3.1 million, but the final budgeted cost was about $20.2 million. Officials said that due-diligence studies conducted before the design phase had not included the costs of resettling residents and business owners from acquired land. In addition, the original land acquisition costs were estimated based on the land’s official value for tax purposes rather than on its market value (which is typically higher), in accordance with normal practice in Honduras, and did not include relocation costs. MCA-Honduras officials said that, to accelerate the acquisition of land for the CA-5, they worked with the Honduras government to pass legislation that allows citizens to be reimbursed for market value land costs and relocation costs. According to MCC officials, relocation of the businesses provided economic benefits by allowing the business owners to retain their livelihood. In addition, businesses were grouped together to reduce traffic congestion related to cars stopping along the road and small chambers of commerce were developed to promote the businesses (see fig. 12). Contract modifications. Modifications of contracts during construction for sections 2, 3, and 4 raised CA-5 costs by about 6 percent, according to our review of construction supervision reports. A construction supervision official for section 2 stated that some of these increases were the result of road design plans with insufficient detail, which required the construction of additional retaining walls, earthwork, and drainage pipes beyond those included in the contract plans. The construction supervision official for section 4 stated that the increases were due to the addition of drainage pipes and other items. MCC planned to reconstruct 91 kilometers of secondary roads, which connect rural roads to primary roads such as the CA-5 highway. MCC disbursed $27.7 million to reconstruct 65.5 kilometers of secondary roads by compact completion. MCC met the final target of 65.5 kilometers of secondary road reconstructed after a reduction in the original target from 91 kilometers (see table 15 for key performance results for the secondary roads activity). After accepting bids for the first secondary road construction contract, MCC agreed to a reduction in the target for reconstructing secondary roads because the cost of the reconstruction work greatly exceeded original estimates, according to MCA-Honduras officials. The officials also stated that the amount of planned MCC funding increased after the first contract was let because the bid amounts were more than estimated. According to the officials, the original estimated reconstruction cost was about $235,000 per kilometer, but the actual cost was about $422,000 per kilometer—an 80 percent increase. For the reduced target, MCA- Honduras selected 65.5 kilometers of secondary roads from among a group of roads expected to provide the highest rate of economic return by increasing vehicle speeds and reducing vehicle maintenance costs. The selected roads, located in three different parts of the country, were constructed through three separate contracts and were completed by the end of the compact. According to MCA-Honduras officials, the reconstructed roads have brought benefits such as improving the health of residents near the road by reducing airborne dust, improving access to land near the roads, attracting new farmers and laborers, and improving access to health clinics. Figure 13 shows the secondary roads before and after the reconstruction was completed. MCC allocated $4.7 million to facilitate the implementation of a weight control system, including activities such as constructing eight truck weigh stations and the purchase of ancillary equipment along the CA-5, to help limit damage to the roads from overweight vehicles. MCC disbursed about $90,000 for the weight control system activity. MCC terminated funding for this activity in 2009 in response to the country’s political situation (see table 16 for key performance results for the weight control activity). MCC officials stated that prior to the decision to eliminate the activity, they worked with the Honduran government to enact legislation allowing Fondo Vial—the Honduran road maintenance agency—to regulate and enforce weight limits on Honduran roads. According to the Honduran government and MCA-Honduras officials, the government is trying to develop a smaller weight control activity, with one permanent weigh station and two portable stations, to start enforcing weight limits on the CA-5. However, at the time of our visit in November 2010, the government had not established a definite plan or obtained funding for the activity, and MCC is no longer monitoring the activity to provide us with an update. To provide management control and ensure quality for the Honduras transportation project, MCA-Honduras established an organization consistent with MCC’s management structure for infrastructure projects. The management organization for infrastructure projects included a MCA- Honduras transportation director and staff; contracted project management consultant who also performed design engineer services; and contracted independent construction supervisors, who reviewed the work of the project construction contractors for the CA-5 highway and secondary roads. MCC hired an independent engineering consultant to provide them with independent reviews and recommendations of MCA- Honduras’ design and construction activities. In addition, MCA-Honduras implemented a quality control process, with independent construction supervisors and contractors ensuring that construction of the CA-5 highway and secondary roads followed designs. The contractors were responsible for the primary testing, or quality control, and independent construction supervisors were responsible for a smaller amount of testing to confirm that the contractor’s tests were accurate. In our review of contracts, we found that to implement the quality control plan, the independent construction supervisors and contractors conducted testing on certified testing equipment and kept records of daily activities and test results (see fig. 14). While the work on the CA-5 highway sections and secondary roads was conducted with a quality control process in place, we observed instances of roadside erosion, pavement roughness, surface slickness, landslides, steep slopes, and limited use of roadside safety measures that raised concerns about the quality of the completed works. Roadside erosion. We found problems with erosion in some areas that had not been adequately revegetated, resulting in drop-offs at the edge of pavement, undermining of sidewalks, and filling of drainage areas (see fig. 15). At one site, construction supervision officials stated that revegetation was included in the contract to control erosion, but they decided not to have the contractor install it because it was dry season and the revegetation would not survive. At another location, there was no erosion control included in the design of a drainage way, resulting in erosion from rains. If these erosion problems are not resolved during construction, they will present maintenance challenges that will require additional funding. Pavement roughness. Pavements on the CA-5 section 3, the CA-5 section 4, and secondary roads met contractual requirements for pavement smoothness; however, these CA-5 sections and secondary roads did not meet the International Roughness Index (IRI) targets that MCC and MCA-Honduras had set (see table 17). The project designer had not included the IRI measures in the contract documents as a performance specification; thus, the contractor was not required to meet IRI targets, which resulted in increased long-term maintenance and user costs. Surface slickness. On two of the completed secondary roads, we observed some areas of asphalt seepage to the road surface—a condition known as asphalt flushing, which can affect road safety by reducing skid resistance, making the surface slick, or obscuring pavement markings (see fig. 16). According to MCA-Honduras officials, the contractor previously had taken action to mitigate the deficiency on the road with the worst flushing and felt it was satisfactorily repaired; however, it still existed at the time of our visit in November 2010. Landslides. Landslides were found along CA-5 in sections 2, 3, and 4. For example, in the unfinished section 2 of the CA-5, a large landslide made the uncompleted road almost impassable and caused delays in construction of section 2 (see fig. 17). The geotechnical analysis identified by MCC as being those used to assess the risks of landslides in the original CA-5 highway designs did not include detailed analysis identifying how specific slopes would be stabilized, prevention measures that could be included in the construction plans, or an analysis of sections 3 and 4 of the CA-5. If such detailed analysis had been conducted during the design of the highway, the construction plans could have included such measures, thus reducing landslides and maintenance costs. Steep slopes. In several locations along one secondary road, we observed that the contractor had excavated soil to construct the road and left steeps slopes that were almost vertical, with soil eroding along the face of the excavation and filling drainage areas (see fig. 18). Construction supervisor officials said that this type of design and construction was typical in Honduras because there was limited right- of-way available to construct gentler slopes that were less subject to erosion. However, we observed some locations where there appeared to be sufficient right-of-way and the slope was still vertical. For example, on one contract where right-of-way was available, the construction supervision officials stated that the work was constructed with a steep slope to save the cost of the excavation. Although the decision to limit right-of-way acquisitions and reduce the amount of excavation reduces costs and reconstruction time, it increases the cost of long-term maintenance to ensure the pavement does not deteriorate due to inadequate drainage. Inadequate or inconsistent traffic safety measures. We found inadequate or inconsistent use of traffic safety measures on the completed CA-5 sections and secondary roads: Concrete barrier wall was installed along retaining walls with drop- offs, but guardrail was not generally installed along steep embankments and drop-offs (see fig. 19). Guardrail with safety end treatments or crash cushions to protect motorists was not installed at the ends of most concrete barrier walls and concrete bridges (see fig. 19). Guardrail was installed to protect vehicles from concrete bridge railing ends on one secondary road but not on another, in part due to limited funding for the second road, according to MCC officials. Solid pavement centerlines were installed in a different manner on one secondary road than on the other two roads, with the one road not following design standards that MCC officials said they generally used for the activity. MCC officials attributed the lack of uniform centerlines to one road contract having less detailed specifications than the other two road contracts, resulting in the contractor using a different standard supplied by the Honduran transportation ministry. MCC asserted that motorist safety was not affected; however, this approach differs from the traffic controls used in the United States, where uniformity of traffic control devices, such as pavement markings, is considered vital to their effectiveness, promoting highway safety and efficiency and minimizing the occurrence of crashes. MCC officials expressed confidence in the safety of the completed CA-5 sections and secondary roads, stating that the design of the road reconstruction had met Central American standards; that the Honduras transportation ministry had accepted and approved the proposed designs; and that the traffic safety devices included in the reconstruction exceeded those traditionally used on Honduran roads. However, MCC officials acknowledged that they did not perform a cost-benefit analysis of additional traffic control and traffic safety devices during the design of the contracts and that funding limitations had affected the extent to which safety improvements were included in the construction contracts. According to MCC, additional safety improvements were installed when funding was available. Uncertainty over Honduras government funding for road maintenance calls into question the likely sustainability of the MCC-funded roads. According to the compact, the key issue for sustainability of the transportation project is routine, periodic, and emergency road maintenance, such as sealing cracks, repainting the pavement markings, cleaning ditches and drainage structures, repairing potholes, resurfacing, and clearing landslides. Several of the quality deficiencies we observed— erosion, roughness, slickness, and landslides—will increase the amount and cost of maintenance needed over time, and failure to perform the planned maintenance may result in escalating maintenance needs. For example, without required maintenance, erosion may block drainage, causing road deterioration and undermining the sidewalks, pavements, or drainage structures, causing them to fail; increasingly rough pavement, as measured by the IRI, will likely require the road to be resurfaced sooner than planned and raise road user costs; and landslides may close roads, produce unexpected safety hazards, or block drainage, causing road deterioration. However, several circumstances call into question the Honduran government’s ability to provide the required maintenance over the 20-year period specified in the compact. MCC expressed concerns about whether the reconstructed roads would be maintained so as to sustain reductions in road users’ travel costs. Contractors and construction supervisor officials also expressed a concern that, unless the Honduras government improved its level of road maintenance, the reconstructed roads would likely not be maintained. Although MCC officials worked with the Honduras government to increase its funding of road maintenance from a precompact amount of $37 million in 2005 to $64 million in 2010, this funding is for maintenance of all roads on the official Honduran road network and not specifically for compact- funded roads. In addition, the commitment did not specifically address road maintenance after 2010. With the increased funding, MCC officials stated that they expect that the Honduran government will maintain the MCC-funded sections of CA-5 and some of the key secondary roads, but are concerned that it may not be at the level required to maximize the road’s life span. The amount that the Honduran government has committed for road maintenance is less than required by law and needed for the roads. According to officials from the Honduras transportation ministry and documents prepared by Fondo Vial, the government’s allocation for 2010 represents less than half of the road maintenance allocation required by Honduras law. These documents show that Honduras law requires the government to allocate 40 percent of a fuel tax for road maintenance. However, according to our analysis of Fondo Vial documents, the percentage of fuel tax allocated for road maintenance has varied, from 27 percent in 2000 to 14 percent in 2006 to 19 percent in 2010, even though Fondo Vial’s road maintenance plan recommends road maintenance be funded at $210 million annually—or about 60 percent of the fuel tax. MCC’s elimination of the vehicle weight control activity from the Transportation Project and the extent to which the Honduran government completes the activity in the future will affect the sustainability of the CA-5 road reconstruction. According to one Honduras government official, there is currently no control of overweight trucks shipping goods, and a large number of truckers exceed legal weight limits. Without enforcement of weight limits on the CA-5 and other MCC-funded roads, the roads will deteriorate faster, reducing transportation cost savings and increasing road maintenance costs. MCC disbursed $26.6 million for the farmer training and development activity, which was designed to improve the techniques and business skills of farmers, assist farmers in improving agricultural productivity, and achieve higher incomes from the production of high-value horticulture crops. MCC did not meet some of its original key targets, but it met or exceeded three of its four final targets for the farmer training and development activity (see table 18 for key performance results for the farmer training and development activity). For example, 6,029 farmers harvested high- value horticulture crops, which is 82 percent of the original target of 7,340 and which exceeds the final target of 6,000. According to MCC, this target was reduced to provide additional technical assistance to those trained, to increase the sustainability of the assistance provided. The farmer training activity provided a number of benefits for participating farmers. The program provided farmers with improved skills in crop choice and site selection, land preparation, soil and water management, and crop protection. A number of farmers in Honduras stated that, as a result of the training, they began growing different types of crops—for instance, switching from corn and beans to new higher-profit crops such as plantains, peppers, and onions—and using new agricultural techniques. Several farmers said they increased crop volumes, quality, and income. Figure 20 shows irrigation on a training participant farm. According to the compact, the farmer training activity is to be sustained by program farmers who are able to maintain their new level of productivity and expand their business. In addition to providing technical assistance directly to farmers, the farmer training and development activity involved working with entities along the farm production value chain to enhance the sustainability of the activity after compact completion. For instance, the contractor emphasized involving the private sector in program activities, including buyers, wholesalers, processors, and input and equipment service providers. In addition, the farmer training activity also helped farmers form associations for growing and selling their products to increase the sustainability of techniques and production practices. According to farmers we spoke with, forming associations helped them sell to larger producers and encouraged certain producers to purchase goods directly from these farms, which had not happened previously. However, according to the contractor and farmers we spoke with in Honduras, sustainability remains a concern for more than half of farmers receiving assistance. In its final report submitted to MCA, the contractor estimated that it takes approximately four to six production cycles for the new skills farmers obtain to become sustainable. According to the report, 90 percent to 95 percent of program farmers who began receiving assistance in the first 2 years of the program will continue using the new technologies. However, of the farmers who were recruited late—more than 50 percent of the total number of program farmers—half are expected to reach sustainability. Farmers in Honduras stated that, although they intended to continue using the new techniques, they were concerned about the ability of some farmers to sustain their new skills and overcome future challenges after the program ended. According to MCC officials, both the contractor and the farmers have an incentive for overstating potential sustainability challenges, as the contractor is interested in receiving additional funding and the farmers are seeking additional services. MCC disbursed $20.1 million for the farm-to-market roads activity, which was designed to improve rural roads that directly serve farms, providing durable, all-weather access to secondary and primary roads and ultimately improving access to markets and to social services. MCC did not meet its original target but nearly achieved the revised target for the farm-to-market roads activity (see table 19 for key performance results for the farm-to-market roads activity). MCC funded the reconstruction of 495 kilometers of farm-to-market roads, or 33 percent of the original target of about 1,500. The target was reduced to 692 kilometers in the 2008 monitoring and evaluation plan and further reduced to 499 in the 2010 plan. Ultimately, MCC achieved 99 percent of the final revised target. MCA-Honduras and MCC officials cited cost increases and compact changes as the primary reasons for the reduction in kilometers of farm-to- market roads reconstructed. The partial termination of the Honduras compact in 2009, in response to the country’s political situation, included termination of the uncommitted portion of the farm-to-market roads activity, representing approximately 93 kilometers of farm-to-market roads. In addition, in generating the original target, MCC used a per- kilometer cost estimate of $14,300, based on Fondo Vial quality, environmental, and social standards, but revised the estimate to $42,000 per kilometer because the Fondo Vial standards did not meet compact requirements. Furthermore, according to MCC officials, MCC chose to improve the durability of the roads built to increase the life of the roads by, for instance, adding drainage structures that reduce water damage. As a result, MCC funded fewer total kilometers of road. The farm-to-market roads reconstructed were selected based on a list of proposed roads with an estimated economic rate of return of at least 12 percent. The reconstructed roads included 38 stretches of roads in 29 different municipalities and 10 departments throughout Honduras. With the completion of the roads, MCA-Honduras officials said that rural residents’ travel times to more urbanized areas for access to markets and health centers had been reduced from 6 hours to 1 hour in some cases (see fig. 21). Lack of equipment, expertise, and funding for road maintenance by the municipalities where many reconstructed roads are located may affect the sustainability of the roads. Although Fondo Vial is responsible for maintaining some farm-to-market roads in Honduras, in many cases the roads are maintained by municipalities. According to MCA-Honduras officials, MCA-Honduras required municipalities to agree to co-finance a percentage of the road reconstruction activities, based on the poverty level of the community, as a condition for receiving funding. This co- financing could be made up of cash and in-kind contributions, such as materials. In addition, the municipality had to agree to permanently maintain the roadway. However, the maintenance of the road and its associated benefits is a concern. MCA-Honduras officials stated that, although some municipalities may be acquiring additional equipment, the municipalities generally lack the equipment and expertise to maintain the roads. We found an example of this in one section of farm-to-market road where the road had washed out in a low area and maintenance was being performed by hand with little progress. MCA-Honduras had intended to help improve the municipalities’ expertise in proper road maintenance procedures through training. However, no funds were available for the training after MCC funding was partially terminated partially as a result of the country’s political situation. MCC disbursed $12.8 million for the farmer access to credit activity, which consisted of three components—an agricultural credit trust fund, technical assistance for financial institutions, and a national property registry activity. This activity was designed to increase the supply of credit to rural borrowers, including program farmers and other agribusiness borrowers. The agricultural credit trust was a $6 million fund that was designed to provide loans to financial institutions to improve the availability of credit for rural lending. The technical assistance program provided assistance to financial and nonfinancial institutions to strengthen the institutions and assist them in developing products to more effectively serve the horticulture industry. The expansion of the national property registry activity was designed to create a new registry of movable property and facilitate implementation of legislation required to institute such a new system. According to MCA-Honduras officials, implementation challenges led to scope modifications and delays in the farmer access to credit activity. An initial lack of interest in accessing the agricultural credit fund among traditional banking institutions led MCA-Honduras and the contractors to refocus these activities on smaller sources of credit, such as financial intermediaries and input suppliers. These early challenges and resulting modifications meant that the agricultural credit fund was not effectively operating until late in the compact. In addition, the agricultural credit fund, which was initially intended to target program farmers, was modified to include horticulture producers and businesses. According to MCC, small farmers making the transition to high-value horticulture used existing resources and savings and did not require access to credit until market opportunities expanded. Due to this delay in demand for credit and an interest in enhancing the sustainability of the lending activity, MCC and MCA-Honduras decided to expand the scope to include nonprogram farmers. Additionally, according to MCA- Honduras and MCC officials, some initial opposition to reforming collateral laws and a political transition in Honduras significantly increased the time it took to enact the new law. MCC met most key original and all final targets for the farmer access to credit activity, following modifications and delays in implementation (see table 20 for key performance results for the farmer access to credit activity). For example, the total value of loans disbursed to farmers, agribusinesses, and other producers in the horticulture industry was $10.7 million—more than 170 percent of the revised target of $6 million and 37 percent of the original target of $28.8 million. MCC noted that the updated indicator reflected changes in the operational guidelines for the use of loan fund resources that allowed nonprogram farmers, agribusinesses, and vendors in the horticulture industry to access credit. An MCC official noted that, as a result of rescoping the activity, MCA- Honduras was better able to reach beneficiary populations that likely would not have been served under the original design. Financial institutions participating in both the agricultural credit fund and technical assistance activity also said that these activities helped them increase the credit they provide to the agricultural sector in Honduras. Representatives of one financial institution in particular said that the training helped them develop special products, which they were previously unfamiliar with, to provide credit to the agricultural sector. MCC took steps to increase the sustainability of the farmer access to credit activity through continuation of certain activities beyond the end of the compact. According to MCA-Honduras officials, since the agricultural credit fund activity started late, MCC arranged for the activity to continue after the end of the compact to achieve the intended effects. The agricultural credit fund will continue operating for 5 additional years after the compact is complete, which will enhance the sustainability of these loans to the horticultural industry. Since MCA-Honduras and MCC will no longer oversee the agricultural credit fund after compact end, a committee chaired by Honduras’s Ministry of Finance was set up to oversee the administration of the agricultural credit fund. According to the contractor of the technical assistance activity, many of the new financial tools adopted by financial institutions as a result of the technical assistance are self-sustaining, as they do not require external updates and are self- financing. In addition, we spoke with representatives of several financial institutions in Honduras who stated their intentions to continue lending to the agricultural sector and taking out loans with the agricultural credit fund after compact completion. MCC disbursed $8.8 million for the agricultural public goods grants facility activity, which funded 15 small competitive grants designed to support activities that enhance and accelerate the development of market-based commercial agriculture, particularly the horticultural sector. MCC met or exceeded some original and most final targets for the agricultural public goods grants facility activity (see table 21 for key performance results for the agricultural public goods grants facility activity). For example, irrigation systems reached more than 950 farmers, or almost 250 percent of the target for the number of farmers connected to the community irrigation system. Agricultural public goods grants facility took longer than expected to implement, but MCA-Honduras officials were positive about sustainability. Public goods grants were planned for 18 months, but almost every activity had to be extended beyond the end of the originally planned completion date. Public goods grants were implemented by local organizations with the support of the local community to improve sustainability. According to some public goods grantees, local communities with irrigation systems received training in the maintenance of such systems and help establishing a user-fee structure that would fund maintenance costs. According to those grantees and MCA-Honduras officials, such arrangements will bolster the sustainability of the irrigation systems. In addition to the contact named above, Emil Friberg Jr. (Assistant Director), Michael Armes, Diana Blumenfeld, Lynn Cothern, Gergana Danailova-Trainor, Miriam Carroll Fenton, Ernie Jackson, Leslie Locke, Reid Lowe, Amanda Miller, and Suneeti Shah Vakharia made key contributions to this report. Additional technical assistance was provided by Lucas Alvarez, Juan Avila, Chloe Brown, Thomas Costa, Martin DeAlteriis, Michael Derr, Kevin Egan, Vanessa Estevez, Etana Finkler, Rachel Girshick, Kieran McCarthy, Lauren Membreno, Werner Miranda- Hernandez, Mark Needham, Nelson Olhero, Joshua Ormond, Marisela Perez, Kyerion Printup, Cristina Ruggiero, Carla Rojas, Jena Sinkfield, and Omar Torres. Millennium Challenge Corporation: Summary Fact Sheet for 17 Compacts. GAO-10-797R. Washington, D.C.: July 14, 2010. Millennium Challenge Corporation: MCC Has Addressed a Number of Implementation Challenges, but Needs to Improve Financial Controls and Infrastructure Planning. GAO-10-52. Washington, D.C.: November 6, 2009. Millennium Challenge Corporation: Summary Fact Sheets for 11 Compacts Entered into Force. GAO-08-1145R. Washington, D.C.: September 26, 2008. Millennium Challenge Corporation: Independent Reviews and Consistent Approaches Will Strengthen Projections of Program Impact. GAO-08-730. Washington, D.C.: June 17, 2008. Millennium Challenge Corporation: Analysis of Compact Development and Future Obligations and Current Disbursements of Compact Assistance. GAO-08-577R. Washington, D.C.: April 11, 2008. Management Letter: Recommendations for Improvements to MCC’s Internal Controls and Policies on Premium Class Air Travel. GAO-08-468R. Washington, D.C.: February 29, 2008. Millennium Challenge Corporation: Projected Impact of Vanuatu Compact Is Overstated. GAO-07-1122T. Washington, D.C.: July 26, 2007. Millennium Challenge Corporation: Vanuatu Compact Overstates Projected Program Impact. GAO-07-909. Washington, D.C.: July 11, 2007. Millennium Challenge Corporation: Progress and Challenges with Compacts in Africa. GAO-07-1049T. Washington, D.C.: June 28, 2007. Millennium Challenge Corporation: Compact Implementation Structures Are Being Established; Framework for Measuring Results Needs Improvement. GAO-06-805. Washington, D.C.: July 28, 2006. Analysis of Future Millennium Challenge Corporation Obligations. GAO-06-466R. Washington, D.C.: February 21, 2006. Millennium Challenge Corporation: Progress Made on Key Challenges in First Year of Operations. GAO-05-625T. Washington, D.C.: April 27, 2005. Millennium Challenge Corporation: Progress Made on Key Challenges in First Year of Operations. GAO-05-455T. Washington, D.C.: April 26, 2005. | The Millennium Challenge Corporation (MCC) was established in 2004 to help developing countries reduce poverty and stimulate economic growth through multiyear compact agreements. As of June 2011, MCC had signed compacts with 23 countries totaling approximately $8.2 billion in assistance. MCC asks countries to develop compacts with a focus on results and effective monitoring and evaluation. MCC sets targets, which may be revised, to measure the compact results. In late 2010, the Cape Verde and Honduras compacts reached the end of the 5-year implementation period. This report, prepared in response to a congressional mandate to review compact results, examines the extent to which MCC has (1) achieved performance targets and sustainability for projects in Cape Verde and Honduras and (2) assessed progress toward the goal of income growth and poverty reduction. GAO analyzed MCC documents and interviewed MCC officials and stakeholders in Washington, D.C., Cape Verde, and Honduras. In its first two completed compacts, Cape Verde and Honduras, MCC met some key original targets and many final targets, but the sustainability of some activities is uncertain. In Cape Verde, MCC altered the scope of its three projects, meeting some key original targets and many final targets by the compact's end. For example, an activity to upgrade and expand a major port in Cape Verde, which represented almost 50 percent of the $110.1 million compact at signature, faced inaccurate early planning assumptions and increased costs. As a result, MCC split the port activity into two phases, funding the completion of the first phase--which covered about one-third of total expected costs for the port activity. In Honduras, MCC met a key original target and most final targets by the end of the $205 million compact. For example, MCC constructed approximately half of the planned highway and all rescoped secondary roads. In addition, several compact activities in Cape Verde and Honduras face challenges to long-term sustainability. Although MCC took steps to provide for sustainability, the governments of both Cape Verde and Honduras may have difficulty maintaining the infrastructure projects in the long term due to lack of funding, among other challenges. For example, MCC included privatization of port operations and road maintenance funding as conditions of the Cape Verde compact. However, the government has had difficulty meeting these requirements, calling into question the long-term sustainability of some projects. In Honduras, both uncertain government funding for road maintenance and design decisions on construction projects may jeopardize the sustainability of MCC-funded roads. MCC impact evaluations for the Cape Verde and Honduras compacts are ongoing but delayed, and updated economic rate of return (ERR) analyses of the largest compact projects have not been well documented or linked to revised targets. MCC has taken steps to modify impact evaluation designs in response to implementation challenges and delays. For example, challenges in implementing the original evaluation design for the farmer training and development activity in Honduras led MCC to enhance the methodology by adding a supplemental design. Furthermore, updated ERR analyses of projects representing over 50 percent of compact funds have not been well documented or supported. For example, MCC updated its ERR analysis for the Honduras transportation project, but documentation for the underlying quantitative analysis supporting the updated ERR is not available. Additionally, ERR analyses updated in response to rescoping compact activities were not consistently linked to revised targets and indicators. For example, MCC updated the ERR analysis for the watershed management and agricultural support project in Cape Verde, but the analysis does not reflect the values and numerical ranges of key revised targets. In addition, although original ERRs are estimated for a 20-year period, MCC has not developed guidance for updating ERRs following compact completion. Re-estimated end-of-compact ERRs will likely be lower than predicted at compact signature. GAO recommends that MCC (1) work with countries to make decisions that reduce long-term maintenance needs, (2) ensure updated economic analyses are documented and consistent with monitoring targets, and (3) develop guidance for updating economic analyses following compact completion. MCC agreed with the intent of all three recommendations. |
The Head Start program was established in 1965 to deliver comprehensive educational, social, health, nutritional, and psychological services to low- income families and their children who are below the age of compulsory school attendance. These services include preschool education, family support, health screenings, and dental care. Head Start was originally aimed at 3- to 5-year-olds. A companion program, called Early Head Start, began in 1994, and focuses on making these services available to pregnant women and children from birth to 3 years of age. Head Start operates both full- and part-day programs—most only during the school year. The Migrant and Seasonal Head Start program is designed to meet the specific needs of migrant and seasonal farm worker families. OHS makes Head Start grants directly to approximately 1,600 local organizations, including community action agencies, school systems, tribal governments and associations, and for-profit and nonprofit organizations. To accomplish Head Start’s goals, the Congress provided $7.2 billion in federal funds for fiscal year 2010, as well as $2.1 billion in Recovery Act funds. Head Start statutes and regulations establish several primary eligibility criteria, one of which a child must generally meet in order to enroll in the program. These primary criteria include: the child’s family earns income below the federal poverty level; the child’s family is eligible or, in the absence of child care, would potentially be eligible for, public assistance; the child is in foster care; or the child is homeless. However, Head Start programs may also fill up to 10 percent of their slots with children from families who do not meet any of the above criteria, but who “would benefit” from participation in the program. We refer to these children and their families as “over-income.” There is no cap on the income level for the over-income families. If the Head Start program has implemented policies and procedures that ensure the program is meeting the needs of children eligible under the primary criteria and prioritizes their enrollment in the program, then the program may also fill up to 35 percent of their slots with children from families with income between the federal poverty line and 130 percent of the poverty line. Programs filling slots under this provision are subject to additional reporting requirements. Children from families with incomes below 130 percent of the poverty line, and children that qualify under one of the primary eligibility criteria, are referred to as “under-income” for the purposes of this testimony. In addition, unless a program applies for and receives a waiver, at least 10 percent of each program’s total slots must be filled with children with disabilities who are determined to be eligible for special education and related services or early intervention services. To qualify for the Migrant and Seasonal Head Start program, families must have changed their residence within the preceding 24 months for the purpose of engaging in certain agricultural work, and the families’ incomes must come primarily from this type of work. In enrolling families in Head Start, program staff are to review documentation of income and employment to certify that each family is eligible. Head Start services are to be provided free of charge to eligible families. OHS assigns each grantee a specific number of children and families it is required to serve, known as the funded enrollment. Head Start statutes and regulations require grantees to maintain enrollment at 100 percent of the funded enrollment level. If a child stops attending the program, after the grantee has attempted, unsuccessfully, to get the child back in regular attendance, the grantee must reopen that spot as a vacancy and no more than 30 calendar days may elapse before the grantee fills the vacancy; otherwise, OHS considers the grantee underenrolled. To facilitate the prompt filling of vacancies, Head Start statutes and regulations require each grantee to maintain a wait list that ranks children according to its selection criteria and to select those with the greatest need for services. Grantees report enrollment numbers monthly, and those that are underenrolled for 4 consecutive months must receive technical assistance from OHS and work to develop and implement a plan to eliminate underenrollment. A grantee that continues to operate with less than 97 percent of its funded enrollment level may have its grant amount recaptured, withheld, or reduced by OHS. According to HHS, funds for 30 grantees were reduced in 2006. A Head Start grantee may also be terminated from participation in the program for continuously failing to meet other performance, education, administrative, and financial management standards that have been established by HHS. We are currently investigating the two allegations of fraud and abuse that we received involving Head Start nonprofit grantees in the Midwest and Texas. In Texas, individuals we spoke with told us that the grantee encouraged enrollment of over-income families in order to meet enrollment requirements. We were able to confirm, through records obtained from the grantee, that 9 of the grantees’ 28 centers had more than 10 percent over-income families enrolled. The percentage of over-income families in the 28 centers ranged from centers with no over-income enrollments to one center where 44 percent of the families it enrolled were over-income. Two families enrolled by this grantee had a reported income in excess of $110,000. However, the grantee as a whole did not report having more than 10 percent over-income families enrolled. An aggregate accounting of all centers operated directly by one grantee is permitted under the law for determination of the 10 percent over-income limit, therefore, we could not substantiate this allegation. Individuals we spoke with also told us that Head Start staff encouraged parents to report that they were homeless when they were not in order to qualify them for the program. Records we obtained indicate that 22 percent of all children enrolled by the grantee were classified as “homeless”—a group considered at-risk and categorically eligible for Head Start services regardless of income. Our concern, based on the allegation, is that some portion of these families classified as homeless in grantee records were actually over- income families that were not, in fact, homeless, but were encouraged to report that they were in order to qualify. In addition, we spoke with several individuals who described a number of fraudulent activities that they had witnessed. We are in the process of attempting to determine if other allegations are true, including classifying children as disabled when they were not, counting children in enrollment figures after they had left the program, and allowing staff to use company vehicles for personal use. For the Midwest Migrant and Seasonal Head Start program, we were able to confirm through documents obtained from the grantee that more than 50 children were moved from one center to other centers with vacancies during the last 60 days of the grant period. According to OHS regulations, if fewer than 60 days remain in the grantee’s program year at the time a child leaves the program, the grantee can choose not to fill the vacancy without OHS considering the grantee underenrolled. By using this process, the grantee was able to make records appear that both centers had reached full enrollment, when in fact 63 children were counted at more than one center. In addition, we spoke with several individuals who alleged that numerous fraudulent activities were occurring at the program. We are in the process of attempting to determine if other allegations are true, including manipulating family income documentation to make over-income families appear to meet Head Start poverty guidelines, enrolling families who do not meet the specific program requirements for the Migrant Head Start program, including earning at least 51 percent of the household income through agricultural work and migrating for work within the past 24 months, and misappropriation of property purchased with Head Start funds. It is important to note that ultimate determination as to whether these allegations are true is a significant challenge because of the minimal requirement for records requested of families to be maintained by grantees. For example, there is no requirement for grantees to maintain support for income, such as pay stubs and Internal Revenue Service Form W-2. In addition, as the proactive testing in the next section discusses, and as alleged, it is possible the grantee records have been fraudulently altered including showing that children who are actually from over-income families are under-income. Our undercover tests determined that the types of eligibility and enrollment fraud schemes allegedly perpetrated by the two grantees are occurring at other Head Start locations around the country. Posing as fictitious families, we attempted to register children at Head Start centers in California, Maryland, New Jersey, Pennsylvania, Texas, Wisconsin, and the Washington, D.C. metropolitan area. For 13 of these tests our fictitious families were over-income or had disqualifying characteristics. For 2 additional tests, our fictitious families did not have any disqualifying characteristics and were under-income. These 2 tests were designed to determine whether a Head Start center would count our fictitious children toward enrollment numbers even if our children never attended the program. For our tests, we contacted each center in advance and were instructed in all cases to bring certain documents necessary for enrollment, which included income documentation. In 8 out of 13 eligibility tests, our families were told they were eligible for the program and instructed to attend class. In all 8 of these cases, Head Start employees actively encouraged our fictitious families to misrepresent their eligibility for the program. In at least 4 cases, documents we later retrieved from these centers show that our applications were doctored to exclude income information for which we provided documentation, which would have shown the family to be over-income. Employees at seven centers knowingly disregarded part of our families’ income to help make over-income families and their children appear to actually be under- income. This would have had the effect of filling slots reserved for under- income children with over-income children. At two centers, staff indicated on application forms that one parent was unemployed, even though we provided documentation of the parents’ income. A Head Start employee at one center even assured us that no one would verify that the income information submitted was accurate. For the 2 tests in which our family did not have disqualifying characteristics, we were accepted into the program once and not accepted in the other. In the test where our eligible child was accepted into the program, the scenario was designed to test how long the center would keep a child who never attended the program on enrollment records before counting the spot as a vacancy and attempting to fill it with another child. Due to our concerns about occupying a slot for an actual child, we were forced to contact the center and voluntarily withdraw our fictitious child before sufficient time elapsed that would have allowed us to make a determination regarding how long the center would have kept our child on enrollment records. However, the enrollment of our family that appeared eligible for the program as well as our other successful tests highlight the ease with which unscrupulous parents could fabricate documentation designed to make it appear as though their children were under-income or otherwise eligible for the program. Our fictitious pay stubs and W-2s were made using information found on the Internet, commercially available word processing software, and a printer. At no point during our registrations was any of the information contained in fictitious documentation submitted by our parents verified, which indicates that the program is vulnerable to beneficiary fraud in addition to grantee fraud. For all 9 cases in which we were told that we were eligible for the program, we are taking steps to determine whether our fictitious children were counted on enrollment or attendance records. Table 1 provides details on our approved applications, followed by our unsuccessful applications. We withdrew our fictitious families from the programs as soon as we documented that there were fewer than two openings at a center. To view selected video clips of these undercover enrollments, go to http://www.gao.gov/products/gao-10-733T. We also identified a key vulnerability during our investigation that could allow over-income children to be enrolled in other Head Start centers: income documentation for enrollees is not required to be maintained by grantees. According to HHS guidance, Head Start center employees must sign a statement attesting that the applicant child is eligible and identifying which income documents they examined, such as W-2s or pay stubs; however, they do not have to maintain copies of them. We discovered that the lack of documentation made it virtually impossible to determine whether only under-income children were enrolled in spots reserved for under-income children. We are concerned that eligible children at other centers do not receive services for which they are in need, given the vulnerabilities to fraud and abuse we found through our undercover tests. At 2 of the 9 centers where we enrolled fictitious children, we were later told, after withdrawing our children from the program, that the center was at full enrollment and was not accepting more children at that time. During the course of our work, we contacted approximately 550 Head Start centers to determine whether they had space for our fictitious children. We found that the majority of the centers stated that they had no open slots for enrollment, but maintained wait lists per program requirements. We found only 44 centers stated they had any openings. We interviewed 21 families on wait lists and found that the majority stated their income was at or below the federal poverty level. In some cases, families had experienced some type of domestic violence or were receiving some other type of public assistance, a group targeted specifically for assistance by Head Start program guidelines. We did not attempt to verify this information. The length of these wait lists varied considerably; however, several of the centers we contacted had lengthy wait lists. For example, one grantee we contacted in Texas, which serves approximately 4,260 children in 36 centers, had over 1,150 children on its wait list. Another Head Start grantee told us that they average around 500 children on their wait list. A representative from one Pennsylvania Head Start center we contacted stated that there were around 120 applicants on the center’s wait list. Furthermore, a review of media sources reveals that Head Start centers around the country face similar challenges meeting their communities’ demand for services. We queried a news media search engine and found numerous reports of lengthy waiting lists to enroll in Head Start programs in many parts of the country. For example, according to one Florida newspaper, the state of Florida has 8,000 students on wait lists for Head Start programs. Another newspaper in Indiana, reported that a program in Indiana that serves 380 students has 170 students on the wait list. It is important to note that we found a discrepancy in enrollment levels among the centers we called. While several grantees had lengthy wait lists, other grantees were eager to accept our fictitious, over-income children to fill their rolls. The center in New Jersey that accepted our fictitious over- income family told us that it had more than 30 openings. Another center in California, which did not accept our application, told us that it had 40 part- day openings. We contacted 21 families who at the time of interview were on wait lists for Head Start programs. We received a list of 1,600 wait list applicants from a Head Start grantee in Texas—of these we were able to speak to 11 applicants. We also received a wait list of 30 applicants for services in Pennsylvania—of these we were able to speak to 10 applicants. We asked applicants for information on the length of time they spent on the wait list, on the family’s economic situation, and whether they had been affected by being waitlisted for Head Start services. Several of the applicants we spoke with described circumstances that made them especially strong candidates for Head Start, including receiving other types of public assistance, such as Medicaid or Supplemental Nutrition Assistance, or having histories of domestic abuse. Additionally, several applicants reported that family members were unable to accept work opportunities as a result of not enrolling in Head Start, or experienced additional financial strain because they had to pay child care costs. Many applicants also cited concerns that their children would not be adequately prepared for school. Given the fraud committed by several grantees we investigated, and the relative ease with which GAO employees posing as fictitious parents were able to qualify for Head Start services, it is likely that some over-income or otherwise ineligible children are currently enrolled in Head Start programs while low-income children are put on wait lists and do not receive necessary services. For example, when a center manipulates information to make it appear that an over-income family is a low-income family this takes up a Head Start slot set aside for a low-income family. Table 2 summarizes the experiences of 10 applicants we contacted. We did not attempt to verify the applicants’ statements. On April 20 and April 23, 2010, we briefed OHS and HHS officials on the results of our work. Officials indicated that HHS would work quickly to address the weaknesses we identified. We suggested a number of potential actions the agency should consider to minimize Head Start fraud and abuse, including the following: Creating an OHS program management fraud hotline for individuals to report fraud, waste, and abuse. These tips could be investigated by the program, the HHS Inspector General, or both; Establishing more stringent income verification requirements, documentation requirements, or both by Head Start employees responsible for certifying family eligibility, such as maintaining income documentation provided by the applicant (e.g., pay stubs or W-2s); and Conducting undercover tests, such as the ones we describe in our report, as a management oversight function. Agency officials indicated that they would consider these suggestions. They also told us that they would make sure that grantee staff received training regarding the proper way to validate income documentation. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For additional information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. 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 Head Start program, overseen by the Department of Health and Human Services and administered by the Office of Head Start, provides child development services primarily to low-income families and their children. Federal law allows up to 10 percent of enrolled families to have incomes above 130 percent of the poverty line--GAO refers to them as "over-income." Families with incomes below 130 percent of the poverty line, or who meet certain other criteria, are referred to as "under-income". Nearly 1 million children a year participate in Head Start, and the American Recovery and Reinvestment Act provided an additional $2.1 billion in funding. GAO received hotline tips alleging fraud and abuse by grantees. In response, GAO investigated the validity of the allegations, conducted undercover tests to determine if other centers were committing fraud, and documented instances where potentially eligible children were put on Head Start wait lists. The investigation of allegations is ongoing. To perform this work, GAO interviewed grantees and a number of informants and reviewed documentation. GAO used fictitious identities and bogus documents for proactive testing of Head Start centers. GAO also interviewed families on wait lists. Results of undercover tests and family interviews cannot be projected to the entire Head Start program. In a corrective action briefing, agency officials agreed to address identified weaknesses. GAO received allegations of fraud and abuse involving two Head Start nonprofit grantees in the Midwest and Texas. Allegations include manipulating recorded income to make over-income applicants appear under-income, encouraging families to report that they were homeless when they were not, enrolling more than 10 percent of over-income children, and counting children as enrolled in more than one center at a time. GAO confirmed that one grantee operated several centers with more than 10 percent over-income students, and the other grantee manipulated enrollment data to over-report the number of children enrolled. GAO is still investigating the other allegations reported. Realizing that these fraud schemes could be perpetrated at other Head Start programs, GAO attempted to register fictitious children as part of 15 undercover test scenarios at centers in six states and the District of Columbia. In 8 instances staff at these centers fraudulently misrepresented information, including disregarding part of the families' income to register over-income children into under-income slots. The undercover tests revealed that 7 Head Start employees lied about applicants' employment status or misrepresented their earnings. This leaves Head Start at risk that over-income children may be enrolled while legitimate under-income children are put on wait lists. At no point during our registrations was information submitted by GAO's fictitious parents verified, leaving the program at risk that dishonest persons could falsify earnings statements and other documents in order to qualify. In 7 instances centers did not manipulate information. To see selected video clips of GAO enrollments, see http://www.gao.gov/products/gao-10-733T . In addition, GAO found that most of the 550 Head Start centers contacted had wait lists. GAO also found that 2 centers where it enrolled fictitious children later became full and developed wait lists after the fictitious children had been withdrawn. Only 44 centers reported that they had openings. GAO interviewed families on wait lists from other centers and found that many stated that their incomes were at or below the federal poverty level. In some cases, families stated they had experienced some type of domestic violence, or were receiving some type of public assistance, a group automatically eligible for Head Start. GAO did not attempt to verify family statements. |
The Food Stamp Program provides a safety net to the millions of low-income individuals and families nationwide who do not otherwise have the means to obtain a healthy diet. Food stamp benefits are calculated to ensure that households have the resources needed to purchase a model diet plan based on the National Academy of Sciences’ Recommended Dietary Allowances. USDA’s Food and Nutrition Service (FNS) administers the program in partnership with the states, funding all of the program’s benefits and about 50 percent of the states’ administrative costs. FNS develops program policy and guidance, such as nationwide criteria for determining who is eligible for assistance and the amount of benefits recipients are entitled to receive, and oversees the states’ activities. The states are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. Food stamp recipients must use their benefits only to purchase allowable food products from retail food stores that FNS authorizes to participate in the program. Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for these items. EBT systems use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems by October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide, with all other states in some earlier stage of implementation. Collectively, about 40 percent of all food stamp benefits are now delivered through EBT systems. Fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking. Overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive. In 1996, the latest year for which data are available, the states overpaid recipients an estimated $1.5 billion, or 7 percent of the approximately $22 billion in food stamps issued. Approximately 57 percent of the overpayments were caused by recipient errors (36 percent unintentional and 21 percent intentional), and 43 percent were caused by caseworkers’ errors. It should also be noted that recipient and caseworker errors can result in underpayments. According to FNS’ data, food stamp recipients were underpaid by about $518 million in fiscal year 1996. In March 1997, we reported on one specific kind of food stamp overpayment—payments to households that included inmates of correctional institutions. Federal regulations prohibit prisoners from participating in the Food Stamp Program. By matching automated food stamp records and prison records in four states—California, Florida, New York, and Texas—we identified over 12,000 inmates who were included in the households receiving food stamps in calendar year 1995. These households improperly collected an estimated $3.5 million in food stamps in 1995. Subsequently, in August 1997, the Balanced Budget Act of 1997 (P.L. 105-33, Aug. 5, 1997) included a provision directing the states to ensure that individuals who are under federal, state, or local detention for more than 30 days are not participating in the Food Stamp Program. In February 1998, we reported on another type of food stamp overpayment—payments made to households that included deceased individuals as members. By matching automated food stamp records from the four states previously mentioned with death information from the Social Security Administration’s (SSA) Death Master File, we identified nearly 26,000 deceased individuals who were included in households receiving food stamps in 1995 and 1996. These households improperly collected an estimated $8.5 million in food stamp benefits. Subsequently, in March 1998, you, Mr. Chairman, introduced legislation that would require the Commissioner of SSA to use all of SSA’s death information to notify state agencies when an individual receiving food stamp benefits is deceased. At your request, Mr. Chairman, we are currently reviewing the extent to which individuals are included in food stamp households in more than one state during the same time period, referred to as “duplicate participation.” While some states conduct matches of their food stamp rolls with neighboring states, our review is focussed on non-neighboring states. For example, we will determine whether duplicate participation occurs between New York and Florida or between California and Texas. Our preliminary results indicate that such duplicate participation is occurring on a significant scale and that there is no national mechanism in place to identify and eliminate it. Regarding trafficking—the second main area of fraud and abuse in the Food Stamp Program—a 1995 FNS study estimated that up to $815 million,or about 4 percent of the food stamps issued, was exchanged for cash by authorized retailers during fiscal year 1993. The study found that the trafficking rate was highest, 13 percent of food stamps redeemed, among small, privately owned food retailers that generally do not stock a full line of food. In contrast, supermarkets and large grocery stores had an average trafficking rate of less than 2 percent of the benefits redeemed. Data on the extent to which food stamps are exchanged between individuals prior to reaching authorized retailers are unavailable. In our March 1998 report on food stamp trafficking, conducted at your request, Mr. Chairman, we found that retail store owners and retail store clerks share almost equal responsibility for the food stamp trafficking problem. Specifically, in the 432 trafficking cases we reviewed, store owners alone were caught trafficking in about 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were caught in 13 percent of the trafficking cases. FNS took administrative action against all the store owners that were trafficking but took no actions against the store clerks because it lacks the authority to do so. However, some clerks were subject to court-ordered actions, including financial penalties or jail sentences. The Food Stamp Program is inherently susceptible to some level of fraud and abuse because of the sheer number of program participants (about 23 million in fiscal year 1997), the basic approach used to determine a household’s eligibility and benefit amount, and the process used to authorize and monitor a sufficient number of retailers to accept food stamps. In making eligibility decisions, state caseworkers rely on applicants to provide accurate information on, among other things, household composition, and to report subsequent changes, such as the loss of a household member. Only “questionable” cases are investigated. In general, the agencies take this approach in an effort to make the program convenient for clients and simple to administer, and to ensure accurate payments; consequently, controls over determining household composition are not as rigorous as they could be. For example, FNS’ regulations do not require caseworkers to verify client-provided information on household composition, unless such information is deemed “questionable,” as defined by the state agency. Investigators attempt to verify this information through techniques such as visiting the home and/or contacting neighbors and landlords, however, they characterize these efforts as time-consuming, costly, and often unreliable. With respect to trafficking, it is difficult to track the flow of food stamps after they are issued to recipients. Federal and state officials agree that food stamps have essentially become a second currency exchanged by some recipients for cash or non-food items. Trafficked food stamps may change hands several times, but all food stamps must eventually pass through an FNS-authorized retailer because only such a retailer can redeem food stamps for cash from the government. FNS is responsible for monitoring program compliance by the approximately 185,000 stores that currently are authorized to redeem food stamps. Our 1995 report found that, at that time, FNS’ controls and procedures for authorizing and monitoring the retailers that participate in the Food Stamp Program did not deter or prevent retailers from trafficking in food stamps. Since our report, FNS has initiated several actions to reduce trafficking in the program, such as contracting with different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998. These visits are being made to verify that the stores are bonafide grocery operations. In addition, FNS is improving its Store Tracking and Redemption System by, for example, developing a profile that enables FNS to better identify stores that may be trafficking. USDA’s data show that overpayments in the Food Stamp Program have declined since 1993. According to the data, the overpayment error rate at the national level has decreased from 8.27 percent of the total benefits provided in fiscal year 1993 to 6.92 percent in fiscal year 1996, the lowest error rate ever achieved in the program. With the support of the Congress, FNS has increased its emphasis on achieving payment accuracy and has employed various initiatives to assist the states in reducing the number of errors. For example, FNS sponsored national, regional, and state conferences, provided direct technical assistance to the states, and facilitated the exchange of state information on effective strategies for determining accurate payments. While these efforts have been useful in reducing fraud and abuse, we believe that FNS could achieve even greater success by taking a leading role in promoting the use and sharing of automated information by state agencies. Given the program’s strong reliance on applicants, clients and retailers to comply with program regulations and provide accurate and timely information, state agencies need to have access to information that will allow them to independently and cost effectively verify the information they are provided and identify noncompliance. Our reviews have demonstrated that useful information can be obtained from (1) matching state food stamp rolls against other state databases, such as prisoner rolls, and (2) reconfiguring existing federal databases to provide additional useful information to state agencies, such as death notices. Additional opportunities to use computerized resources to verify information exist, as seen in our ongoing review of duplicate participation in non-neighboring states. Both an FNS study and our own experiences demonstrate that automated data matches by the states using food stamp records provides a cost-effective means of reducing fraud and improving program integrity. The cost of conducting computer matches is relatively low for the return generated, which includes identifying ineligible individuals in the application process before any benefits are issued and preventing additional issuance once an ineligible participant is identified. State agencies have already implemented computerized matches on their own initiative, such as neighboring state matches for duplicate participation. Two state agencies we visited have taken steps to obtain information from credit reporting services to ensure that applicants are eligible for benefits. In addition to recouping overpayments, matching efforts help the program realize savings by identifying erroneous information during the application process, according to states. Furthermore, the states said that these efforts have a deterrent effect on applicants who may be considering fraudulent activities. Relatedly, while EBT will not eliminate all types of fraud, it shows promise as a means to identify redemption patterns that indicate potential trafficking. By eliminating paper coupons that may be lost, stolen, or sold without any record of sale and creating an electronic record of transactions, EBT can help identify and reduce food stamp trafficking. However, because EBT systems are simply another vehicle for distributing benefits, they cannot correct fraud and abuse that occurs during the process of determining eligibility and benefit levels. Also, like any computer system, food stamp EBT systems can be susceptible to security breaches that result in new forms of fraud and abuse. FNS can further expand on its recent successes in reducing overpayments by actively encouraging the states to identify ways to use computerized information to verify information provided by applicants and to encourage states to share their techniques and information with each other. FNS can demonstrate its leadership in this regard by identifying sources of information that would be useful to the states and ensuring that states have access to that information. Thank you again for the opportunity to appear before you today. We would be pleased to answer any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed fraud and abuse in the Food Stamp Program, focusing on the: (1) nature and extent of the problem; (2) reasons it often goes undetected; and (3) ways computerized information can be used to identify and reduce it. GAO noted that: (1) fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking; (2) overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive; (3) overpayments are caused by inadvertent and intentional errors made by recipients and errors made by state caseworkers; (4) the latest available information indicates that overpayments in 1996 totalled about $1.5 billion, or about 7 percent of the food stamp benefits issued that year; (5) errors also result in underpayments; in fiscal year 1996, such underpayments totalled about $518 million; (6) with regard to trafficking, the Department of Agriculture (USDA) estimated that in 1993 about $815 million in food stamps, approximately 4 percent of the food stamps issued, were traded for cash at retail stores; (7) no one knows the extent of trafficking between individuals before the food stamps are redeemed at authorized retailers; (8) participation in the Food Stamp Program by ineligible recipients occurs, and often goes undetected, because the information used to determine a household's eligibility and benefit amount for the program is not always accurate; (9) state agencies that administer the program determine household membership on the basis of unverified information provided by food stamp applicants; (10) food stamp trafficking takes place when recipients collaborate with unscrupulous retailers to convert food stamp benefits to cash or other non-food items; (11) these retailers make a profit by giving the recipients a discounted cash payment for the stamps, then redeeming the stamps at full face value to the government; (12) while USDA has reduced the overpayment rate in recent years, further reductions could result if food stamp rolls were matched against computerized information held by various sources; (13) computer matching provides a cost-effective mechanism to accurately and independently identify ineligible participants; (14) some states already conduct data matching programs; (15) by taking a leading role in promoting the use and sharing of information among federal and state agencies, USDA can enhance the states' effectiveness in identifying ineligible participants and reducing overpayments; and (16) in addition, the congressionally mandated use of electronic benefit transfers, while not the answer to eliminating all fraud, has the potential to reduce trafficking by providing an electronic trail of transactions. |
Asylum is a form of humanitarian protection that provides refuge for individuals who are unable or unwilling to return to their home countries because they were persecuted or have a well-founded fear of persecution on the basis of race, religion, nationality, membership in a particular social group, or political opinion. It is an immigration benefit that enables such individuals to remain in the United States and apply for lawful permanent residence 1 year after receiving the grant of asylum. Responsibility for adjudicating asylum applications is shared between U.S. Citizen and Immigration Services (USCIS) in DHS and EOIR in DOJ. Asylum officers in 8 USCIS Asylum Offices and immigration judges in 54 immigration courts within EOIR’s Office of the Chief Immigration Judge adjudicate asylum and other cases. In fiscal year 2008, the Asylum Division received about $61 million from USCIS fee-based funding and EOIR received about $238 million from congressional appropriations for its entire operation, of which asylum adjudications are part. There are two main avenues for applying for asylum in the United States: Affirmative asylum process: DHS’s asylum adjudication process involves affirmative asylum claims—that is, claims that are made at the initiative of aliens who are in the country either legally or illegally and who file directly with USCIS. Asylum officers are to conduct non-adversarial interviews in which they verify the applicant’s identity, determine whether the applicant is eligible for asylum, and evaluate the credibility of the applicant’s asylum claim. The asylum officer may (1) grant asylum, (2) deny asylum to applicants who are in legal status and issue a Notice of Intent to Deny, or (3) refer applicants not in legal status to the immigration court for a de novo review of their claim by an immigration judge. Upon referral to the immigration court, the applicant is placed in removal proceedings. Defensive asylum process: Defensive claims are those that are first filed after removal proceedings have been initiated against an alien. An alien making a defensive claim may have been placed in removal proceedings after having been stopped at the border without proper documentation, identified as being in the United States illegally, or identified as deportable on one or more grounds, such as certain kinds of criminal convictions. Immigration judges hear affirmative asylum claims referred to them by asylum officers, as well as defensive claims first raised before them. Adjudication of asylum claims in immigration court is adversarial in that aliens appear before EOIR immigration judges to defend themselves from removal from the United States. Immigration judges hear testimony given during direct and cross-examinations and review the evidence submitted. Immigration and Customs Enforcement (ICE) Assistant Chief Counsels (also known as ICE trial attorneys) represent DHS in these proceedings. Figure 1 illustrates the steps involved in the immigration proceedings process for affirmative and defensive claims. As shown in figure 1, EOIR’s asylum process generally consists of the following steps. The applicant is to appear before an immigration judge for an initial, or master calendar, hearing, during which the immigration judge is to, among other things, (a) ensure that the applicant understands the contents of the charging document, or Notice to Appear, (b) provide the applicant with information on available free of charge or low-cost legal representation in the area, and (c) schedule a subsequent date to hear the merits of the asylum claim and requests for other alternative forms of relief from persecution or torture, including withholding of removal and protection under the Convention Against Torture (CAT). Prior to the merits hearing, both the ICE trial attorney and the applicant or his or her representative must submit applications, exhibits, motions, a witness list, and criminal history to the immigration court. At the merits hearing, where EOIR is to provide interpreters when necessary, parties present the case before the immigration judge by generally making opening statements, presenting witnesses who are subject to cross examination and evidence to the immigration judge, and making closing statements. The immigration judge may participate in the questioning of the applicant and other witnesses. At the end of the hearing, the immigration judge generally issues an oral decision that should include a statement of facts that were found to be true, the substantive law and the application of the law to the facts, what factors were considered, and what weight was given to the evidence presented (including the credibility of witnesses). EOIR’s asylum adjudication process can result in one of the following outcomes for applicants and their qualifying dependents: Grant of asylum: Immigration judges may grant asylum to applicants, enabling them to remain in the United States indefinitely, unless DOJ terminates asylum. Asylees are eligible to apply for certain benefits, such as an Employment Authorization Document, a Social Security card, medical and employment assistance, lawful permanent residence, and ultimately citizenship. Within 2 years of being granted asylum, asylees can also petition for a spouse or child to obtain derivative asylum status. Withholding of removal prohibits removal if the applicant’s life or freedom would be threatened because of persecution. Generally, individuals apply for asylum and withholding of removal at the same time, but only the immigration judge can grant withholding of removal. The applicant must demonstrate that it is “more likely than not” that he or she would be persecuted if returned to the country of origin, a higher standard than the “reasonable possibility” standard for asylum. Protection under regulations implementing the United Nations Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment (CAT) is another form of relief for individuals fearing torture. As with withholding of removal based on persecution, the applicant must establish that it is “more likely than not” that he or she would be tortured if returned to the country of origin. Denial of asylum: Immigration judges may deny asylum to applicants and order them to be removed from the United States unless they qualify for another form of relief, s such as withholding or deferral of removal. However, these other forms of relief do not include all of the benefits of asylum, such as the ability to apply for permanent resident status and bring family members to the United States. In some cases, in lieu of an order of removal, immigration judges may grant voluntary departure. Case closure: Immigration judges may close a case without making a decision on the asylum application if, for example, applicants request moving their case from one immigration court to another or withdraw or abandon their application for asylum . If either the applicant or ICE disagrees with the immigration judge’s decision, either party may appeal the decision to the BIA within 30 days. The BIA is the highest administrative adjudicatory body for immigration decisions within DOJ, and its members hear appeals of decisions rendered by immigration judges and by DHS District Directors in a wide variety of proceedings. If the BIA’s decision is adverse to the applicant, he or she may, within 30 days of the decision, file a petition for review of the decision in the U.S. Court of Appeals with jurisdiction over the immigration court in which the decision was made. Voluntary departure allows otherwise removable aliens to depart the United States at their own expense. They may be barred from reentering the United States for up to 10 years and be subject to civil and criminal penalties if they fail to depart or reenter without proper authorization. Generally, the BIA decides appeals by reviewing the record and documents submitted by the parties, as opposed to conducting courtroom proceedings. If DHS disagrees with BIA’s ruling, in rare instances, the case may be referred to the Attorney General for review. 2002, to 251 in fiscal year 2007. During fiscal years 2002 through 2007, the BIA received 217,162 appeals of immigration judge decisions, of which 64 percent were appeals by applicants or by DHS in cases where an asylum application had been filed with the immigration court. According to EOIR, as of May 2008 there were 216 immigration judges on board in the 54 immigration courts, 13 judges who had been hired and were undergoing training, and 19 judges who were at various stages of the background investigation, interview and selection processes. 5 C.F.R. § 6.3(a) allows the head of an agency to fill excepted service positions by appointment of persons without civil service eligibility or competitive status. Schedule A positions are “positions other than those of a confidential or policy determining character” and are considered career positions. The authority to appoint an immigration judge is vested in the Attorney General pursuant to 8 U.S.C. § 1101(b)(4). For direct appointments, the applicants are referred to EOIR from the deputy attorney general, who exercises the attorney general’s appointment authority. The Office of the Chief Immigration Judge (OCIJ) confirms the qualifications, and usually interviews the applicant. The applicant must have a law degree and be duly licensed and authorized to practice law as an attorney under the laws of a state, territory, or the District of Columbia: be a United States Citizen; and have a minimum of 7 years relevant post-bar admission legal experience at the time the application is submitted, with 1 year experience equivalent to the GS-15 level in the federal service. According to EOIR, DOJ looks for experience in at least three of the following areas: substantial litigation experience, preferably in a high- volume context; knowledge of immigration laws and procedure; experience handling complex legal issues; experience conducting administrative hearings; or knowledge of judicial practices and procedures. According to EOIR, from October 1993 through October 2007, three sitting Attorneys General directly appointed 26 immigration judges—19 were directly appointed by Alberto Gonzales, 4 by John Ashcroft, and 3 by Janet Reno. These three Attorneys General also appointed 181 immigration judges pursuant to an open announcement in which applicants competed for a vacant immigration judge position. An additional eight EOIR personnel who were not originally hired as immigration judges were identified by EOIR to fill immigration judge vacancies on EOIR’s recommendation. According to EOIR, since 1997, training for newly hired immigration judges has included attendance at a weeklong basic training session at the National Judicial College (NJC). The NJC training has included courses on immigration court procedure, immigration law, ethics, caseload management, and stress management. The training is delivered in a workshop format, and incorporates lecture instruction, small group exercises, and immigration court hearing demonstrations. In addition to this training, immigration judges complete 2 weeks of observations in their home immigration court and 2 weeks of observations and holding hearings in a training immigration court. According to EOIR, new immigration judges are also assigned mentors in both their home and observation immigration courts to guide their learning during the training. They are to remain their mentors throughout the probationary period. As of December 31, 2006, all newly appointed immigration judges have been required to pass an examination testing familiarity with key principles of immigration law and complete a set of mock-hearing and oral decision exercises before beginning to adjudicate matters. For both new and veteran immigration judges, EOIR has convened an annual training conference, which includes lectures and presentations covering topics such as immigration law and procedure, ethics, religious freedom, disparities in asylum adjudications, and forensic analysis. Because of budget constraints, a virtual conference that included recorded presentations was offered in place of the in-person conference in fiscal years 2004, 2005, and 2008. Additionally, according to EOIR, immigration judges have access to a variety of reference tools such as the Immigration Judge Benchbook, which includes information on substantive law, sample decisions, and forms; and EOIR’s virtual law library, which has current publications and reference documents on immigration law, immigration procedure, international law, and country conditions and provides case summaries distributed electronically on a weekly basis. In October 2007, EOIR launched the Immigration Law Advisor that provides a monthly analysis of statutory, regulatory, and case law developments. Under U.S. immigration law, aliens in removal proceedings may be represented by an attorney at no expense to the government. Aliens must either find and pay for counsel or secure free representation. Since April 2003, EOIR has administered the Legal Orientation Program (LOP), a court-based legal education program for detained non-citizens in immigration court proceedings. The LOP seeks to educate detained persons in removal proceedings so they can make more informed decisions, thus increasing efficiencies in the immigration court and detention processes. The program offers individual and group orientation sessions; self-help workshops, and referrals to pro bono attorneys. In fiscal year 2008, $3.8 million was authorized for the program, and LOP presentations were offered at 12 sites. In May 2008, the Vera Institute of Justice reported that participation in the LOP was associated with faster immigration court processing times for aliens who were detained and more favorable case outcomes for aliens who represented themselves in removal hearings. EOIR’s BIA Pro Bono Project assists several nongovernment organizations in their efforts to link volunteer legal representatives nationwide with aliens, most of whom are detained, who have immigration cases on appeal to the BIA and cannot afford legal representation. The project seeks to remove traditional obstacles private attorneys face in identifying, locating, and communicating with unrepresented aliens by providing EOIR case tracking and summary information to facilitate the initial contact. 8 U.S.C. § 1362. Nina Siulc, Zhifen Cheng, Arnold Song and Olga Byrne, Vera Institute of Justice, Legal Orientation Program Evaluation and Performance Outcome Measurement Report, Phase II, a report prepared at the request of the Department of Justice, Executive Office for Immigration Review, May 2008. The evaluation combined statistical analysis of administrative data with interviews with LOP stakeholders. EOIR also maintains a list of organizations and attorneys deemed qualified to provide free legal services to indigent individuals. EOIR is required by regulation to update the list not less than quarterly and to provide the list to all aliens in immigration proceedings. Historically, with a few exceptions, the BIA adjudicated its appeals in panels of three BIA members, which generally issued full written decisions explaining the order in each case. Because of an increasing number of appeals filed with the BIA and an increasing backlog of pending cases, DOJ began in 1999 to implement procedural changes at the BIA to better manage its docket. These regulatory changes, referred to as “streamlining” or “restructuring,” occurred in phases. Changes starting in October 1999 and continuing through February 2002 authorized single Board members to affirm an immigration judge’s decision (in certain categories of cases other than asylum appeals) without writing an opinion (referred to as “affirmances without opinion,” or AWO orders). On March 15, 2002, the Chairman of the BIA authorized cases involving appeals of asylum cases, withholding, and CAT applications to be decided by single members using affirmances without opinion (AWO). Until then, these matters had been handled by panels of three BIA members, and the panels had issued full written decisions explaining their reasoning. The Attorney General issued a final rule on August 26, 2002, that codified these changes in regulation and made other changes to BIA’s structure and procedures. For all cases before the BIA, including asylum cases, the rule made single member decisions the default procedure. 64 Fed. Reg. 56,135 (Oct. 18, 1999). An AWO decision contains two sentences prescribed by regulation, without any additional language or explanation about the reasons for the affirmance. The sentences state, “the Board affirms, without opinion, the decision below. The decision below is, therefore, the final agency determination.” 67 Fed. Reg. 54,878 (Aug. 26, 2002). The rule became effective on September 25, 2002. BIA had grown too large and unwieldy to reach consensus on individual cases and resolve complex legal questions effectively. According to DOJ, the regulation was intended, at least in part, to improve the timeliness and efficiency of BIA’s review. Specifically, the Attorney General stressed four objectives: (1) eliminate the current backlog of pending cases, (2) eliminate unwarranted delays in the adjudication of administrative appeals, (3) utilize BIA resources more efficiently, and (4) allow more resources for difficult or controversial cases that may warrant the issuance of precedent decisions. Under the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 and its implementing regulations, individuals seeking asylum after April 1, 1998, are generally required to apply within the first year of entering the United States. Specifically, the applicant must demonstrate by clear and convincing evidence during an interview with an asylum officer or during a removal proceeding in front of an immigration judge that the application has been filed within 1 year after the date of the applicant’s last arrival in the country. The time limit or “1-year rule” was intended to minimize fraudulent asylum applications and to encourage applicants who have illegally entered the country to present themselves without delay to the authorities. The statute allows exceptions to the 1-year rule to the extent the applicant demonstrates changed circumstances materially affecting eligibility or extraordinary circumstances relating to the filing delay. Changed circumstances generally include changes in conditions in the applicant’s country of nationality, changes in the applicant’s circumstances, including changes in applicable law or changes in dependency status. Extraordinary circumstances affecting the filing delay may include serious illness or mental or physical disability, including any effects of persecution or violent harm suffered in the past; legal disability, such as for those applicants who are unaccompanied minors; ineffective assistance of counsel; or death or serious illness or incapacity of the applicant’s legal representative, among a nonexhaustive list specified in the regulations. If asylum officers are unable to establish whether or not applicants have met the 1 year time limit, they are required to refer the cases to the immigration court, where the entirety of the application will be reviewed by the immigration judge. Applicants who cannot demonstrate that their application was filed within 1 year after arrival in the United States and are not eligible for an exception to the bar, may be eligible for relief from persecution through withholding of removal because of persecution or withholding or protection under the Convention Against Torture. However, as discussed earlier, the standard of proof for withholding and CAT is higher than for asylum, and the benefits are more limited. Our analyses included all asylum cases decided between October 1, 1994, and April 30, 2007, that involved asylum seekers from the 20 countries that produced the most asylum cases and the 19 courts that handled a minimum of 800 affirmative and 800 defensive asylum cases. The 20 countries and 19 courts represented more than 198,000 cases, or 66 percent of all asylum cases decided during this period. Except where noted, our analyses included all immigration judges in all 19 immigration courts. In descriptively analyzing differences across immigration courts, we focused on immigration courts that heard 50 or more cases from a particular country. In analyzing differences in asylum decisions across immigration judges, we excluded those immigration judges who heard fewer than 50 affirmative cases in our analyses of affirmative asylum decisions and fewer than 50 defensive cases in our analyses of defensive asylum decisions and excluded cases heard by immigration judges other than in their primary court, in order to simplify the presentation and avoid reaching inappropriate conclusions that can occur when calculations are based on small numbers of cases. judge and (2) the length of experience as an immigration judge. The seven factors that did not significantly affect applicants’ likelihood of being granted asylum were the following characteristics of immigration judges: (1) age, (2) caseload size, (3) race/ethnicity, (4) veteran status, (5) prior government immigration experience, (6) prior experience doing immigration work for a nonprofit organization, and (7) the presidential administration under which the judges were appointed. The likelihood of being granted asylum differed for affirmative and defensive cases and varied depending on the immigration court in which the case was heard. Overall, the grant rate for affirmative cases (37 percent) was significantly higher than the grant rate for defensive cases (26 percent). The affirmative asylum grant rate ranged from 6 percent in Atlanta to 54 percent in New York City. The grant rate for defensive cases ranged from 7 percent in Atlanta to 35 percent in San Francisco and New York City. (See fig. 2 and a detailed discussion of these differences in appendix II). Several recent studies have also used EOIR data to examine asylum decisions by immigration judges and other adjudicators. We summarize this prior research in appendix IV. Our work overlaps with these earlier studies, although we analyze data that cover a longer period of time; are more recent; include both defensive and affirmative cases; cover a broader range of asylum producing countries; and provide information on in absentia cases as well as those in which applicants appeared for their asylum hearing. In contrast to previous studies of asylum decisions, we use multivariate statistical models that take account of potentially confounding factors and possible correlations within and between judges to estimate immigration court and judge differences. Unless otherwise noted, the analysis results presented in this section excluded cases that were denied in absentia, or denied when the asylum seeker failed to appear before the immigration judge. In appendix II (tables 8 though 11), we provide information on cases that were denied in absentia as well as cases that were granted and denied when the asylum seeker did appear before the judge. The likelihood of being granted asylum differed considerably across immigration courts, even after we statistically controlled simultaneously for the effects of a number of factors. For example, we found that relative to Atlanta, affirmative asylum applicants in San Francisco were about 12 times more likely to be granted asylum, applicants in New York were about 10 times more likely to be granted asylum, and applicants in Dallas and Houston were about 7 times more likely to be granted asylum. Defensive applicants in these cities were also more likely to be granted asylum than in Atlanta, with the likelihood being about 15 times greater in San Francisco, 8 times greater in New York, and about 4 times greater in Dallas and Houston. In these analyses we controlled for applicants’ nationality; the time period in which their case was decided; and whether they had representation, claimed dependents, filed within 1 year of entry, and, among defensive cases, if they were ever detained. (See tables 13 and 14 in app. II for the likelihood of applicants being granted asylum in each of the 19 immigration courts.) Data limitations prevented us from controlling for other factors that could have contributed to variability in case outcomes. Although we were able to control some factors related to the merits of asylum cases (such as nationality and whether the applicant appeared for the asylum hearing), we did not statistically control for the underlying facts and merits of the cases being decided because data were not available. This is because asylum decisions require a determination of applicant credibility, often without corroborating evidence, and immigration judges generally do not, and are not required to, document each factor (such as applicants’ demeanor while testifying) that went into their overall assessment of credibility. It would be difficult and burdensome for them to do so. Therefore, we were not in a position determine the extent to which such factors accounted for the pronounced differences that we found in the likelihood of applicants being granted asylum across immigration courts and judges. Nonetheless, these multivariate analyses can increase the understanding of variability in asylum decisions because our statistical controls help account for differences among immigration judges and applicants and enable comparisons to be made across immigration courts and judges. In the following sections, we examine the effects of each of the factors that we were able to control in our statistical analyses. Just as the likelihood of being granted asylum varied across immigration courts, it also varied by nationality. The grant rate for affirmative cases exceeded 50 percent for asylum seekers from some countries, including Albania, China, Ethiopia, Iran, Russia, Somalia, and Yugoslavia (see fig. 3). For other countries, including El Salvador, Guatemala, Honduras and Mexico, it was lower than 10 percent. Similarly, while about 50 percent of asylum seekers in defensive cases from Iran and Ethiopia were granted asylum and almost 60 percent of such cases from Somalia were granted asylum, the same was true of 13 percent or less defensive asylum cases from El Salvador, Honduras and Indonesia. The likelihood of being granted asylum also differed considerably across the 20 nationalities, even after we statistically controlled simultaneously for the effects of the immigration court the case was heard in; the time period in which the case was decided; and whether applicants had representation, claimed dependents, filed within 1 year of entry, and, among defensive cases, if they were ever detained. For example, among affirmative asylum applicants, the likelihood of being granted asylum after controlling for these factors was about 1.5 times greater if the applicant was from Russia than Albania, about 3 times greater if the applicant was from Somalia than Nigeria; and about 4 times greater if the applicant was from Iran than Bangladesh or India. Differences in the extent to which applicants from various countries are granted or denied asylum in the United States is not surprising in light of the differences that exist among countries’ political climates and human rights records. (See tables 13 and 14 in app. II for full information on the likelihood of affirmative and defensive cases being granted asylum for the 20 nationalities we examined.) Grant rates generally increased from fiscal year 1995 to fiscal year 2007 (see fig. 4). This was the case for both affirmative and defensive applicants, although grant rates for affirmative applicants increased substantially more than they did for defensive applicants. The grant rates for defensive applicants did not change substantially during the period from fiscal year 1997 through fiscal year 2005, and grant rates for affirmative applicants did not change substantially during the period from fiscal year 2001 through fiscal year 2005. Beginning in fiscal year 1998, affirmative asylum applications were more likely to be granted than defensive asylum applications, while the opposite was true in the 3 fiscal years for which we had data prior to that time. In the mid 1990s, the Asylum Division implemented major reforms that decoupled employment authorization from asylum requests to discourage applicants with fraudulent asylum claims from applying for asylum solely to obtain a work authorization, and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 added a requirement that the identity of all asylum applicants be checked against records or databases maintained by the Attorney General and Secretaries of State and later Homeland Security to determine if an applicant is ineligible to apply for or be granted asylum. that lack merit may have been among the reasons for the increase in asylum grants over time. For both affirmative and defensive cases, having representation was associated with more than a three-fold increase in the asylum grant rate compared to those without representation. The grant rate for affirmative applicants with representation was 39 percent, compared to 12 percent for those without representation. For defensive cases, the grant rate for applicants with representation was 27 percent, compared to 8 percent without. Representation generally doubled the likelihood of affirmative and defensive cases being granted asylum, after we controlled for the effects of the immigration court the case was heard in; the applicant’s nationality; the time period in which the decision was made; and whether the applicant claimed dependents, filed within 1 year of entry, and, among defensive cases, if the applicant was ever detained. According to EOIR officials, there could be several explanations for why representation can increase the likelihood of applicants being granted asylum. For example, officials said that attorneys can help applicants present their case more effectively because asylum law is complicated and applicants face cultural barriers; and attorneys can make better decisions about the viability of a case, so claims that are not likely to be granted won’t go forward. Just as having representation was associated with a greater likelihood of being granted asylum, so was filing an application within 1 year of entry to the United States. Affirmative applicants who filed their asylum application within 1 year of entry to the United States had a grant rate of 42 percent, compared with 26 percent of those who did not file within 1 year. The grant rate for defensive applicants was 29 percent among those who filed within 1 year of entry, and 22 percent among those who did not. Filing within 1 year of entry increased the likelihood of affirmative and defensive cases being granted asylum by 40 percent and 30 percent, respectively, after we controlled for the effects of the immigration court in which the case was heard; the applicant’s nationality; the time period in which the decision was made; and whether the applicant had representation, claimed dependents, and, among defensive cases, if the applicant was ever detained. Since those who fail to apply for asylum within 1 year of entry are generally barred from receiving asylum, the positive association between filing within 1 year and immigration judges granting asylum is understandable. For both affirmative and defensive cases, the grant rate for those who claimed dependents on their asylum application was higher than for those who did not. Among affirmative applicants, 43 percent of those who claimed dependents were granted asylum, compared to 36 percent of those who did not. Among defensive applicants, the grant rate was 37 percent for those who claimed dependents and 25 percent for those who did not. The positive association between asylum grants and claiming dependents persisted after we controlled for the effects of the immigration court in which the case was heard; the applicant’s nationality; the time period in which the decision was made; and whether the applicant had representation, filed within 1 year of entry, and, among defensive cases, if the applicant was ever detained. The likelihood of being granted asylum was roughly 50 percent greater for affirmative cases, and roughly 80 percent greater for defensive cases, when the asylum applicant claimed dependents on the asylum application. While we do not know why applicants with dependents were more likely to be granted asylum, those who came to their hearings with a spouse or dependent children may have appeared to adjudicators to have more sympathetic cases than applicants who appeared alone. In a later section of this report, we discuss the unavailability of EOIR data to assess whether applicants’ failure to apply for asylum within 1 year of entry to the United States was a basis for their being denied asylum. However, EOIR maintains a limited amount of data on the date of aliens’ entry into the US and the date of the initial asylum application, and we used those data for this multivariate analysis. Of the 190,476 cases on which this analysis was based, data on whether the alien applied for asylum within 1 year of entry were missing in 9,051 of the 124,972 affirmative cases and 15,885 of the 65,504 defensive cases. Asylum results differed depending on whether the data were tabulated using grant rates or analyzed using statistical controls for the effects of other outcome-related factors. In terms of grant rates, there was little difference in the grant rates of defensive cases who had and had not been detained. The grant rate for applicants who had been detained was 25 percent, compared to 27 percent for those who had not been detained. However, when we controlled for the effects of the immigration court the case was heard in; the applicant’s nationality; the time period in which the decision was made; and whether the applicant had representation, filed within 1 year of entry, or claimed dependents on the asylum application, we found that those who had been detained were about two-thirds as likely to be granted asylum as those who had not been detained. According to EOIR officials, the category of applicants who had been detained may contain a higher percentage of criminal applicants, who may be statutorily ineligible to be granted asylum. Additionally, detained applicants may have more difficulty obtaining evidence in support of their claims. We did not examine the effects of detention in affirmative cases, as very few of the affirmative applicants, who are generally free to live in the United States pending the completion of their claims, were detained during their removal hearings. Immigration judges varied considerably in the asylum decisions they rendered, both across and within immigration courts, and in both affirmative and defensive cases. Grant rates for the immigration judges in our review ranged between 2 percent and 93 percent for affirmative cases, and between 2 percent and 72 percent for defensive cases. Our analysis was based on 196 immigration judges who heard more than 50 affirmative or defensive asylum cases from one or more of the 20 nationalities between October 1, 1994, and April 30, 2007. The asylum caseload of these 196 immigration judges consisted of more than three-quarters of all affirmative cases and nearly 90 percent of all defensive cases from the 19 different immigration courts we considered. (See fig. 5, below, and tables 17 and 18 in app. III, for the grant and denial rates of all the immigration judges included in our review.) We examined the data to determine if variability in grant rates across immigration judges was at least partly because of the fact that different immigration courts have proportionately different numbers of cases from different countries. We found that even within immigration courts, there were pronounced differences in grant rates across immigration judges. This was the case even though asylum and other immigration cases were reportedly assigned to immigration judges largely at random. For example, grant rates for affirmative cases ranged between 19 percent and 61 percent in Arlington, Va., 8 percent and 55 percent in Boston, 2 percent and 72 percent in Miami, and 3 percent and 93 percent in New York City (see fig. 5). The variation across immigration judges in many of the remaining courts was similarly large. For defensive cases, there was also large variability in the grant rates of immigration judges within the same immigration court, but the difference between the highest and lowest granting immigration judge within each immigration court was somewhat lower than for affirmative cases (see app. III, fig. 13). The likelihood of being granted asylum differed considerably across immigration judges within the same immigration court even after we statistically controlled simultaneously for the effects of applicants’ nationality; the time period in which their case was decided; and whether they had representation, claimed dependents, filed within 1 year of entry, and, among defensive cases, if they were ever detained. For example, in the New York immigration court, the likelihood of an affirmative applicant being granted asylum was 420 times greater if the applicant’s case were handled by the immigration judge who had the highest likelihood of granting asylum than if the applicant’s case were handled by the immigration judge who had the lowest likelihood in that immigration court. If we consider the two immigration judges at the highest and lowest ends of the granting spectrum to be outliers, and instead compare immigration judges who were second highest and second lowest, the disparity was still great. The likelihood of being granted asylum in New York was 122 times greater for applicants whose cases were decided by the immigration judge with the second highest versus the second lowest likelihood of granting asylum. Even when we compared the third highest and third lowest asylum granting immigration judges in New York, applicants were still 35 times more likely to be granted asylum by the former than the latter. For defensive cases in New York, the likelihood of being granted asylum was 93 times greater for applicants whose cases were decided by the immigration judge with the highest versus the lowest likelihood of granting asylum in the immigration court. (Table 2 below provides information on the extent to which the likelihood of being granted asylum varied within the same immigration court; and the last column of tables 17 and 18 in app. III shows the likelihood of being granted asylum by each immigration judge in each immigration court, after controlling for the effects of other factors.) As can be determined from table 2, in 14 out of 19 immigration courts for affirmative cases, and in 13 out of 19 immigration courts for defensive cases, the likelihood of being granted asylum was at least 4 times as great for applicants whose cases were decided by the immigration judge with the highest versus lowest grant rate in the immigration court. For example, an affirmative applicant whose case was assigned to the immigration judge most likely to grant asylum in Arlington, Va., had a likelihood (or odds ratio) of being granted asylum that was nearly 6 times as great as an applicant whose case was assigned to the immigration judge least likely to grant asylum in the Arlington immigration court. In a later section of this report, we discuss recent initiatives by EOIR to provide training, mentoring, and supervision to immigration judges whose performance EOIR has determined needs improvement, using indicators such as asylum grant rates of the immigration judges, complaints filed about immigration judge performance, and reversals and remands from the BIA. In a separate set of analyses, after statistically controlling for claimant and immigration judge characteristics, immigration judges’ gender and length of experience as an immigration judge were associated with the likelihood of being granted asylum; while age, race/ethnicity, veteran status, prior government immigration experience, prior experience doing immigration work for a nonprofit organization, caseload size, and the presidential administration under which judges were appointed were not. These results are detailed in appendix III, tables 19 and 20, and related text. With respect to gender differences, male immigration judges’ grant rate was lower than that of females for both affirmative and defensive asylum cases. We found that after statistically controlling for 14 factors, male immigration judges were about 60 percent as likely as female immigration judges to grant asylum in both affirmative cases and defensive cases. The 14 factors that we controlled statistically in this analysis were immigration judge’s age, caseload size, length of service, race/ethnicity, veteran status, prior government immigration experience, prior experience doing immigration work for a non-profit organization, the presidential administration under which the immigration judge was appointed, applicant’s nationality, whether the applicant was represented, time period when the case was decided, and if the applicant had claimed dependents on the asylum application, filed within 1 year of entry, and, among defensive cases, if the applicant was ever detained. With respect to length of service, immigration judges with less than 3 ½ years of experience had a lower affirmative grant rate than those with 3 ½ to 10 years of experience, or those with 10 or more years of experience as an immigration judge. For defensive cases, immigration judges with 10 or more years of experience had the highest grant rate. After we statistically controlled for the effects of the same 14 factors as in our analysis of gender differences, we found that net of these other factors, immigration judges with 3 ½ to 10 years of experience were more likely than less experienced immigration judges to grant asylum in affirmative cases, by a factor of 1.25. In other words, controlling for the effects of the other factors, these immigration judges were 25 percent more likely to grant asylum than those with less experience. Immigration judges with more than 10 years of experience were also somewhat more likely than the least experienced immigration judges to grant asylum, but the difference was not statistically significant. Immigration judges’ experience level was not significantly associated with outcomes in defensive asylum cases. None of the other immigration judge characteristics had significant effects on the likelihood of being granted asylum. This suggests that the immigration judge characteristics for which we had data were not sufficient to account for the large differences in the likelihood of being granted asylum across individual judges. In our final set of analyses, we continued to find substantial disparities in the likelihood of being granted asylum even when we looked at cases that shared certain characteristics—that is, the cases of asylum applicants of the same nationality who appeared before immigration judges in the same immigration court. Our analyses focused on the likelihood of being granted asylum in four country-immigration court combinations for affirmative cases (China in New York, China in Los Angeles, Haiti in Miami, and India in San Francisco), and two country-immigration court combinations for defensive cases (China in New York, and Haiti in Miami). The results of these analyses are summarized in table 21 in appendix III. Many and often most of the immigration judges in the same immigration court differed significantly in their likelihood of granting asylum to applicants of the same nationality when compared to the immigration judge who represented the average likelihood of granting asylum in that immigration court (the “average immigration judge”). This was the case both before and after we statistically controlled for the effects of five claimant characteristics (representation, claimed one or more dependents on application, filed for asylum within 1 year of entry to the United States, time period in which application was filed, and, among defensive cases, if the applicant was ever detained). In the four immigration courts where we examined affirmative asylum cases and statistically controlled for the five claimant characteristics, we found that that between 34 percent of immigration judges handling cases from China in Los Angeles and 84 percent of immigration judges handling cases from China in New York had a likelihood of granting asylum that differed significantly from that of the average immigration judge in the same immigration court. In the two immigration courts where we examined defensive asylum cases and statistically controlled for claimant characteristics, we found that in both, approximately 40 percent of immigration judges differed significantly from the average immigration judge in the same immigration court in their likelihood of granting asylum. We selected these country-immigration court combinations because they had a sufficiently large number of immigration judges rendering a sufficiently large number of decisions to produce reliable estimates in our logistic regression analyses. dependents significantly increased the likelihood of being granted asylum in five of the six immigration court-country combinations, while having representation and applying for asylum within 1 year of entry to the United States significantly increased the likelihood of being granted asylum in four of the six combinations. Further, the likelihood of being granted asylum significantly increased over time for both affirmative and defensive Chinese applicants in New York, but significantly decreased for affirmative Chinese applicants in Los Angeles. Noteworthy, also, is the absence of consistent effects of immigration judge characteristics. With some exceptions, we generally found that the following factors did not have statistically significant effects on the likelihood of being granted asylum: immigration judges’ age, race/ethnicity, veteran status, prior government immigration experience, or prior experience doing immigration work for a nonprofit organization. EOIR has taken actions to improve its assistance to aliens in removal proceedings by, among other things, expanding programs to help aliens obtain representation, improving accuracy in EOIR’s list of free legal service providers, and drafting proposed regulations to promote the availability of free and low-cost legal services. EOIR has also taken actions to identify and improve the performance of immigration judges who may need supervisory attention. EOIR conducted studies of immigration judges’ grant rates, but did not statistically control for factors that can affect asylum outcomes. EOIR said it was using information on which immigration judges had unusually high or low asylum grant rates, in conjunction with other indicators of performance, to identify immigration judges in need of greater supervision, and has taken steps to increase training and make mentoring available for all immigration judges. However, EOIR’s analyses of immigration judges’ decisions did not statistically control for a number of factors that affected those decisions, and EOIR has not determined the ACIJ resources and guidance needed to ensure that immigration judges are effectively supervised. EOIR has taken several actions to improve its assistance to aliens in removal proceedings, including expanding its Legal Orientation Program (LOP), improving the accuracy of its list of free legal providers, drafting proposed regulations to help promote the availability of free and low-cost legal services, and issuing a policy memorandum to facilitate pro bono representation in removal proceedings. The LOP is an initiative designed to improve efficiency in immigration courts and assist adult detained aliens in removal proceedings by helping them understand their legal rights and how to access potential counsel. EOIR expanded its LOP in response to an August 2006 directive from the Attorney General to improve and expand pro bono services. Pursuant to the Attorney General’s directive, EOIR increased its cadre of LOP sites from 6 to 13, although 2 sites were subsequently discontinued in 2007 and 1 additional site was added that year. In March 2008, EOIR stated that because of an increase in funding for LOP in fiscal year 2008 (from $2 million to $3.76 million), it expected to establish new programs at 6 to 10 additional sites by the end of calendar year 2008 and to determine by September 1, 2008, at which current sites program services would be increased. In May 2008, an EOIR-funded evaluation of the outcomes and performance of the LOP reported that from January 1 through December 31, 2006, unrepresented asylum applicants were more likely to be granted asylum in immigration court when they received such LOP-provided services as individual orientations and self-help workshops, in addition to the initial group orientation that nearly all LOP participants receive. According to the Vera Institute of Justice, asylum applicants who received any of these additional services were granted asylum 9.4 percent of the time, versus 2.4 percent for those LOP participants who attended group orientations alone. The evaluation also reported increases from 2002 (6 months before the program began) to 2005 in representation rates for individuals with applications for relief—including asylum—in sites with LOP programs, compared to sites without programs. GAO did not assess the reliability of the data used by Vera in its analyses. Immigration law provides that aliens in immigration proceedings shall have the privilege of being represented at no expense to the government by counsel selected by the alien and authorized to practice. The San Pedro, Calif., site was discontinued in November, 2007, because of ICE’s decision to temporarily close the facility. EOIR chose not to renew the contract task order for the LOP program at the Laredo, Tex. facility, because of a significant reduction in the number of detained aliens in EOIR removal proceedings at the facility. The San Diego, Calif., ICE detention facility at Otay Mesa was added in fiscal year 2007. Siulc et al, Legal Orientation Program Evaluation, 63. EOIR has also taken actions to improve the accuracy of its list of eligible free legal service providers, and has drafted proposed regulations to strengthen the requirements for attorneys and organizations wishing to be placed on this list. According to EOIR, all individuals in immigration proceedings are to be provided a copy of the “List of Free Legal Service Providers,” maintained by the Office of the Chief Immigration Judge. The list was created with the intent to increase opportunities for indigent aliens to obtain free legal counsel, and contains the names of attorneys, bar associations, and certain non-profit organizations who are willing to provide free legal services to indigent individuals in immigration proceedings. In 2005, EOIR audited the Free Legal Service Providers list for accuracy and eliminated providers that it determined were no longer providing pro bono services. In March 2008, EOIR stated that it had increased its monitoring of entities on the list and had acted to remove the names of attorneys and organizations that have not met the list’s requirements. Furthermore, as a result of the Attorney General’s directive to improve and expand pro bono programs, EOIR has drafted two proposed regulations which it says will ensure the integrity and promote the availability of free and low-cost legal services. As of September 2008, these draft proposed regulations were under review with DOJ’s Office of Legal Policy. The first is to strengthen the requirements for entities and individuals wishing to be placed on the “Free Legal Service Providers” list. The second is to strengthen the process for recognizing and accrediting organizations and individuals charging only nominal fees for providing immigration services and wishing to be placed on EOIR’s Recognition and Accreditation Roster, which appears on EOIR’s Web site. EOIR’s Pro Bono Coordinator stated that this regulation would take longer to develop, as it requires joint rule-making with DHS’s USCIS and ICE. EOIR issued a policy memorandum to the immigration courts in March 2008, which listed guidelines and best practices for facilitating pro bono representation in removal hearings—including such activities as appointing a liaison immigration judge to coordinate with local pro bono providers, and encouraging immigration judges to be flexible in scheduling hearings that involve pro bono providers who may require additional time to recruit and train representatives. The memorandum also listed guidelines for tracking pro bono cases in EOIR’s case management database. EOIR stated that tracking appearances by pro bono counsel will enable it, among other things, to better monitor the number of pro bono cases handled by entities on the “Free Legal Service Providers” list and verify genuine pro bono representation. EOIR officials stated that EOIR planned to review how successfully immigration judges and immigration court personnel were tracking pro bono cases at the summer 2008 meeting of the committee set up to implement the Attorney General’s directive regarding pro bono representation. EOIR has taken several actions to identify immigration judges who may need supervisory attention and has designed mechanisms to improve the performance of those judges. Beginning in 2006, partially in response to a directive from the Attorney General that EOIR identify immigration judges in need of additional training or supervision, EOIR’s Office of the Chief Immigration Judge conducted two internal studies to determine asylum grant rates across all immigration judges. However, these studies did not statistically control for the effects of a number of factors that could affect the asylum outcome. This statistical procedure would have increased the completeness, accuracy, and usefulness of comparing asylum decisions across immigration courts and judges. EOIR said it was using information reflecting which immigration judges had unusually high or low asylum grant rates, in conjunction with other indicators of performance, to identify immigration judges in need of greater supervision. EOIR has also taken actions to improve training for immigration judges and has developed a mentor directory to encourage immigration judges to share best practices. However, there are relatively few ACIJs available to supervise many geographically dispersed immigration judges, and EOIR did not provide explicit guidance to ACIJs on the elements of effective supervision of immigration judges. EOIR conducted two studies of the asylum grant rates of its immigration judges, but neither study used statistical controls to examine the effects on grant rates of factors associated with asylum outcomes. EOIR stated that in 2006, its Office of the Chief Immigration Judge conducted a study to determine the grant rates for all immigration judges who made any asylum decision from fiscal years 2001 through 2006. EOIR conducted a follow-up study in June 2008, which updated the immigration judge grant rate information through the end of fiscal year 2007. EOIR said it did not run statistical analyses on the data, nor use the results of the 2006 study to identify immigration judges whose grant rates could be considered to be outliers. EOIR officials also said that immigration judges’ supervisors—the ACIJs—had not been informed of the study’s results as of May 2008 because EOIR had not decided the value of the grant rate information. In contrast, EOIR’s June 2008 grant rate study determined the asylum grant and denial rate for each immigration judge and identified those deemed to be outliers—that is, according to EOIR, immigration judges who were among the top 16 percent of asylum granters and the top 16 percent of asylum deniers. Pursuant to the 2008 grant rate study, ACIJs were provided information on those immigration judges under their supervision whose grant or denial rates were among the top 16 percent of immigration judges in their local immigration court and nationally. In rank ordering immigration judges based on the results of our multivariate analysis, the factors that we simultaneous statistically controlled for were applicants’ nationality; the time period in which their case was decided; and whether applicants had representation, claimed dependents, filed within 1 year of entry, and, among defensive cases, if applicants were ever detained. immigration judge who ranked as the 171st highest granter before other factors were statistically controlled, and the 67th highest granter after. In conducting its grant rate studies, EOIR attempted to take some factors into account such as whether the applicant was detained or had not appeared for the merits hearing. However, EOIR’s grant rate studies did not take into account available data on the characteristics of asylum seekers (such as, nationality and representation) and immigration judges (such as gender and length of experience) that are statistically related to immigration judges’ decisions to grant or deny asylum. The relationship between these characteristics and variability in asylum decisions by immigration judges across and within immigration courts can be determined using a multivariate statistical analysis. While generally accepted statistical practices include the use of multivariate analyses to statistically control for various factors that may affect outcomes when data on such factors are available, EOIR’s studies did not statistically control for such factors. According to EOIR, (1) it does not have a trained statistician on staff who could analyze its data using such sophisticated statistical controls, and (2) its ability to obtain statistical expertise would depend on the availability of funding. While we recognize that EOIR does not currently have the expertise to conduct multivariate statistical analyses, without doing so, the completeness, accuracy, and usefulness of EOIR’s grant rate studies are limited, and EOIR is hindered in its efforts to have the information it seeks to help it identify immigration judges who require additional training and supervision. The results of our statistical analyses could help EOIR, on an interim basis, further its understanding of immigration judges’ asylum decisions. EOIR duly noted that caution must be exercised when evaluating disparities in asylum grants because the asylum process is complex, asylum decisions can be affected by factors unrelated to the underlying merits of the case (such as compliance with the 1-year filing deadline), and each case is unique and cannot be directly compared with other cases. As noted earlier, EOIR said it was using information on which immigration judges had unusually high or low asylum grant rates, in conjunction with other indicators of performance (such as reversal rates for legal error), to identify immigration judges in need of greater supervision. Further, EOIR said it was improving training for immigration judges and developing a program to encourage immigration judges to share best practices. In 2006, as part of an effort to increase management and oversight of immigration courts, EOIR reassigned a number of ACIJs from headquarters to immigration courts in field locations; however, insofar as ACIJs’ being a key component of this effort, EOIR’s ability to achieve its goal was hindered by limitations in both the availability of ACIJ resources and guidance to ensure that immigration judges were effectively supervised. EOIR’s deployment of supervisors to field locations was a pilot program undertaken in response to the results of the Attorney General’s 2006 review of the performance of immigration courts. This review was prompted by complaints from litigants and federal circuit courts, among others, about issues relating to the caliber of immigration judges’ legal work and their treatment of aliens appearing before them. EOIR had an additional ACIJ who was not supervising any immigration judges. The 6 ACIJs deployed to immigration courts in the field were located in San Diego, Calif.; San Francisco, Calif.; Los Angeles, Calif.; Miami, Fla.; San Antonio, Tex.; and New York, N.Y. In addition to supervising immigration judges, the four headquarters ACIJs serve as focal points for the following areas: training and education; conduct and professionalism; the Institutional Hearing Program; and DHS and the Legal Orientation Program. judges, and it has not provided ACIJs with guidance on how to carry out their supervisory role. Doing so would put EOIR in a better position to monitor immigration judge performance and take appropriate action to correct or prevent immigration judge performance issues that may arise. Officials at EOIR said that they depend on the judgment of its ACIJs to help identify and address the mentoring, training, and peer observation needs of immigration judges and that asylum grant rate is only one of several factors that may alert EOIR management to concerns about the performance of immigration judges and the potential need for ameliorative action. These officials further noted that information on remands and reversals of immigration judge decisions, and complaints from a wide variety of sources were also of great importance in identifying the need for ameliorative action. EOIR has a position description for its ACIJs that generically states that the role of the ACIJ is to manage and coordinate immigration judge activities and supervise the administrative operations of the adjudications program. It tasks ACIJs with a range of duties pertaining to legal, policy, operational, and human capital matters, including managing immigration judge activities. EOIR also has written performance appraisal standards for ACIJs’ handling of people and workforce issues. However, these standards make brief and general reference to supervision in characterizing the behaviors that ACIJs are to demonstrate in order to obtain an outstanding, excellent, or successful rating on their handling of people and workforce issues. For example, to obtain a successful rating, ACIJs are to take actions such as training, discipline, and performance improvement plans to correct poor immigration judge performance. More detailed guidance did not exist regarding how ACIJs are to carry out their supervisory role, such as how to develop familiarity with the performance of the numerous, geographically dispersed immigration judges who were assigned to them, how they are to allocate their time between supervising immigration judges and handling their own caseload or operational duties, and how ACIJs are to use information on immigration judges’ asylum grant rates in combination with other performance information they may collect. According to a headquarters ACIJ, immigration courts are all different and the supervisory role of the ACIJs depends on their location, caseload, the immigration judges they supervise, and their relationship with the private bar. Further, according to EOIR, as of May 2008, DOJ had not yet determined whether or for how long the field ACIJ pilot program should continue. While the circumstances of immigration judges may differ and while it is uncertain if the ACIJ pilot program will be temporary or permanent, ACIJs are nonetheless tasked with supervising immigration judges. Internal control standards call for federal agencies to design controls to assure that continuous supervision occurs to help ensure the effective management of the agencies’ workforce. Given the ratio of ACIJs to immigration judges, the geographic distance between them in many cases, and the additional operational or adjudicative duties that consume the time of ACIJs, ensuring effective management through supervision cannot be easy to achieve. Providing more explicit guidance regarding the supervision ACIJs are to provide immigration judges, including how they are to use information on immigration judges’ asylum grant rates in combination with other performance information they may collect, could put ACIJs in a better position to supervise immigration judges and take appropriate action to correct or prevent performance issues that may arise. Additionally, EOIR began to implement a performance appraisal system for members of the BIA in July 2008. The Attorney General’s recommendations for reforming immigration courts, including for improving training for immigration judges, and the Board of Immigration Appeals, were issued the previous month, in August 2006. multiple immigration judges within the same immigration court over the course of the week, either in their own immigration court location or at a training court. According to EOIR officials, an attempt has been made to improve training for all immigration judges, and not just for those identified as needing ameliorative attention. EOIR officials said EOIR expanded its training for newly hired immigration judges in September 2006 by extending the time immigration judges are to observe hearings from 1 week to 4 weeks. In addition to the new immigration judge training program, EOIR also holds an annual immigration judge conference. This conference is a week-long training that includes lectures and presentations. Although immigration judges generally attended this conference in person, it was canceled in fiscal years 2003 through 2005 and again in 2008 as a result of budget constraints. A virtual conference that included recorded presentations was offered in place of the in-person conference in fiscal years 2004 and 2005, and EOIR officials told us in that a virtual conference, including one day devoted to asylum issues, was offered in August 2008. The virtual conference included interactive computer-based training addressing asylum issues before the immigration courts and a multimedia presentation emphasizing the importance and impact of immigration judge asylum decisions. According to EOIR, immigration judges’ supervisors were instructed to organize time for each immigration judge to observe colleagues in immigration court prior to the virtual conference. EOIR officials stated that EOIR will assess the effectiveness of peer observation during the August training. EOIR reported it has also developed a mentor directory to take advantage of the pool of expertise among the immigration judges, providing a list of immigration judges with expertise willing to serve as mentors to their colleagues on specific areas of immigration law and procedure. The mentors are to be available for consultation at any time, and supervisors may use the directory to identify resources to help sharpen immigration judges’ legal skills. The mentor directory was made available to all immigration judges on-line in April 2008 through the Immigration Judge Benchbook. The streamlining of BIA’s administrative procedures was associated with a pronounced decrease in the overall backlog of appeals pending at the BIA, including asylum appeals, and in the number of BIA decisions favorable to asylum seekers. Pursuant to the BIA’s March 2002 streamlining changes in which cases involving asylum claims could, for the first time, be decided by a single BIA member and without a written opinion, there was a marked increase in the number of asylum decisions rendered by the BIA, coupled with a reduction in the average amount of time that asylum appeals were on the BIA docket. BIA decisions favorable to asylum applicants were more than 50 percent lower in the 4 years following the 2002 changes, a period during which BIA members made substantial use of the authority to affirm immigration judge decisions without writing an opinion (AWO). EOIR proposed regulations in 2008 allowing for more written opinions and expanding the criteria for referring appeals to three- member panels, but it is too soon to tell how these procedures will affect asylum appeals outcomes. DOJ realized its objective of reducing the BIA’s overall backlog of cases, including asylum cases, by streamlining BIA’s procedures for handling immigration appeals. During each of fiscal years 1995 through 2000, the annual number of cases completed at the BIA was generally lower than the number of cases received, driving up the appeals backlog to a peak of over 58,000 cases in fiscal year 2000 (see fig. 6). With the implementation of BIA’s initial streamlining in late fiscal year 2000—which applied to a number of categories of appeals other than asylum, withholding, or CAT—BIA’s overall backlog of cases began to decrease. In fiscal year 2002, when DOJ authorized the inclusion of asylum, withholding, and CAT appeals in the category of cases subject to streamlining procedures and made single member review the primary mode of BIA decision-making, the overall BIA backlog decreased further and was at its lowest level in 12 years in fiscal year 2006, with approximately 26,100 pending appeals, before increasing slightly in fiscal year 2007 to about 27,700 pending appeals. BIA streamlining was authorized by regulation in October 1999, implemented for certain categories of appeals in September 2000, and expanded to apply specifically to asylum, withholding and CAT appeals in March 2002. BIA decisions favoring the alien in asylum appeals decreased following the 2002 streamlining. Although there were limitations in the data maintained by EOIR, we were able to derive general estimates of the change in outcomes for asylum applicants that were associated with the 2002 streamlining by merging EOIR data on decisions made by immigration judges with EOIR data on the results of appeals of these decisions to the BIA. BIA decisions favoring the alien in asylum appeals—including granting asylum, dismissing an appeal by DHS of an immigration judge’s grant of relief through asylum, or remanding the case to the immigration judge—decreased following the 2002 streamlining, from 21 percent in the period from October 1, 1997, through March 14, 2002, to 10 percent in the period from March 15, 2002, through September 30, 2006. In addition, the percentage of BIA decisions granting the alien relief in the form of voluntary departure from the United States also decreased following the 2002 streamlining, from 25 percent to 17 percent. BIA decisions that favored DHS (dismissing an applicant’s appeal of an immigration judge’s asylum denial) remained constant, at 27 percent in the periods before and after streamlining. Appeals by aliens and DHS represented 97 percent and 3 percent, respectively, of BIA’s asylum appeals caseload from October 1997 to September 2006. BIA members used their authority to issue AWOs in 44 percent of the asylum cases they reviewed—35 percent without a grant of voluntary departure (with 98 percent of these resulting in removal orders)--and 9 percent resulting in grants of voluntary departure (see fig. 9). Overall, 78 percent of AWOs issued by the BIA after streamlining resulted in removal orders. EOIR does not track in its data system the specific legal issues underlying an alien’s or DHS’s appeal of an immigration judge decision to the BIA, nor the BIA’s decision on each of the issues raised in the appeal. The methods we used to merge the EOIR data sources and to categorize the BIA decision outcomes are described in appendix I. Voluntary departure allows an otherwise-removable alien to depart the United States at his or her own personal expense and return to his or her home country or another country if the individual can secure an entry there. Post-Streamlining: 3/15/02 – 9/30/06 (11,667) (37,957) (10,063) (25,385) (7,629) (29,954) (7,280) (19,671) (4,038) (8,003) (2,783) (5,714) (956) (5,689) (402) (1,048) (10,711) (32,268) (9,661) (24,337) (124) (175) (2,491) (3,271) (11,543) (37,782) (7,572) (22,114) Of all BIA decisions in asylum appeals from fiscal years 2004 through 2006, 92 percent of decisions were made by single BIA members, of which 7 percent of these favored the alien. (See table 4.) In contrast, 8 percent of decisions were made by panels, with 52 percent of these decisions favoring the alien. Although the percent of appeals favoring the alien increased significantly over this time period both for single-member decisions and three-member panel decisions, the increase in favorable decisions made by three-member panels was significantly greater and doubled during that period. Only 4 percent of defensive applicants in our analysis had dependents. EOIR officials stated that in fiscal year 2004 EOIR began maintaining reliable data regarding whether the appeal was decided by a single member or a three-member panel. Percentage (number) of decisions favorable to alien (number) Percentage (number) of decisions favorable to alien (number) Percentage (number) of decisions favorable to alien (number) Percentage (number) of decisions favorable to alien (497) (793) (432) (804) (591) (2,923) (1,520) (742) (10,055) (721) (9,042) (812) (32,388) (2,275) Following a 2006 review of the immigration courts and the BIA, the Attorney General directed EOIR to undertake regulatory changes to the streamlining rules with the intent of improving BIA adjudicatory procedures. In June 2008, EOIR published proposed regulations for comment in the Federal Register. The regulations are intended to codify the discretion that BIA members have in deciding whether to write opinions or issue AWOs. BIA officials told us that the BIA believed it always had this discretion under the 2002 streamlining regulations and had already begun to issue more written opinions. The regulations also propose to expand the criteria for the referral of appeals to three-member panels, allowing a single BIA member to refer a case to a three-member panel when the case presents a particularly complex, novel, or unusual legal or factual issue. 73 Fed. Reg. 34,654 (June 18, 2008). 71 Fed. Reg. 70,855 (Dec. 7, 2006). 73 Fed. Reg. 33,875 (June 16, 2008). implement the Attorney General’s directives encouraging the increased use of one-member written opinions and three-member panel decisions. Between December 2006 and May 2008, the number of permanent members did not exceed nine members, although EOIR stated that the BIA has used between two and five temporary members at any one time to help manage the caseload on a temporary basis. In May 2008, the BIA had 8 members, and the Attorney General appointed 5 new members, bringing the total number to 13. It is too soon to tell how these regulatory changes might affect outcomes for asylum appellants. Data limitations prevented us from determining the effects of the 1-year rule and the resources spent adjudicating it. EOIR does not collect data that would enable us to determine the effects of the 1-year rule on the filing of fraudulent asylum applications or on immigration judge decisions to deny asylum because of it. DHS and DOJ do not maintain records on how much time asylum officers, immigration judges, and DHS attorneys spend addressing issues related to the rule. We could not determine the effects of the 1-year rule on the filing of fraudulent asylum applications or on immigration judge decisions to deny asylum because data were not available to conduct such analyses. Currently, EOIR does not collect data related to the effect of the 1-year rule on asylum decisions and applicants because, according to agency officials, EOIR’s mission of fair and prompt adjudication of immigration proceedings has not required its staff to track data on the legal basis for the decisions. Therefore, it remains unknown what impact the 1 year filing deadline may have had on asylum fraud or the extent to which this deadline may have prevented asylum seekers with a well-founded fear of persecution from being granted asylum. It is difficult to assess the effect of the 1-year rule on reducing fraud because good measures of deterring fraudulent behavior are not available, and the presence of fraud is generally difficult to identify and prove. In contrast, it was difficult to assess the effect of the 1-year rule on asylum denials because EOIR does not maintain automated data on the reasons underlying immigration judge decisions. DHS does maintain data on whether the affirmative asylum cases it decides are referred to immigration court because of the 1-year rule. However, the data do not shed light on whether the 1-year rule was the only reason for referring a case to immigration court or whether it was one of several possible reasons. DHS data show that from fiscal years 1999 through 2006, asylum officers referred about 64,000 cases to immigration court based at least in part on the 1-year rule. During this period, cases referred by asylum officers to immigration court based on the 1-year rule, as a percent of total cases interviewed and referred by asylum officers, peaked in fiscal years 2001 through 2003 at around 43 to 45 percent, as shown in table 5. However, the total number of cases referred by asylum officers to immigration judges constitutes only a portion of all the asylum cases in which the 1-year rule was adjudicated in the immigration courts. In the absence of EOIR data, our 2007 survey asked immigration judges to estimate the frequency and outcomes of their asylum cases that involved the 1-year rule during the past year. Nearly all (98 percent) of the respondents said the 1-year issue (questions about the date of entry or eligibility for exceptions to the rule) had to be resolved in at least some of the asylum cases they adjudicated, including 55 percent who said the rule was an issue in about one-half or more of their cases. Further, 85 percent of the respondents said they denied asylum in some of the cases they had heard in the past year (including 12 percent who said they had denied asylum in about one-half or more of their cases) because they found that the applicant was ineligible because of the 1-year rule. We could not determine the amount of resources spent adjudicating asylum cases related to the 1-year rule because DHS and DOJ do not maintain records on how much time asylum officers, immigration judges, and DHS attorneys spend addressing issues related to the rule. We asked immigration judges in our 2007 nationwide survey to provide estimates of the average amount of time they spent adjudicating the 1-year rule, and these ranged from less than 30 minutes to more than 2 hours. The majority of survey respondents (79 percent) said that adjudicating the rule took less than an hour; 15 percent, between 1 hour and less than 2 hours; 2.5 percent, 2 hours or more. Immigrant advocates have argued that it is important to have data on how many applicants are denied asylum based on the 1-year rule because such applicants may have a well-founded fear of persecution, as do asylees, but they must meet a higher standard to remain in the United States; that is, to be granted a “withholding from removal.” As opposed to the requirement that the applicants demonstrate a “reasonable possibility” of persecution to be granted asylum, applicants must demonstrate that persecution is “more likely than not” to be granted a withholding from removal (see fn. 16). If the Congress believes it is important for EOIR to begin collecting data on the impact of the 1-year rule on asylum decisions, the applicants, and their dependents, it would need to direct EOIR to develop a cost effective method for carrying this effort out. For such data collection activities to result in useful data, Congress would have to direct EOIR to develop mechanisms to directly capture the key elements underlying an immigration judge’s decision, so that analysts would be able to identify those instances in which the 1-year rule was the determinative basis in the decision. We found large differences in asylum decisions among immigration judges. Our analysis used more comprehensive statistical procedures, examined a longer period of time, and had data on more potential explanatory factors than the analyses reported in EOIR’s grant rate studies. Because data were not available on the facts, evidence, and testimony presented in each asylum case, nor on immigration judges’ rationale for deciding whether to grant or deny a case, we could not measure the effect of case merits on case outcomes. However, the size of the disparities in asylum grant rates creates a perception of unfairness in the asylum adjudication process within the immigration court system. We commend EOIR for taking actions to collect information on the variation of asylum outcomes across immigration judges and to attempt to integrate that information into its oversight of immigration judges. However, we believe that EOIR’s grant rate studies have weaknesses that limit their ability to identify immigration judges who have unusually high or low rates in the granting of asylum. Although EOIR has attempted to take into account a few of the factors that may be associated with variation in asylum grant rates among immigration judges, we believe that the statistical methods we applied to EOIR’s data provide a more complete, accurate, and useful picture of asylum rulings for the immigration judges included in our analysis. Without statistically controlling for factors that could affect asylum decisions, including variations in the types of cases immigration judges adjudicate, some of the immigration judges who EOIR’s grant rate studies determined to be unusually high granters and deniers of asylum may actually be less extreme than they appear, while others who do not appear to be outliers may actually be more extreme after statistical adjustment. Consequently, some immigration judges identified as needing supervisory assistance and attention when EOIR uses its grant rate results in combination with other performance indicators may sometimes not be the same individuals who are identified once certain factors associated with asylum decisions are taken into account. We recognize that decisions about whether and which immigration judges’ skills need improvement should not depend entirely on statistical disparities in asylum decisions, as there are other indicators (including high remand and reversal rates) that should be taken into account in making such decisions. Nevertheless, we believe that the information we produced, in conjunction with other indicators of immigration judge performance that EOIR is collecting and considers to be important, would put EOIR in a better position to identify immigration judges who would benefit from supervisory attention and assistance. While the information we produced through our analyses can be useful to EOIR for a limited amount of time, it represents an analysis of immigration judges’ decisions during a 12 ½ year period ending in April 2007. As time goes on, there will be turnover in immigration judges, changes in country conditions that will prompt changes in the composition of applicants seeking asylum in this country, and possibly other unanticipated changes that could affect variability in asylum outcomes. Periodic updates using the types of multivariate analyses that we did would provide EOIR with a more complete, accurate, and useful picture of immigration judge decision making over time than the current approach. These analyses would also facilitate EOIR’s goal of using data on grants and denials, in combination with other information about immigration judges, to identify those whose skills may need to be improved through training or other means. We recognize that EOIR currently does not have the expertise or the budget to perform sophisticated statistical analyses and that acquiring the expertise would involve some cost. We believe that such an effort should be considered, however, because ensuring both the reality and perception of fairness in the asylum system is a worthwhile goal. With regard to supervision, EOIR has made efforts to improve oversight and management of the immigration courts by redeploying some ACIJs from headquarters to field locations. However, EOIR has not determined how many ACIJs it needs to effectively supervise immigration judges, and it has not provided ACIJs with guidance on how to carry out their supervisory role. We believe that building blocks of an effective management system involve allocating the right number of resources and delineating the responsibilities of individuals tasked with carrying out supervisory functions. Doing so would put EOIR in a better position to monitor immigration judge performance and take appropriate action to correct or prevent immigration judge performance issues that may arise. To address disparities in asylum outcomes that may be unwarranted and to facilitate EOIR’s goal of identifying immigration judges who may benefit from supplemental efforts to improve their performance, we recommend that EOIR’s Chief Immigration Judge take the following two actions: Utilize the information from our multivariate statistical analyses to identify which immigration judges remained many times more or less likely to grant asylum than others, after accounting for claimant and immigration judge characteristics. Identify and examine cost-effective options (e.g., developing an in- house capability or hiring a private contractor) for acquiring the expertise needed to perform periodic multivariate statistical analyses of immigration judges’ asylum decisions. In addition, to more fully respond to the Attorney General’s directive to strengthen management and oversight of immigration courts, we recommend that EOIR’s Chief Immigration Judge develop a plan for supervisory immigration judges, to include an assessment of the resources and guidance needed to ensure that immigration judges receive effective supervision. We requested comments on a draft of this report from DOJ and DHS. DOJ and DHS did not provide official written comments to include in our report. However, on September 11, 2008, EOIR’s liaison stated that EOIR agreed with our recommendations. EOIR also provided technical comments, which we incorporated into the report, as appropriate. In an email received on September 19, 2008, DHS's liaison stated that DHS had no comments on the report. We are sending copies of this report to the interested congressional committees, the Attorney General and the Secretary of Homeland Security. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. For further information about this report, please contact Richard M. Stana, Director, GAO Homeland Security and Justice Issues, at (202) 512-8777 or at [email protected]. GAO staff members who were major contributors to this report are listed in appendix V. Our reporting objectives were to (1) identify what factors affected the variability in asylum outcomes in immigration courts; (2) identify what actions DOJ’s Executive Office for Immigration Review (EOIR) has taken to assist applicants in obtaining legal representation and immigration judges in rendering asylum decisions, and how, if at all, these actions could be improved; (3) determine what changes in asylum backlogs and outcomes occurred following the streamlining of appeals procedures at the Board of Immigration Appeals (BIA); and (4) identify what information existed on the effects of the 1-year rule on reducing fraudulent asylum applications and preventing applicants from being granted asylum and what resources have been expended in adjudicating it. To address the first and third objectives, we obtained and analyzed over 12 years of EOIR data on asylum outcomes in the immigration courts and at the BIA. Our methods for obtaining and analyzing these data are described below. Prior to developing and analyzing the EOIR data, we assessed the reliability of each data source and used only the data that we found to be sufficiently reliable for the purposes of our report. The actions we took to reach this conclusion are described in detail below. To address our fourth objective, we also surveyed from May through July 2007 the 207 immigration judges who had been in their positions since at least September 30, 2006, and elicited responses from them regarding the challenges they faced in adjudicating the 1-year rule. In addition, we obtained from DHS data on the number of applicants referred to immigration court from the Asylum Division in fiscal years 1999 through 2007, and the percentage of referrals for which the 1-year rule was the stated reason for referral. To address all four of our objectives, we also analyzed research on factors affecting asylum outcomes; reviewed DOJ documents covering asylum policies and procedures; interviewed agency officials at headquarters and in the field; and visited three of the four largest immigration courts in the country, ranked in terms of asylum decisions in fiscal year 2006—New York City, Los Angeles, and San Francisco—and two smaller immigration courts handling large percentages of cases of aliens in detention—Varick Street in New York City, and San Pedro, Calif.—where we spoke with immigration judges, court administrators, attorneys representing asylum applicants and for DHS, and representatives of immigrant advocacy groups. We also observed removal hearings. Because we selected nonprobablity samples of immigration courts and stakeholders associated with these immigration courts, the information we obtained at these locations may not be generalized either within the immigration courts or to all immigration courts nationwide. However, the information we obtained at these locations provided us with a perspective on circumstances associated with asylum proceedings. We used logistic regression multivariate statistical models to examine all decisions rendered by immigration judges from October 1, 1994, through April 30, 2007, that involved asylum seekers from the 20 countries that produced the most asylum cases and the 19 immigration courts that handled the largest numbers of asylum cases. Each of the 20 countries and 19 immigration courts contributed a minimum of 800 affirmative and 800 defensive asylum cases to our analyses. The results of our analysis cannot be generalized to asylum seekers from other countries or to other immigration courts. Our statistical models are described in more detail in appendixes II and III. To compile the data for analysis, we (1) obtained from EOIR, records of all immigration court proceedings that occurred during the period covered by the study, (2) selected those records where the immigration judge made the first decision on the asylum application (eliminating decisions rendered following appeals), (3) selected only the records for “lead” applicants (eliminating duplicate decisions for a spouse and dependent children), and (4) selected the immigration courts and countries that contributed a minimum of 800 cases. We then (5) obtained biographical information from EOIR on those immigration judges who had served during the time period of the study, and (6) merged these data with the EOIR proceedings data to produce a combined dataset for analysis that contained proceedings records with information on the characteristics of the applicants, the immigration judges, the immigration courts, and the decision rendered on the applicants’ asylum applications. Because we were interested in those proceedings in which the immigration judge made an asylum decision without any review or direction from the BIA, we limited our analysis data set to only those proceedings with records that included the first decision on the merits of the asylum case made by an immigration judge. EOIR provided us biographical information, including prior employment history and prior immigration court assignments, for 284 of the 295 immigration judges who had made asylum decisions during the period of our study. We obtained additional biographical information on four immigration judges by conducting searches on the Internet and confirmed the accuracy of this additional information with EOIR. We obtained data on immigration judges’ race/ethnicity, gender, age, and veteran status from the Office of Personnel Management’s database on federal civilian personnel, the Central Personnel Data File (CPDF). Table 6 below lists the variables used in our analysis and the source of the data. The likelihood of a grant of asylum was the dependent variable in most of our analyses. To measure the effect of factors that could explain the variability in asylum outcomes, we modeled the effect of claimant, immigration judge, and immigration court characteristics on case outcome. We conducted separate analyses for affirmative and defensive cases in our sample to control for characteristics shared by cases in each of those groups that could affect case outcomes, such as whether the asylum application had already been reviewed by an asylum officer. Data limitations prevented us from controlling for factors other than those listed in table 6 that could have contributed to variability in case outcomes. The models we used are described in more detail in appendixes II and III. Prior to developing our database, we assessed the reliability of the EOIR data and the immigration judges’ biographical data. To assess the reliability of the EOIR data, we (1) performed electronic testing for obvious errors in accuracy and completeness; (2) analyzed related documentation, including EOIR’s Automated Nationwide System for Immigration Review (ANSIR) Field User Manual, and ANSIR Court Administrators Handbook, a 2002 KPMG study of the reliability of selected EOIR fields, and published research reports that made use of the EOIR data; and (3) worked with agency officials to identify any data problems. When we found apparent discrepancies (such as fields containing what appeared to be erroneous data), we brought them to the agency’s attention and worked with agency officials and data experts to understand the data. We assessed the reliability of the immigration judge biographical data by checking a selection of fields in our database against information contained in the CPDF. Where direct comparison of the data was not possible, we brought data that appeared to be erroneous to EOIR’s attention, and updated our records where appropriate. We determined that the data were sufficiently reliable for the purposes of our report. To gain a better understanding of factors affecting asylum adjudications and the reliability and validity of EOIR data on asylum adjudications, we interviewed EOIR headquarters officials responsible for overseeing the immigration courts, including the Chief Immigration Judge and Deputy Chief Immigration Judges; and the Assistant Director of EOIR’s Office of Planning, Analysis and Technology, which is responsible for EOIR’s information technology, program evaluation, statistical analysis, and reporting activities. To obtain an overview of and perspectives on the asylum process, we visited five immigration courts in three cities—Los Angeles and San Pedro in Los Angeles, Calif.; New York City and Varick Street in New York, NY; and San Francisco, Calif. These immigration courts handled 43 percent of all asylum cases decided in fiscal year 2006, and consisted of two immigration courts that handled large percentages of detained cases (San Pedro and Varick Street), and three immigration courts that handled primarily non-detained cases (Los Angeles, New York City, and San Francisco). In each immigration court, we observed immigration proceedings, which included initial master calendar and merit hearings on asylum cases. We conducted semi-structured interviews with the ACIJ with responsibility for the immigration courts we visited. In addition, we interviewed a total of 22 immigration judges representing a range of grant rates in the five immigration courts. To further our understanding, including how cases are allocated to immigration judges and how data on immigration proceedings are recorded in EOIR’s case management system, we interviewed the court administrator of each of the five immigration courts we visited. In the three cities, we also interviewed (1) seven ICE Assistant Chief Counsels (known as ICE trial attorneys) with varying levels of experience prosecuting asylum cases in the five immigration courts. We also interviewed the Deputy Chief Counsels in the Los Angeles, New York, and San Francisco immigration courts; (2) six members of the private bar who represented asylum applicants in immigration court proceedings; and (3) groups of immigration advocates and pro bono providers, totaling 25 participants across the three cities. Because we selected nonprobability samples of immigration courts and stakeholders associated with these courts, the information we obtained at these locations may not be generalized either within immigration courts or to all immigration courts nationwide. However, the information we obtained at these locations provided us with a perspective on circumstances associated with asylum proceedings. To identify what actions EOIR has taken to assist applicants and immigration judges in the asylum process and how, if at all, these actions could be improved, we reviewed the Attorney General’s 2006 directives to institute reforms in the immigration courts and BIA, and obtained information from EOIR regarding its implementation of the directives. Regarding initiatives designed to assist applicants, we reviewed the Vera Institute of Justice’s evaluation of EOIR’s Legal Orientation Program and the BIA’s evaluation of its pro bono program as well as the Office of Chief Immigration Judge’s “Guidelines for Facilitating Pro Bono Legal Services.” Regarding actions to assist immigration judges in adjudicating asylum cases, we reviewed EOIR’s Operating Policy and Procedure Memorandums on Asylum Request Processing, and Immigration Judges Decisions and Immigration Judge Orders, among others; training materials for new immigration judges, including the agenda and materials from EOIR’s 2007 annual Immigration Judges Training conference; the Immigration Judge Benchbook, and the legal examination administered to new immigration judges. We also interviewed EOIR’s ACIJ for Conduct and Professionalism and ACIJ for Training as well as the coordinator for EOIR’s Legal Orientation and Pro Bono Program, regarding the implementation of the Attorney General’s 2006 directives. To obtain information on EOIR’s studies of immigration judge grant rates, we interviewed knowledgeable EOIR officials, and obtained documentation on the data queries EOIR conducted to determine the grant rates. To examine what changes in asylum backlogs and outcomes occurred at the BIA following the streamlining changes implemented in March 2002, we (1) obtained from EOIR records of all appeals of immigration judge decisions received or completed between October 1, 1994, and September 30, 2007, and (3) selected only those records pertaining to lead applicants. For each fiscal year from 1995 through 2007, we computed the “pending caseload” as the number of appeals received during the current fiscal year or any prior fiscal year that had not been completed by the end of the current fiscal year. We repeated this analysis for those appeals involving aliens who had filed an asylum application in immigration court. To determine if the proportion of decisions favorable to the asylum applicant changed following the March 2002 streamlining, we merged the BIA appeals records with the immigration proceedings records compiled for objective 1 and conducted a series of descriptive analyses comparing the outcomes of BIA decisions before and after the streamlined procedures took effect. For our analysis of appeals outcomes, we limited our analysis data set to appeals (1) pertaining to lead applicants who had filed an asylum application in immigration court and (2) involving immigration judge decisions in removal, deportation, and exclusion hearings (what the BIA refers to as “Case Appeals”) rather than other kinds of appeals arising from immigration judge proceedings. These appeals accounted for 58 percent of all decisions stemming from appeals of immigration judge proceedings during fiscal year 2007. We matched the resulting set of BIA records with the database of immigration judge asylum decisions developed for objective 1. If more than one BIA case appeal record was associated with a single immigration judge decision, we selected the case appeal that occurred first in order to eliminate BIA decisions that resulted from a remand order from the U.S. courts of appeals. We examined BIA decisions for fiscal years 1998 through 2006. We chose this time period because the starting point for our immigration judge data was October 1994, and a BIA appeal could take an average of 1 to 2 years to complete. We did not examine BIA decisions from fiscal year 2007 because we did not have immigration judge data for the full fiscal year. To examine asylum appeals that BIA decided on the merits of the case, we analyzed only those cases where the appeal had been filed in a timely fashion, within 30 days of the decision rendered by the immigration judge. We selected only cases that involved applicants who had filed for asylum, rather than other forms of relief, to help ensure that the immigration judge’s asylum decision was likely a central focus of the appeal. In order to correctly categorize whether the BIA decision favored the alien or DHS, we had numerous meetings with EOIR officials and data specialists regarding the meaning of EOIR’s codes for decisions rendered by the BIA. EOIR stated that its data system did not capture the specific issue on appeal to the BIA, and thus it would be difficult to determine whether some BIA decisions favored the alien or the DHS without examining the actual record of appeal. In other cases, according to EOIR, the decision could be identified as favoring the alien or DHS, if the decision field were examined simultaneously with other data elements, including the party that had filed the appeal and the decision of the immigration judge on the asylum application. In those cases where it was not possible to determine from the EOIR data if the decision favored the alien or DHS, we coded the BIA decision as neither favoring the alien nor favoring DHS (such as in the case of an Affirmance without Opinion without a grant of Voluntary Departure). In those cases, we looked further to determine whether a formal order of removal had been entered by the BIA. Our coding scheme is detailed in table 7, below. We assessed the reliability of the EOIR’s data on BIA asylum appeals decisions by (1) performing electronic testing for obvious errors in accuracy and completeness; (2) analyzing related documentation, including a 2002 KPMG study of the reliability of selected EOIR fields and published research reports that made use of the data sources; and (3) working closely with agency officials to identify any data problems. When we found apparent discrepancies (such as fields containing what appeared to be erroneous data) we brought them to the agency’s attention and worked with it to understand the discrepancies before conducting our analyses. We determined that the data were sufficiently reliable for the purposes of our report. We examined the outcomes of appeals that were decided by single BIA members and by panels of three members. Based on our analysis of the field indexing who made the decision and further discussions with EOIR data specialists, we determined that the reliability of the field indexing single versus panel decisions was unknown for years prior to fiscal year 2004 and was most reliable since fiscal year 2004, because of extensive training provided to the BIA staff. Thus, we examined outcomes for fiscal years 2004 through 2006. To gain a better understanding of the procedural changes in adjudication procedures that have occurred at the BIA since 1999 (referred to as “Streamlining”), we reviewed the streamlining regulations; memorandums issued by the BIA Chairman between November 2000 and August 2002 expanding the categories of appeals for which streamlined procedures were authorized; two independent assessments of the 1999 and 2002 procedural changes; and an analysis of the association between the change in procedures at the BIA and the increase in petitions for review of these decisions in the U.S. courts of appeal. We also interviewed the Chairman and Vice Chairman of the BIA; officials from DOJ’s Office of Immigration Litigation (OIL), which handles and coordinates all federal court litigation arising under the Immigration and Nationality Act, including petitions for review in the federal courts; and Assistant U.S. Attorneys in the Southern District of New York. Until recently, the U.S. Attorney’s Office in the Southern District of New York handled all alien petitions for review in the 2nd U.S. Circuit Court of Appeals. We also interviewed seven federal appeals court judges who were available and agreed to meet with us in the two circuits handling the largest number of petitions for review of BIA decisions (the 2nd and 9th circuits). To address issues regarding the effects of the 1-year rule and resources expended adjudicating it, we added questions about immigration judges’ views of the 1-year rule to a Web-based survey of immigration judges that was being conducted as part of another GAO review. The survey was sent to all immigration judges identified as having been in their position since at least September 30, 2006—a total of 207 immigration judges. GAO social science survey specialists along with GAO staff knowledgeable about asylum adjudications developed the survey instrument. We sent a draft of the survey to EOIR officials and ACIJs for preliminary review to ensure that our questions were clear and unambiguous and used clear terminology and appropriate response options, and that the survey was comprehensive and unbiased. We also asked for and received comments from National Association of Immigration Judges (NAIJ) representatives on the draft immigration judge survey. We considered comments and suggestions from all parties and made revisions where we thought warranted. We conducted telephone pretests of the survey with three immigration judges in three different immigration courts to ensure that the questions were clear and concise, and refined the instrument based on feedback we received. The survey, which was conducted between May 30 and July 29, 2007, resulted in a response rate of 77 percent. In analyzing the survey data, we generated descriptive statistics on the close-ended survey responses and had two GAO analysts review all of the open-ended responses. To review information on how many cases were referred to the immigration courts by DHS asylum officers, we obtained data from USCIS’s Asylum Division. To assess the reliability of these data, we reviewed existing information about the Asylum Division’s data systems and reviewed the data for obvious errors in accuracy or completeness. We determined that the data were sufficiently reliable for presenting overall trends in 1-year rule referrals. We did not report data for fiscal year 2007 because we were unable to verify these data with the data from another Asylum Division report. We conducted this performance audit from December 2005 through September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In this appendix, we present descriptive information on how immigration judge decisions differed for affirmative and defensive cases as a function of the asylum seeker’s nationality, the immigration court, and time period the asylum case was heard in, and whether the asylum seeker was represented, had dependents, and applied for asylum within a year of entering the country. For defensive cases, we further considered whether the asylum seeker had ever been detained. We also provide statistical results from logistic regression models that estimated the effects of these different factors to determine whether differences in decisions across immigration courts persisted after these other factors were controlled. Our analyses included all asylum cases decided from October 1, 1994, through April 30, 2007, that involved asylum seekers from the 20 countries that produced the most asylum cases and the 19 immigration courts that handled the largest numbers of asylum cases. Each of the 20 countries and 19 immigration courts contributed a minimum of 800 asylum cases to our analyses. The 20 countries represented 73 percent of all asylum cases that were decided during this period, and the 19 immigration courts represented 87 percent of all asylum cases. This combination of countries and immigration courts yielded slightly more than 198,000 cases for our analyses, which constituted 66 percent of all asylum cases decided during this period. We excluded roughly 4 percent of these cases because they had missing data on one or more of the variables we used in our analyses. Table 8 shows the numbers and percentages of affirmative and defensive asylum cases across the countries and immigration courts analyzed that were granted and denied, with the denied cases broken out separately according to whether or not the asylum decision was made in absentia (that is, the asylum seeker failed to appear before the immigration judge). Asylum denials were far more frequent than grants, with immigration judges granting less than 30 percent of either affirmative or defensive asylum cases. They granted asylum in a somewhat higher percentage of affirmative cases (29.8 percent) than defensive cases (24.7 percent). The percentage of affirmative cases denied because the asylum seeker was in absentia was much higher for affirmative cases (19.0 percent) than for defensive cases (3.8 percent). Table 9 shows, separately for affirmative and defensive cases, differences in the percentages of cases granted and denied across the 19 different courts in our analysis. The percentage of affirmative cases that were granted asylum ranged from 2.4 percent in Atlanta to 47.6 percent in New York. The percentage of defensive cases that were granted asylum ranged from 6.7 percent in Atlanta to 34.6 percent in San Francisco. The percentages of cases denied because of the asylum seeker’s being in absentia also varied markedly across the 19 courts, especially for affirmative cases where the numbers of in absentia cases were larger. In Los Angeles and Atlanta, 46.3 percent and 61.5 percent of affirmative asylum cases, respectively, were denied as a result of the asylum seeker’s being in absentia, while the same was true of only roughly 1 percent of the affirmative cases in Orlando, San Francisco, and Seattle. We examined whether the sizable differences in the percentage of cases granted and denied asylum across immigration courts may be because the fact that immigration courts differ in the types of cases they handle, particularly in terms of differences in asylum seekers’ nationality. Table 10 shows the different grant rates for asylum seekers from different countries, again for affirmative and defensive cases separately. While the percentage of affirmative cases granted asylum equaled or exceeded 50 percent for asylum seekers from some countries—including Albania, China, Ethiopia, Iran, Russia, and Yugoslavia—it was lower than 10 percent for asylum seekers from other countries, including El Salvador, Guatemala, Honduras and Mexico. Pronounced differences in the percentage of cases granted asylum across countries are evident for defensive cases, as well. Nearly half or more than half of the asylum seekers in defensive cases from Ethiopia, Iran, and Somalia were granted asylum, while the same was true of only about 10 percent, or less than 10 percent, of the asylum seekers in defensive cases from El Salvador, Honduras, and Indonesia. Among affirmative cases, there are also sizable differences in the percentages denied because of asylum seekers’ being in absentia. For example, fully two-thirds of such cases from Mexico were denied, but only 2 or 3 percent of the cases involving Colombians or Haitians were denied with the claimant in absentia. Table 11 presents information, separately for affirmative and defensive asylum cases, on how grant rates differed across different claimant characteristics. For example, the percentage of affirmative and defensive cases that were granted asylum increased over time. The top panel of table 11 shows the percentages of cases granted and denied in three different periods. The three periods cover the interval (1) from the beginning of our data series on October 1, 1994, until March 30, 1997, the day prior to the implementation date for Immigration Reform and Immigrant Responsibility Act of 1996; (2) from April 1, 1997, through September 10, 2001; and (3) from September 11, 2001, through the final day in our data series on April 30, 2007. The percentage of affirmative cases that were granted asylum increased from 9.5 percent in the first period, to 26.8 percent in the second period, to 41.8 percent in the third. The percentage of defensive cases that were granted asylum increased from 15.3 percent in the first period to 26.0 percent in the second period and 28.6 percent in the third. For affirmative cases in particular, denials resulting from claimants’ being in absentia decreased considerably over the three periods from 44.0 percent in the first period, to 22.7 percent in the second, and to 4.3 percent in the third. Case outcome also differed as a function of whether claimants were represented, had dependents, or filed their claims within 1 year of entering the country. For affirmative cases, (1) 36.8 percent of claimants who were represented were granted asylum, compared to 4.0 percent who were not represented; (2) 40.2 percent of the claimants with dependents were granted asylum, compared with 28.4 percent of the claimants without dependents; and (3) 36.5 percent of claimants who applied for asylum within 1 year of entering the country were granted asylum, compared to 18.4 percent who applied more than 1year later. nounced differences, for claimants in defensive cases. For defensive cases, we also considered whether there were differences between those who had and had not been detained, but as the bottom panel of table 13 shows, those differences were very small (24.1 percent versus 25.4 percent). To get a general sense of whether the seemingly large disparities in asylum outcomes across immigration courts were associated with the fact that different immigration courts handled different numbers of cases from the 20 countries we considered, we first looked at how, for claimants from the same country, decisions differed depending on which immigration court handled their case. In doing so, we restricted our analysis to immigration courts that handled 50 or more affirmative cases and 50 or more defensive cases from a given country, both to simplify our results and to avoid giving too much weight to differences in percentages that were based on very small numbers of cases. Table 12 shows the percentages granted and denied when the cases denied in absentia are excluded. When looking at differences in grant rates for the same country across immigration courts, we excluded cases denied in absentia because the denial of in absentia cases involves no judicial discretion. Table 12 shows the percentages granted and denied across immigration courts, for both affirmative and defensive cases, for cases from the 20 countries. While grant rates for affirmative cases were similar for a few countries, such as Bangladesh and Iran, there were large differences in grant rates across immigration courts for most countries. For example, 12 percent of Chinese asylum seekers in affirmative cases were granted asylum in Atlanta, while 75 percent were granted asylum in Orlando. Similarly, less than 1 percent of Guatemalans in affirmative cases were granted asylum in Atlanta, while slightly more than 30 percent were granted asylum in San Francisco. Claimants in affirmative cases from many other countries show markedly different percentages granted across the various immigration courts they came into. The percentages granted in such cases range from 21 percent to 68 percent for Albanians, from 14 percent to 69 percent for Colombians, and from 14 percent to 77 percent for Ethiopians. For many countries, the percentage of defensive cases that were granted asylum varied similarly depending upon the immigration court they came into. One of the difficulties with interpreting the results shown in Table 12, above, is that there are so many comparisons that can be made and that these three-way cross-classifications (e.g., immigration court by asylum decision by country) do not take into account the other characteristics of the claimants that, as we showed in Table 11, can affect asylum decisions; namely, the period in which the cases were heard, whether the asylum seekers were represented, whether they had dependents, whether they applied for asylum within a year of entering the country, and whether, among those whose cases were defensive, they had ever been detained. An alternative approach to assessing the variability in granting asylum across immigration courts is to use logistic regression models, which allow us to estimate the differences across immigration courts in a multivariate context, or while controlling statistically (and simultaneously) for the effects of these other factors. In tables 13 and 14, we show the results of fitting logistic regression models to the data for affirmative and defensive cases respectively, in both cases after excluding those cases that were in absentia. Before describing the results of the multivariate regression models, we first note one fundamental difference between them and our foregoing results, which is that in logistic regression models we use odds and odds ratios, rather than percentages and percentage differences, to compare countries (or differences by period, between cases represented, and so on). The odds themselves are fairly straightforward and can, when we are looking at the effect of one factor at a time on the likelihood of cases being granted asylum, be calculated directly from the percentages granted. To estimate the differences across immigration courts, for example, we can calculate the odds on cases’ being granted in each immigration court, which is simply the percentage granted divided by the percentage not granted. In the case of the Atlanta immigration court, the odds on being granted would be 6.1/93.9 = 0.07 (see table 13). This odds has a straightforward interpretation, and indicates that 0.07 cases were granted for every 1 case that was not, or that 7 cases were granted for every 100 that were not. The odds on being granted can be similarly calculated and interpreted for the other immigration courts, and at the bottom of Tables 13 and 14, we also show the odds on cases’ being granted across categories of the other factors as well (i.e., period, representation, etc.). To compare immigration courts or different categories of the other variables, we choose one immigration court or one category of the other variables as a referent category, and calculate odds ratios that indicate how different the odds are for other immigration courts or other categories versus that one. In assessing immigration courts, we arbitrarily chose Denver as the referent category. As shown in columns 4 and 5 in table 13, by dividing, for example, the odds on being granted asylum in Atlanta (0.07) and the same odds in Baltimore (0.90) by the odds in Denver (0.51), we find that the odds on granting asylum (in affirmative cases) are lower in Atlanta than in Denver, by a factor of 0.13, but higher in Baltimore than in Denver, by a factor of 1.79. Without adjusting for the effects of immigration court, nationality, time period, representation, dependents, timeliness of application, and detention status, this means that for affirmative cases, the odds on asylum being granted in Baltimore were about 14 times greater than in Atlanta (1.79 unadjusted odds ratio in Baltimore divided by .13 unadjusted odds ratio in Atlanta, which are shown in column 5 in table 13). The full set of “unadjusted” odds ratios comparing all immigration courts with Denver are given in column 5 of table 13 for affirmative cases, and column 5 of table 13 for defensive cases. These unadjusted odds ratios indicate the differences in the odds on being granted asylum across the various categories of the different factors, when factors are considered one at a time. Tables 13 and 14 also show unadjusted odds ratios comparing differences across countries, periods, representation categories, dependents categories, entry-to-application categories and, in table 16, categories that indicate whether the applicants for asylum in defensive cases had ever been detained. When considering one factor at a time, these unadjusted odds ratios can be directly calculated from the percentages granted and denied across the categories of each factor. However, when we want to consider the effects of the different factors simultaneously—that is, to estimate differences across immigration courts after taking account of which countries the asylum seekers came from, when their case was heard, whether they were represented, etc., we use multivariate logistic regression models which involve an iterative statistical estimation procedure to obtain a net effect estimate for each factor. These are referred to as “adjusted odds ratios,” shown in column 6 of tables 13 and 14. The adjusted odds ratios tell us that even after adjusting for the sizable differences in the odds on asylum’s being granted across countries, across the different periods, and across categories of representation, dependents, entry-to-application time, and whether ever detained (for defensive cases only), there remain sizable differences across immigration courts. That is, even after we take account of the effects of all these other factors and how, for example, immigration courts differ in terms of the asylum seekers’ nationalities and when asylum seekers’ cases were heard, we find sizable differences across immigration courts in the odds on granting asylum. After controlling for all of these factors, the net effect was that in comparison with Denver, the likelihood of affirmative cases’ being granted asylum was 2.15 times greater in San Francisco, half as likely in Bloomington, and less than one-fifth as likely in Atlanta. This implies that, for affirmative cases, the odds on asylum’s being granted were about 4 times greater in San Francisco than in Bloomington (2.15 adjusted odds ratio in San Francisco divided by .5 adjusted odds ratio in Bloomington, which are shown in column 6 of table 13), and almost 13 times greater in San Francisco than in Atlanta (2.15 odds ratio in San Francisco divided by .17 odds ratio in Atlanta), even after the other differences in claimant characteristics, including where they came from, were controlled. Other large differences are implied by these adjusted odds ratios, for both affirmative and defensive cases. The adjusted odds comparing each immigration court with every other immigration court are shown in table 15 (for affirmative cases) and table 16 (for defensive cases). While controlling for these other factors sometimes alters the relative likelihoods in granting asylum across the different immigration courts, it does not diminish the overall finding that there are substantial differences across immigration courts. Figures 11 and 12 show the odds ratios (with their 95 percent confidence intervals) that indicate how much different the odds on granting asylum were across immigration courts before and after adjusting for the other factors, for affirmative and defensive cases respectively. Figure 11 shows that for affirmative decisions, even after adjustments, three immigration courts (Orlando, San Francisco, and New York) had significantly higher odds than the referent immigration court (Denver), by factors ranging from roughly 1.6 to 2.2. Four other immigration courts (Atlanta, Detroit, Bloomington, and San Diego) had significantly lower odds of granting asylum than the Denver immigration court, by factors ranging from 0.2 to 0.6. This implies that all of the former three immigration courts had significantly higher odds of granting asylum than the latter four immigration courts, by factors ranging from roughly 3 to 13. Figure 12 shows fairly similar disparities across immigration courts for defensive decisions, with the Orlando, San Francisco, and New York courts again being significantly more likely and the Atlanta, Detroit, and Bloomington (but not San Diego) courts being significantly less likely than other courts to grant asylum. In this appendix, we present information on how asylum decisions differed across immigration judges. First, we look at all immigration judges across the 19 immigration courts in our study who heard 50 or more affirmative or defensive cases in their primary immigration court. Then, we look at how decisions were affected by characteristics of the different immigration judges. And finally we look at selected immigration courts by country combinations to see how sizable differences were when different immigration judges heard cases involving applicants for the same country in the same immigration court. In the immigration court by country analyses, we limited the analysis to immigration judges who saw 20 or more affirmative and defensive cases. In these analyses, the immigration judges were not necessarily in their primary court. In our final set of analyses, we focused on asylum outcomes in six country- immigration court combinations (1) affirmative Chinese cases in New York, (2) affirmative Chinese cases in Los Angeles, (3) affirmative Haitian case in Miami, (4) affirmative Indian cases in San Francisco, (5) defensive Chinese cases in New York, and (6) defensive Haitian cases in Miami. We selected these country- immigration court combinations because they had a sufficiently large number of immigration judges rendering a sufficiently large number of decisions to produce reliable estimates in our logistic regression analyses. We examined differences across immigration judges within the same immigration court in judges’ likelihood of granting asylum to applicants of the same nationality. Because the number of immigration judges in these analyses ranged from only 25 to 47, we looked at the effect of immigration judge characteristics one at a time, while controlling for the full set of claimant characteristics. The results of these analyses are summarized in table 21, below. Immigration judges used in the analysis had seen at least 20 cases during this time period, and we excluded immigration judges who had all grants or all denials. Many and often most of the immigration judges in the same immigration court differed significantly in their likelihood of granting asylum to applicants from the same nationality when compared to the immigration judge who represented the average likelihood of granting asylum in that immigration court (the “average immigration judge”). This was the case both before and after we statistically controlled for the effects of five claimant characteristics (represented, claimed one or more dependents on application, filed for asylum within 1 year of entry to the United States, time period in which application was filed, ever detained). When the effects of these 5 factors were accounted for, it was still the case that relative to the grant rate of the “average immigration judge” who ruled on similar cases in each immigration court, the grant rates of many immigration judges in the same immigration court were significantly different (either in the direction of having grant rates that were significantly higher or lower than that of the average immigration judge). Specifically, the decisions of 77 percent of immigration judges in New York differed significantly from that of the average immigration judge for affirmative applicants from China, the decisions of 55 percent of immigration judges in Los Angeles differed significantly from that of the average immigration judge for affirmative applicants from China. the decisions of 70 percent of immigration judges in Miami differed significantly from that of the average immigration judge for affirmative applicants from Haiti, the decisions of 79 percent of immigration judges in San Francisco differed significantly from that of the average immigration judge for affirmative applicants from India, the decisions of 41 percent of immigration judges in New York differed significantly from that of the average immigration judge for defensive applicants from China, and the decisions of 39 percent of immigration judges in Miami differed significantly from that of the average immigration judge for defensive applicants from Haiti. We found that certain claimant and immigration judge characteristics did not have significant effects on asylum outcomes for the nationalities examined within the same immigration court, while others did. Specifically, after simultaneously controlling for the effects of the other factors, we found that for the six specific immigration court/nationality combinations in our analysis, asylum outcomes were generally not significantly affected by whether or not an immigration judge had previous experience doing immigration work for a nonprofit organization; whether or not an immigration judge had previous immigration the immigration judge’s gender (except for Haitians in Miami, where both affirmative and defensive applicants were 30 percent as likely to be granted asylum if the immigration judge was male rather than female); The immigration judge’s race/ethnicity (except for Chinese in Los Angeles and Haitians in Miami, where affirmative applicants were more than twice as likely to be granted asylum if the immigration judge was white, nonHispanic rather than other race/ethnicity); the immigration judge’s veteran status (except for Haitians in Miami, where defensive applicants were 40 percent as likely to be granted asylum if the immigration judge was a veteran); whether the immigration judge was appointed during a Democratic or Republican presidential administration (except for Chinese in New York, where affirmative applicants were more than twice as likely to be granted asylum, and defensive applicants were almost 3 times as likely to be granted asylum by immigration judges who were appointed during a Republican presidential administration); or the age of the immigration judge (except for Haitians in Miami where affirmative applicants were nearly twice as likely to be granted asylum by older rather than younger immigration judges). In contrast, certain characteristics did have significant effects on asylum outcomes, and we found the size of these effects in the six immigration court/nationality combinations to be similar to those found across all immigration judges and all immigration courts. Specifically, asylum grants were generally significantly higher when the following circumstances were present: Applicants were represented. This was the case in five of the six immigration court/nationality combinations we examined. For example, representation was associated with a six-fold increase in asylum grants for affirmative applicants from India who filed their cases in San Francisco and a two-fold increase in asylum grants for affirmative applicants from China who filed their cases in Los Angeles, as well as defensive applicants from Haiti who filed their case in Miami. Only affirmative Chinese applicants in New York failed to gain significantly more grants of asylum when represented. Applicants claimed one or more dependents on the asylum application. This was the case in five of the six immigration court/nationality combinations we examined. For example, claiming dependents was associated with nearly a fourfold increase in asylum grants for defensive applicants from China who filed their cases in New York City; and a twofold increase in asylum grants for affirmative applicants from China who filed their cases in New York or Los Angeles, as well as affirmative applicants from Haiti who filed their case in Miami. Of the six, only defensive Haitian applicants in Miami failed to obtain significantly more grants of asylum when claiming one or more dependents on the asylum application. Results for other characteristics were mixed. For example, immigration judges who handled 65 cases or more at the time of the hearing were in some instances more likely, and in others less likely to grant asylum than those who handled less than 30 cases at the time of the hearing. Immigration judges in Miami who handled affirmative and defensive Haitian cases, were only 60 percent as likely to grant asylum if their caseload size was 65 or more rather than less than 30. Several recent studies have used EOIR administrative data to examine asylum decisions by immigration judges and other adjudicators and have concluded that asylum decisions varied significantly across immigration judges, and immigration courts, for both affirmative and defensive applicants from a variety of countries of origin. Of these, three studies attempted to statistically control for differences among cases by looking at “similarly situated” applicants. These studies cross-tabulated adjudicators’ asylum grant rates with one or two other factors, such as applicants of the same nationality in the same immigration court or applicants of the same nationality who were also represented by counsel. Two studies attempted to correlate adjudicators’ grant rates with other factors, such as the gender of the adjudicator or his or her prior employment experience. Two studies published in 2006 and 2007 by Syracuse University’s Transactional Records Analysis Clearinghouse examined decisions by immigration judges who decided at least 100 asylum cases during the period covering fiscal years 1995 to 2005 and 2001 to 2006, respectively. Each study reported that there was substantial variation in asylum grant rates across judges in many of the nation’s immigration courts and for applicants from a wide range of countries of origin. A study published in 2007 by researchers at Temple and Georgetown universities found substantial variation in asylum decisions made by asylum officers, immigration judges, and federal appeals court judges. To examine adjudicator decisions in “similarly situated” cases, the researchers selected applicants from 15 “Asylee Producing Countries” that produced at least 500 cases before the Asylum Office or immigration court during fiscal year 2004 and a national grant rate of at least 30 percent in either of these venues. The study defined “substantial variation” as deviations by individual adjudicators in asylum offices, immigration courts, or federal courts of more than 50 percent from that venue’s average. Among other things, the study found that more than 25 percent of the immigration judges in the three largest immigration courts had asylum grant rates that deviated from their own immigration court’s average asylum grant rate by more than 50 percent. The study also found that female immigration judges were more likely to grant asylum than male immigration judges, and immigration judges who came from private law practices, often representing aliens, were more likely to grant asylum than immigration judges who previously worked for the government. These findings were similar to those of the San Jose Mercury News, which in 2000 reported on its analysis of asylum decisions made between 1995 and 1999. A 2005 report by the U.S. Commission on International Religious Freedom examined a subset of immigration judge decisions for defensive asylum applicants who were apprehended when they attempted to enter the country illegally at or between ports of entry. Using a nonrepresentative sample of 14 immigration courts, the study analyzed variation in asylum grant rates across immigration judges for fiscal years 2000 to 2003. The study found statistically significant variations in the asylum decisions of immigration judges in the same immigration court. The study did not examine other factors that could contribute to variability in asylum decisions such as the nationality of the applicants or characteristics of the immigration judges. Richard M. Stana, (202) 512-8777 or [email protected]. In addition to the contact named above, Evi Rezmovic, Assistant Director, and Tom Jessor, Analyst-in-Charge, managed this assignment. Douglas Sloane, Lisa Mirel, Grant Mallie, and David Alexander made significant contributions to the study’s design, methodology, and data analysis. Yvette Gutierrez-Thomas, Christoph Hoashi-Erhardt, Odi Cuero, and Bari Bendell contributed to numerous aspects of the work. Frances Cook and Jan Montgomery provided legal support; Lara Kaskie and Debbie Sebastian provided assistance with report preparation; Lori Weiss and Tracey Cross provided expertise on Asylum Division issues; Travis Broussard provided assistance in compiling immigration judge biographical data; Orlando Copeland provided technical support for graphics presentations; Karen Burke and Tina Cheng developed the report graphics; and Anna Maria Ortiz verified the results of our statistical analyses. | Each year, tens of thousands of people who have been persecuted or fear persecution in their home countries apply for asylum in the United States. Immigration judges (IJ) from the Department of Justice's (DOJ) Executive Office for Immigration Review (EOIR) decide whether to grant or deny asylum to aliens in removal proceedings. Those denied asylum may appeal their case to EOIR's Board of Immigration Appeals (BIA). GAO was asked to assess the variability of IJ rulings, and the effects of policy changes related to appeals and claims. This report addresses: (1) factors affecting variability in asylum outcomes; (2) EOIR actions to assist applicants and IJs; (3) effects associated with procedural changes at the BIA; and (4) effects of the requirement that asylum seekers apply within 1 year of entering the country. GAO analyzed DOJ asylum data for fiscal years 1995 through mid-2007, visited 5 immigration courts in 3 cities, including those with 3 of the top 4 asylum caseloads; observed asylum hearings; and interviewed key officials. Results of the visits provided additional information but were not projectable. In the 19 immigration courts that handled almost 90 percent of asylum cases from October 1994 through April 2007, nine factors affected variability in asylum outcomes: (1) filed affirmatively (originally with DHS at his/her own initiative) or defensively (with DOJ, if in removal proceedings); (2) applicant's nationality; (3) time period of the asylum decision; (4) representation; (5) applied within 1 year of entry to the United States; (6) claimed dependents on the application; (7) had ever been detained (defensive cases only); (8) gender of the immigration judge and (9) length of experience as an immigration judge. After statistically controlling for these factors, disparities across immigration courts and judges existed. For example, affirmative applicants in San Francisco were still 12 times more likely than those in Atlanta to be granted asylum. Further, in 14 of 19 immigration courts for affirmative cases, and 13 of 19 for defensive cases, applicants were at least 4 times more likely to be granted asylum if their cases were decided by the judge with the highest versus the lowest likelihood of granting asylum in that court. EOIR expanded its programs designed to assist applicants with obtaining representation and has attempted to improve the capabilities of some IJs. EOIR has conducted two grant rate studies and was using information on IJs with unusually high or low grant rates, together with other indicators of IJ performance, to identify IJs who might benefit from additional training and supervision. However, EOIR lacked the expertise to statistically control for factors that could affect asylum outcomes, and this limited the completeness, accuracy, and usefulness of grant rate information. Without such information, to be used in conjunction with other performance indicators, EOIR's ability to identify IJs who may need additional training and supervision was hindered. EOIR assigned some IJ supervisors to field locations to improve oversight of immigration courts, but EOIR has not determined how many supervisors it needs to effectively supervise IJs and has not provided supervisors with guidance on how to carry out their supervisory role. Following streamlining (procedural changes) at the BIA in March 2002, BIA's appeals backlog decreased, as did the number of decisions favoring asylum seekers. Such decisions were more than 50 percent lower in the 4 years after streamlining compared to 4 years prior. The authority to affirm the IJ's' decisions without writing an opinion was used in 44 percent of BIA's asylum decisions. In June 2008, EOIR proposed regulatory changes to the streamlining rules, but it is too soon to tell how they will affect appeals outcomes. Data limitations prevented GAO from determining the (1) effect of the 1-year rule on fraudulent applications and denials and (2) resources adjudicators have spent addressing related issues. EOIR lacked measures of fraud, data on whether the 1-year rule was the basis for asylum denials, and records of time spent addressing such issues. Congress would need to direct EOIR to develop a cost-effective method of collecting data to determine the effect of the rule. |
To determine the challenges FPS faces in managing its guard contractors and guards, we conducted site visits at 6 of FPS’s 11 regions. To select these 6 regions, we considered the number of FPS guards, contractors, and federal facilities, and the geographic dispersion of the regions across the United States. At each region, we observed FPS’s guard inspection process and interviewed FPS’s regional manager, contract guard program managers, inspectors who are responsible for conducting guard inspections; guards, and contractors. We also interviewed officials at GSA headquarters and regional security officials in all 11 FPS regions, to identify any concerns GSA has with FPS’s contract guard program. We also met with representatives of the National Association of Security Companies to learn about the contract security guard industry. In addition, we reviewed and analyzed FPS’s contract requirements and training and certifications requirements, and reviewed the Security Guard Information Manual. We also randomly selected 663 out of approximately 15,000 guard training records that were maintained in FPS’s Contract Guard Employment Requirements Tracking System (CERTS) and validated them against the contractual requirements that were in effect at the time of our review. To assess the reliability of the CERTS data, we interviewed agency officials about data quality, reviewed relevant documentation, and performed our own electronic testing of the data. Because CERTS was not fully reliable for our purpose of determining the extent to which there were guards with expired certifications or training records, we corroborated our findings using FPS regional spreadsheets and information provided by the contractors, or the actual guard files. To determine what actions, if any, FPS has taken against contractors for not complying with the terms of the contract, we reviewed the contract files for 7 of FPS’s 38 guard contractors. We selected these 7 contractors because our previous work showed that they had contract compliance issues. In addition to reviewing FPS’s contract files, we interviewed contracting officials in these locations to learn about what information should be included in the contract files. We also requested all contract evaluations for January 2006 through June 2009. We estimate that the number of guard contracts requiring a performance evaluation during this period would have totaled approximately 375. We analyzed a random sample of 99 FPS contractor evaluations to determine how FPS evaluated the performance of its contractors on an annual basis. We conducted covert testing at 10 judgmentally selected level IV facilities. The facilities were selected from FPS’s most current listing of federal facilities by security level. The criteria for choosing these facilities include public access, location in a major metropolitan area, and level IV facility security level. The results of our audit work are not generalizable. However, almost 54 percent of FPS’s 15,000 guards and 52 percent of the 2,360 facilities that have guards are located in the 6 regions where we conducted our audit work. Because of the sensitivity of some of the information in our report, we cannot provide information about the specific locations of the incidents discussed. To determine what actions, if any, FPS has taken to address challenges with managing its contract guard program, we reviewed new contract guard program guidance issued since our July 2009 testimony. We conducted follow-up site visits at 3 of the original 6 FPS regions that we visited and interviewed FPS officials, contractors, and guards who are responsible for implementing FPS’s new contract guard program guidance. We also observed guard inspections and covert testing done by FPS in August and November 2009. We conducted this performance audit from July 2008 to February 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. Since the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, FPS has relied on a substantial contract guard force to help accomplish its mission of protecting federal facilities. The level of security FPS provides at each of the 9,000 federal facilities varies depending on the building’s security level. While the contractor has the primary responsibility for training and ensuring that the guards have met certification requirements, FPS is ultimately responsible for oversight of the guards and relies on about 752 inspectors located in its 11 regions to inspect guard posts and verify that training, certifications, and time cards are accurate. It is also responsible for providing X-ray and magnetometer training to the guards. Figure 1 shows the location of FPS’s 11 regions and the number of guards and federal facilities with guards in each of these regions, as of July 2009. Some of the key responsibilities of FPS’s guards include controlling access, enforcing property rules and regulations, detecting and reporting criminal acts, and responding to emergency situations involving the safety and security of the facility. Guards may only detain, not arrest, an individual, and their authority typically does not extend beyond the facility. Before guards are assigned to a post or an area of responsibility at a federal facility, FPS requires that they all undergo background suitability checks and complete approximately 128 hours of training provided by the contractor or FPS, including 8 hours of X-ray and magnetometer training. Guards must also pass an FPS-administered written examination and possess the necessary certificates, licenses, and permits as required by the contract. FPS also requires its guards to complete 40 hours of refresher training every 2 to 3 years, depending on the terms of the contract. Some states also require that guards obtain additional training and certifications. In addition, in response to our July 2009 report, in August 2009, FPS revised its X-ray and magnetometer training requirements and began requiring its guards to watch a 15-minute digital video disc (DVD) on bomb component detection that addresses types of bombs, bomb components, abnormal behavioral such as apprehension or nervousness, and actions to take if a bomb threat is detected. FPS also requires the contractor to ensure that all guards view this DVD when they receive refresher training, which occurs every 2-3 years after the basic training. As of October 2009, FPS had 125 guard contracts with 38 different contractors. The majority of FPS guard service contracts are for routine security services at federal facilities and are for a 12-month base period. They also have four 12-month options. FPS’s contractors are responsible for providing and maintaining all guard services as described in the contract statement of work, including licensing. FPS has three Consolidated Contracting Groups (CCG) located in Philadelphia, Pennsylvania; Grand Prairie, Texas; and Federal Way, Washington, that provide contracting support for guard services and other FPS mission-related acquisitions. Within the CCGs, 43 warranted contracting officers are dedicated to FPS contracts. After awarding a contract, the contracting officers are responsible for enforcing the terms and conditions of the guard contracts, including authorizing and negotiating any changes to the contract. Each year the contracting officer is required to perform an annual review of the contract and take enforcement action if the services have not been provided, in accordance with the terms of the contract. The contracting officer also issues modifications and ensures proper payments are made in accordance with the contract. In addition to the 43 warranted contracting officers, approximately 60 Contracting Officer Technical Representatives (COTR) work with the contracting officers to complete annual contractor performance evaluations and determine if a contract option should be exercised. COTRs are responsible for daily contract oversight, assessing a contractor’s performance, and ensuring that the contractor is meeting all training, certification, and suitability requirements. Many of the COTRs are current or former inspectors and may have other job duties in addition to their COTR responsibilities, depending on their regional resource alignment. FPS’s inspectors are also involved in the oversight of contract guards. The inspectors help the COTRs oversee guards and contractors. For example, the COTR relies on inspectors to perform guard inspections and report any problems with respect to the performance of guards on post to the COTR. Finally, FPS has a contract guard program manager in each of its 11 regions who is responsible for coordinating with the contracting officers and the COTRs to ensure that performance monitoring and reporting are being used to ensure continuous high-quality contractor performance in their regions. FPS continues to face challenges with overseeing its guard contractors that hamper its ability to protect federal facilities. FPS generally requires its contractors to provide guards who have completed the training and certification requirements shown in table 1. The most notable area where FPS contract requirements vary is regarding X-ray and magnetometer training. For example, for 3 of the 7 contractors we reviewed, FPS’s contracts do not require X-ray and magnetometer training if the guards were not assigned to an access control point. In contrast, guards employed by the other 4 contractors we reviewed were required to receive X-ray and magnetometer training regardless of their duty station. On the basis of our review of FPS’s contractual requirements and guard training and certification records maintained by FPS and/or the contractor, we reported in July 2009 that 62 percent, or 411, of the 663 guards employed by 7 of FPS’s 38 guard contractors and subsequently deployed to a federal facility had at least one expired certification. Examples of expired certifications included firearms qualification, background investigation, domestic violence declaration, CPR, or first aid training certification. More specifically, we also found that over 75 percent of the 354 guards at one level IV facility had expired certifications or the contractor had no record of the training. According to the contractor information for another contract, almost 40 percent of the 191 guards at another level IV facility had domestic violence declarations that had expired. Guards are not permitted to carry firearms unless they have such declarations. Since our July 2009 report, we have requested information from FPS to determine whether the status of these guards’ certifications had changed. FPS’s data showed that of the 663 guards, 435 are now fully certified and trained, 167 are not fully certified and trained, and 61 guards are no longer working on the contract. We also testified in July 2009 that some guard contractors were not providing building-specific training, such as on actions to take during a building evacuation or a building emergency. This lack of training may have contributed to several incidents in which guards neglected their assigned responsibilities. For example, At a level IV facility, the guards did not follow evacuation procedures and left two access points unattended, thereby leaving the facility vulnerable. At a different level IV facility, a guard allowed employees to enter the building while an incident involving suspicious packages was being investigated. At a level III facility, a guard allowed employees to access an area that was required to be evacuated because of a suspicious package. In addition to receiving insufficient building-specific training, guards generally said that they did not receive scenario-based training and thus were not sure what they should do in certain situations. During our site visits at 6 FPS regions, we interviewed over 50 guards and presented them with an incident that occurred at a federal facility in 2008. Specifically, we asked the guards whether they would assist an FPS inspector chasing an individual escaping from a federal facility in handcuffs. According to FPS policies and in accordance with contract requirements, contract guards are responsible for detecting, delaying, detaining, or apprehending persons attempting to gain unauthorized access to government property or otherwise violating laws, rules, and regulations. The guards’ responses varied, however. Some guards stated that they would assist the FPS inspector and apprehend the individual, while others stated that they would likely do nothing and stay at their posts because they feared being fired for leaving their posts. Some guards also told us that they would not intervene because of the threat of a liability lawsuit for use of force and did not want to risk losing their jobs. Moreover, guards employed by some contractors were not always complying with post orders once they were deployed to federal facilities. FPS’s post orders describe a number of things that guards are prohibited from doing while on post. For example, guards are prohibited from sleeping, using government property such as computers, and test-firing a weapon unless at a range course. However, as we testified in July 2009, when FPS routinely inspects guard posts, it has found incidents at level IV facilities where guards were not complying with post orders, including the following: A guard was caught using government computers while he was supposed to be standing post, to further his private for-profit adult Web site. A guard attached a motion sensor to a pole at the entrance to a federal facility garage to alert him whenever a person was approaching his post. Another law enforcement agency discovered the device and reported it to FPS. A guard, during regular business hours, accidentally fired his firearm in a restroom while practicing drawing his weapon. A guard failed to recognize or did not properly X-ray a box containing semiautomatic handguns at the loading dock at one federal facility we visited. FPS became aware of the situation only because the handguns were delivered to FPS. In each of these incidents, the guards were fired or disciplined. However, FPS continues to find instances where guards are not complying with post orders. For example, 2 days after the July 2009 hearing, another guard fired his firearm in a restroom in a level IV facility while practicing drawing his weapon. FPS has not taken actions against some guard contractors that did not comply with the terms of the contracts. According to FPS guard contracts, a contractor has not complied with the terms of the contract if the contractor has a guard working without valid certifications or background suitability investigations, falsifies a guard’s training records, does not have a guard at a post, or has an unarmed guard working an armed post. If FPS determines that a contractor does not comply with these contract requirements, it can—among other things—assess a financial deduction for nonperformed work; elect not to exercise a contract option; or terminate the contract for default or cause. Deductions are one type of action FPS may use to address contractor nonperformance issues. We reviewed the official contract files for the 7 contractors who, as we testified in July 2009, had guards performing on contracts with expired certification and training records to determine what action, if any, FPS had taken against these contractors for contract noncompliance. According to the documentation in the contract files, FPS did not take any enforcement action against them for not complying with the terms of the contract, a finding consistent with DHS’s Inspector General’s 2009 report. In fact, FPS exercised the option to extend the contracts of these 7 contractors. FPS contracting officials told us that the contracting officer who is responsible for enforcing the terms of the contract considers the appropriate course of action among the available contractual remedies on a case-by-case basis. For example, the decision of whether to assess financial deductions is a subjective assessment in which the contracting officer and the COTR take into account the value of the nonperformance and the seriousness of the deficiency, according to FPS contracting officials. According to FPS’s Acquisitions Division Director, financial deductions are rarely taken for contract noncompliance and when they are the amount is generally insignificant. FPS requires that a performance evaluation be completed annually and at the conclusion of the contract for those contracts exceeding $100,000. Contractor performance evaluations are one of the most important tools available for ensuring that the contractor meets the terms of the contract. According to contracting officials, monetary deductions do little to change contractor behavior, but contractors recognize the importance of evaluations and that FPS uses them to help determine whether to extend the contract. FPS policy also requires contracting officials to consider past performance as one of several technical evaluation factors in awarding new contracts. In addition, given that other federal agencies rely on many of the same contractors to provide security services, the need to complete accurate evaluations of a contractor’s past performance is critical. FPS’s contracting officers and COTRs did not always evaluate contractors’ performance as required, and some evaluations were incomplete and not consistent with contractors’ performance. We reviewed a random sample of 99 contract performance evaluations from calendar year 2006 through June 2009. These evaluations were for 38 contractors. Eighty-two of the 99 contract performance evaluations showed that FPS assessed the quality of services provided by the majority of its guard contractors as “satisfactory,” “very good,” or “exceptional.” For the remaining 17 evaluations, 11 showed that the contractor’s performance was “marginal,” 1 as “unsatisfactory,” and assessments for 5 contractors were not complete. According to applicable guidance, a contractor must meet contractual requirements to obtain a satisfactory evaluation and a contractor should receive an unsatisfactory evaluation if its performance does not meet most contract requirements and recovery in a timely manner is not likely. Nevertheless, we found instances where some contractors received a satisfactory or better rating although they had not met some of the terms of the contract. For example, contractors receiving satisfactory or better ratings included the 7 contractors that had guards with expired certification and training records working at federal facilities. In addition, some performance evaluations that we reviewed did not include a justification for the rating and there was no other supporting documentation in the official contract file to explain the rating. Moreover, there was no information in the contract file that indicated that the COTR had communicated any performance problems to the contracting officer. FPS’s contracting officials told us that the contract files should contain annual performance evaluations. In addition, if a contractor has not met the terms of the contract, the contract file should also contain guard inspection reports and correspondence between the contracting officer and contractor, and any other written reports that can be used to evaluate the contractor’s performance in meeting the terms of the contract. In addition, DHS’s Office of Procurement Operations has also established procedures for preparing and organizing contract files and has provided contracting officials with a standard checklist to identify the documentation required in each stage of the contract award life cycle. According to this checklist, the contract file should contain information about performance monitoring, quality assurance records, and evaluations of contractor performance for contracts over $100,000. The Federal Acquisition Regulation (FAR) also prescribes requirements for establishing, maintaining, and disposing of contract files. It requires the head of each office that performs contracting, contract administration, or payment functions to establish files containing records of all contractual actions. FPS’s CCGs did not follow these procedures for the contract files we reviewed. Specifically, our review of the official contract files for the 7 contractors who had guards with expired training and certification records working at federal facilities showed that the files were poorly documented, did not contain all of the required performance-related information, and varied among the CCGs. For example, contract files for 5 of the 7 contractors we reviewed did not have guard inspection reports, justifications for extending the contract, or annual performance evaluations. Without the performance-related information, FPS has difficulty deciding whether to exercise a contract option. Moreover, because federal agencies rely on many of the same contractors to provide security services, the need to consistently document contractor performance is important in determining future contracts. While FPS has given its guard contractors the responsibility to conduct most of the training of guards, FPS is responsible for conducting the 8 hours of X-ray and magnetometer training that all guards are required to have. However, as we reported in July 2009, FPS was not providing some of its guards with all of the required training in the six regions we visited. For example, in one region, FPS has not provided the required X-ray or magnetometer training to its almost 1,500 guards since 2004. X-ray and magnetometer training is important because the majority of the guards are primarily responsible for using this equipment to monitor and control access points at federal facilities. Controlling access to a facility helps ensure that only authorized personnel, vehicles, and materials are allowed to enter, move within, and leave the facility. In the absence of the X-ray and magnetometer training, one contractor in the region said that it is relying on veteran guards who have experience operating these machines to provide some on-the-job training to new guards. FPS officials subsequently told us that the contract for this region requires that only guards who are assigned to work on posts that contain screening equipment are required to have 8 hours of X-ray and magnetometer training. However, in response to our July 2009 testimony, FPS now requires all guards to receive 16 hours of X-ray and magnetometer training. As of January 2010, these guards had not received the 16 hours of training but continued to work at federal facilities in this region. FPS plans to provide X-ray and magnetometer training to all guards by the end of 2010. Lapses and weaknesses in FPS’s X-ray and magnetometer training have contributed to several incidents at federal facilities in which the guards neglected to carry out their responsibilities. For example, at a level IV federal facility in a major metropolitan area, an infant in a carrier was sent through the X-ray machine. Specifically, according to an FPS official in that region, a woman with her infant in a carrier attempted to enter the facility, which has child care services. While retrieving her identification, the woman placed the carrier on the X-ray machine. Because the guard was not paying attention and the machine’s safety features had been disabled, causing the belt to operate continuously, the infant in the carrier was sent through the X-ray machine. FPS investigated the incident and dismissed the guard. However, the guard subsequently sued FPS for not providing the required X-ray training. The guard won the suit because FPS could not produce any documentation to show that the guard had received the training, according to an FPS official. As we reported in July 2009, FPS’s primary system—CERTS—for monitoring and verifying whether guards have the training and certifications required to stand post at federal facilities is not fully reliable. Moreover, five of the six regions we visited did not have current information on guard training and certifications. Guard contractors are responsible for maintaining the status of each element of the guards’ certifications, such as firearms qualification, domestic violence certification, and first aid training. These certifications are subsequently entered into and tracked in CERTS by FPS personnel in the regional program offices. According to FPS officials in these five regions, updating CERTS is time-consuming and they do not have the resources needed to keep up with the thousands of paper files. Consequently, these five regions were not generally relying on CERTS and instead were relying on the contractor to self-report training and certification information about its guards. Not having a fully reliable system to better track whether training has occurred may have contributed to a situation in which a contractor allegedly falsified training records. As we reported last summer, in 2007, FPS was not aware that a contractor who was responsible for providing guard service at several level IV facilities in a major metropolitan area had allegedly falsified training records until it was notified by an employee of the company. According to FPS’s affidavit, the contractor allegedly repeatedly self-certified to FPS that its guards had satisfied CPR and first aid training requirements, as well as the contractually required biannual recertification training, although the contractor knew that the guards had not completed the required training and were not qualified to stand post at federal facilities. According to FPS’s affidavit, in exchange for a $100 bribe, contractor officials provided a security guard with certificates of completion for CPR and first aid. The case is currently being litigated in U.S. District Court. FPS has limited assurance that its 15,000 guards are complying with post orders. As we testified in July 2009, we identified substantial security vulnerabilities related to FPS’s guard program. Each time they tried, our investigators successfully passed undetected through security checkpoints monitored by FPS guards with the components for an improvised explosive device (IED) concealed on their persons at 10 level IV facilities in four cities in major metropolitan areas. We planned additional tests but suspended them after achieving 100 percent test results, which highlighted the vulnerabilities federal facilities face. The specific components for this device, items used to conceal the device components, and the methods of concealment that we used during our covert testing are classified, and thus are not discussed in this report. Of the 10 level IV facilities we penetrated, 8 were government owned and 2 were leased facilities. The facilities included field offices of a U.S. Senator and a U.S. Representative as well as agencies of the Departments of Homeland Security, Transportation, Health and Human Services, Justice, and State, and others. The 2 leased facilities did not have any guards at the access control point at the time of our testing. In August 2009, FPS told us that the 2 leased facilities did not have guards because the facilities were recently reclassified from a level IV to level II based on the new Interagency Security Committee security standards. Using publicly available information, our investigators identified a type of device that a terrorist could use to cause damage to a federal facility and threaten the safety of federal workers and the general public. The device was an IED made up of two parts—a liquid explosive and a low-yield detonator—and included a variety of materials not typically brought into a federal facility by employees or the public. Although the detonator itself could function as an IED, investigators determined that it could also be used to set off a liquid explosive and cause significantly more damage. To ensure safety during this testing, we took precautions so that the IED would not explode. For example, we lowered the concentration level of the material. To gain entry into each of the 10 level IV facilities, our investigators showed photo identification (state driver’s licenses) and walked through the magnetometer machines without incident. The investigators also placed their briefcases with the IED material on the conveyor belts of the X-ray machines, but the guards detected nothing. Furthermore, our investigators did not receive any secondary searches from the guards that might have revealed the IED material that we brought into the facilities. At security checkpoints at 3 of the 10 facilities, our investigators noticed that the guard was not looking at the X-ray screen as some of the IED components passed through the machine. A guard questioned an item in the briefcase at 1 of the 10 facilities, but the materials were subsequently allowed through the X-ray machine. At each facility, once past the guard screening checkpoint, our investigators proceeded to a restroom and assembled the IED. At some of the facilities, the restrooms were locked. Our investigators gained access by asking employees to let them in. With the IED completely assembled in a briefcase, our investigators walked freely around several floors of the facilities and into various executive and legislative branch offices. In addition, recent FPS penetration testing—similar to the covert testing we conducted in May 2009—showed that guards continued to experience problems with complying with post orders. Since July 2009, FPS has conducted 53 penetration tests in the six regions we visited. The guards identified the prohibited items (guns, knives, and fake bombs) in 18 tests but did not identify the items in 35 tests. More specifically, in August 2009, we accompanied FPS on 2 of these penetration tests at a level IV facility. During 1 test, FPS agents placed a bag containing a fake gun and knife on the X-ray machine belt. The guard failed to identify the gun and knife on the X-ray screen, and the undercover FPS official was able to retrieve his bag and proceed to the check-in desk without incident. During a second test, a knife was hidden on an FPS officer. During the test, the magnetometer detected the knife, as did the hand wand, but the guard failed to locate the knife and the FPS officer was able to gain access to the facility. According to the FPS officer, the guards who failed the test had not been provided the required X-ray and magnetometer training. Upon further investigation, only 2 of the 11 guards at the facility had the required X-ray and magnetometer training. In response to the results of this test, FPS debriefed the contractor and moved one of the guard posts to improve access control. In November 2009, we accompanied FPS on another test of security countermeasures at a different level IV facility. As in the previous test, a FPS agent placed a bag containing a fake bomb on the X-ray machine belt. The guard operating the X-ray machine did not identify the fake bomb and the inspector was allowed to enter the facility with it. In a second test, a FPS inspector placed a bag containing a fake gun on the X-ray belt. The guard identified the gun and the FPS inspector was detained. However, the FPS inspector was told to stand in a corner and was not handcuffed or searched as required. In addition, while all the guards were focusing on the individual with the fake gun, a second FPS inspector walked through the security checkpoint with two knives without being screened. In response to the results of this test, FPS suspended 2 guards and provided additional training to 2 guards. In response to our July 2009 testimony, FPS has increased the number of guard inspections at federal facilities in some metropolitan areas. FPS currently requires two guard inspections to be completed a week at level IV facilities. Prior to this new requirement, FPS did not have a national requirement for guard inspections, and each region we visited had requirements that ranged from no inspection requirements to each inspector having to conduct five inspections per month. Overall, FPS’s data show that the number of guard inspections has increased nearly 40 percent, from 4,639 inspections in July 2009 to 6,501 in October 2009. However, about 54 percent of these inspections occurred either at level IV facilities or in metropolitan areas and not in rural areas, where we found that guard inspections are rarely done. In our 2008 report, we found incidents in which guards deployed to federal facilities in rural areas had not been inspected in over 1 year or where the inspections were done over the telephone, instead of in person. In addition, while FPS’s Director authorized overtime to complete the additional inspections, previous funding challenges that resulted in FPS limiting overtime raise questions about whether it will be able to continue to authorize overtime to fund these increased inspections. Moreover, concerns remain about the quality of guard inspections. According to officials in one region, guard program officials recently provided training for inspectors on how to conduct and document guard inspections. However, despite this training, program officials said that the quality of the guard inspections and reports remains inconsistent. The guard inspection reports are one of the key factors FPS uses to assess a contractor’s performance. FPS is in the process of providing additional X-ray and magnetometer training, in response to our July testimony, but guards will not be fully trained until the end of 2010. FPS plans to train its inspectors—who will subsequently be responsible for training the guards—first. Under the new program, FPS will require inspectors to receive 30 hours of X-ray and magnetometer training and guards to receive 16 hours of training. Prior to this new requirement, FPS required guards to receive 8 hours of training on X-ray and magnetometer machines. In July 2009, FPS also required each guard to watch a government-provided DVD on bomb component detection by August 20, 2009. According to FPS, as of January 2010, approximately 78 percent, or 11,711, of the 15,000 guards had been certified as having watched the DVD. While the changes FPS has made to its X-ray and magnetometer training will help to address some of the problems we found, there are some weaknesses in the guard training. For example, one contractor told us that one of the weaknesses associated with FPS’s guard training program is that it focuses primarily on prevention and detection but does not adequately address challenge and response. This contractor has developed specific scenario training and provides its guards on other contracts with an additional 12 hours of training on scenario-based examples, such as how to control a suicide bomber or active shooter situation, evacuation, and shelter in place. The contractor, who has multiple contracts with government agencies, does not provide this scenario-based training to its guards on FPS contracts because FPS does not require it. We also found that some guards were still not provided building-specific training, such as what actions to take during a building evacuation or a building emergency. According to guards we spoke to in one region, guards receive very little training on building emergency procedures during basic training or the refresher training. These guards also said that the only time they receive building emergency training is once they are on post. Consequently, some guards do not know how to operate basic building equipment, such as the locks or the building ventilation system, which is important in a building evacuation or building emergency. In 2007, FPS began developing a new system to replace several legacy GSA systems including CERTS, Security Tracking System, and other systems associated with the facility security assessment program. The new system, referred to as the Risk Assessment Management Program (RAMP), is designed to be a central database for capturing and managing facility security, including the risks posed to federal facilities and the countermeasures that are in place to mitigate risk. It is also expected to enable FPS to manage guard certifications and to conduct and track guard inspections electronically as opposed to manually. RAMP will also allow FPS to produce regular reports on the status of guards and guard contracts and to address issues with guards and contractors as they arise. According to FPS officials, the first phase of RAMP training started in some regions in October 2009. However, as of December 2009, about half of the 752 inspectors had not received RAMP training. FPS also has experienced technical difficulties with RAMP, for example, server issues, and the system is not always available for use. Consequently, the 386 inspectors that were trained are not able to use RAMP and are doing guard inspections manually, a fact that increases the risk of inaccurate data. We are encouraged that FPS is attempting to replace some of its legacy GSA systems with a more reliable and accurate system. However, FPS has not fully addressed some issues associated with implementing RAMP. For example, we are concerned about the accuracy and reliability of the information that will be entered into RAMP. According to FPS, the agency plans to transfer data from several of its legacy systems, including CERTS, into RAMP. In July 2009, we testified on accuracy and reliability issues associated with CERTS. Since that time, FPS has taken steps to review and update all guard training and certification records. For example, FPS is conducting an internal audit of its CERTS database. As of February 2010, the results of that audit showed that FPS was able to verify the status for about 8,600 of its 15,000 guards. FPS is experiencing difficulty verifying the status of the remaining 6,400 guards, in part because it does not have a system to obtain reliable information on a real-time basis. Despite FPS’s recent efforts, challenges remain. While RAMP is a step in the right direction, it is not fully operational. Equally important, RAMP will not put FPS in an effective position to provide the oversight and decision making that are necessary to ensure that its 15,000 guards deployed at federal facilities in metropolitan and rural areas, private contractors, and 1,225 full-time employees in headquarters and 11 regions are performing as required and achieving FPS’s facility protection mission. We have previously reported that for an agency to effectively manage and control its operations, it must have relevant and reliable information relating to its mission on a real-time basis. FPS does not have this capability. FPS relies on its 11 regions to manage its contract guard program, including the collection and analysis of performance information. However, each of the 11 regions differs in how it manages, collects, and reports contract guard information. Without the ability to access contract guard information on a real-time basis, FPS cannot ensure appropriate oversight and accountability, or that the agency’s facility protection mission is accomplished. In addition, since 2002, we and DHS’s Inspector General have reported that oversight of the contract guard program is a challenge for FPS. For example, in 2008, we reported on the poor quality of contract guards and the lack of guard inspections. However, FPS has only recently begun addressing some of these challenges and has not undertaken a comprehensive review of the agency’s use of contract guards to protect federal facilities since the bombing of Alfred P. Murrah Federal Building in 1995. We also identified a number of changes that have had a cascading impact on FPS’s management of the contract guard program. Chief among them is FPS’s decision to move to an inspector-based workforce. Under this approach, FPS eliminated its police officer position and is primarily using about 752 inspectors and special agents to oversee its 15,000 contract guards, provide law enforcement services, conduct building security assessments, and perform other duties as assigned. Many inspectors in the regions we visited stated that they are not provided sufficient time to complete guard inspections because FPS’s priority is physical security activities, such as completing facility security assessments. The combined effect of recent changes and long-standing challenges has contributed to the poor oversight of the contract guard program, and we believe it indicates a need for a reassessment of the current approach to protect federal facilities and greater oversight. FPS also has not completed a workforce analysis to determine if its current staff of about 752 inspectors will be able to effectively complete the additional inspections as required and provide the X-ray and magnetometer training to 15,000 guards in addition to their current physical security and law enforcement responsibilities. Our previous work has raised questions about the wide range of responsibilities inspectors have and the quality of facility security assessments and guard oversight. According to the Director of FPS, while having more resources would help address the weaknesses in the guard program, the additional resources would have to be trained and thus could not be deployed immediately. Finally, according to the Director of FPS, the agency recognized that its guard program has long-standing challenges, and in response to recent concerns about the guard program identified by GAO and others, FPS contemplated assuming responsibility for all guard training and/or federalizing some guard positions at some federal facilities. However, FPS decided not to pursue federalizing guard positions because of the cost. While federalizing guard positions may not be cost-beneficial, we believe that given the long-standing challenges FPS faces with managing its guard program, it should continue to conduct research to determine if other options for protecting federal facilities may be more cost-beneficial. FPS continues to face challenges in ensuring that its $659 million guard program is effective in protecting federal facilities. While FPS has recently taken some actions, such as requiring more guard training and inspections, to address these long-standing challenges, guards employed by private contractors continue to neglect or inadequately perform their assigned responsibilities. We believe that FPS continues to struggle with managing its contract guard program in part because, although it has used guards to supplement the agency’s workforce since the 1995 bombing of the Alfred P. Murrah Federal Building, it has not undertaken a comprehensive review of its use of guards to protect federal facilities to determine whether other options and approaches would be more cost-beneficial. FPS also has not acted diligently in ensuring that its guard contractors meet the terms of the contract and taking enforcement action when noncompliance occurs. In addition, we believe that FPS’s overall approach to protecting federal facilities, coupled with many unresolved operational issues, has hampered its oversight of the contract guard program. The combined effect of these long-standing challenges suggests that FPS needs to do more to protect the over 1 million government employees and members of the public who visit federal facilities each year. Thus, we believe that among other things, FPS needs to reassess how it protects federal facilities and take a stronger role in overseeing contractor performance. We also believe that completing the required contract performance evaluations for its contractors and maintaining contract files will put FPS in a better position to determine whether it should continue to exercise contract options with some contractors. FPS’s decision to increase guard inspections at federal facilities in metropolitan areas is a step in the right direction. However, it does not address issues with guard inspections at federal facilities outside metropolitan areas, which are equally vulnerable. Thus, without routine inspections of guards at these facilities, FPS has no assurance that guards are complying with their post orders. In addition, ensuring that its guards are adequately trained to respond to building- specific situations, for example, how to handle an evacuation or shelter in place situation at a federal facility, is equally important. The lack of building-specific and scenario-based training may have contributed to several incidents in which guards neglected their assigned responsibilities. Moreover, maintaining accurate and reliable data on whether the 15,000 guards deployed at federal facilities have met the training and certification requirements is important for a number of reasons. First, without accurate and reliable data, FPS cannot consistently ensure compliance with contract requirements and lacks information critical for effective oversight of its guard program. Second, given that other federal agencies rely on many of the same contractors to provide security services, the need to complete accurate evaluations of a contractor’s past performance is critical to future contract awards. Finally, until FPS develops and implements a management tool, in addition to RAMP, that provides it with reliable contract guard data on a real-time basis, the agency will not be in an effective position to provide the oversight and decision making that are necessary to ensure that its 15,000 guards deployed at federal facilities in metropolitan and rural areas, private contractors, and 1,225 full-time employees in headquarters and 11 regions are performing as required and achieving FPS’s facility protection mission. Given the long-standing and unresolved issues related to FPS’s contract guard program and challenges in protecting federal facilities, employees, and the public who use these facilities, we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to take the following eight actions: identify other approaches and options that would be most beneficial and financially feasible for protecting federal facilities; rigorously and consistently monitor guard contractors’ and guards’ performance and step up enforcement against contractors that are not complying with the terms of the contract; complete all contract performance evaluations in accordance with FPS issue a standardized record-keeping format to ensure that contract files have required documentation; develop a mechanism to routinely monitor guards at federal facilities provide building-specific and scenario-based training and guidance to its develop and implement a management tool for ensuring that reliable, comprehensive data on the contract guard program are available on a real- time basis; and verify the accuracy of all guard certification and training data before entering them into RAMP, and periodically test the accuracy and reliability of RAMP data to ensure that FPS management has the information needed to effectively oversee its guard program. We provided a draft of this report to DHS for review and comment. DHS concurred with seven of the eight recommendations in this report. Regarding the report’s recommendation—issue a standardized record- keeping format to ensure that contract files have required documentation—DHS concurred that contract files must have required documentation and did not concur that a new record-keeping format should be issued. DHS commented that written procedures already exist and are required for use by all DHS’s Office of Procurement Operations staff and the components it serves, including NPPD. We believe that the policies referenced by DHS are a step in the right direction in ensuring that contract files have required documentation; however, although these policies exist, we found a lack of standardization and consistency in the contract files we reviewed among the three Consolidated Contract Groups. In response to this recommendation, DHS also commented it will conduct an internal audit of the contract files to determine the extent and quality of contract administration. We agree with this next step. In addition, while DHS agreed with our other recommendations, we are concerned that some of the steps it described may not address our recommendation—to develop a mechanism to routinely monitor guards at federal facilities outside metropolitan areas. In response to this recommendation, FPS commented that to provide routine oversight of guards in remote regions it will use an employee of a tenant agency (referred to as an Agency Technical Representative) who has authority to act as a representative of a COTR for day-to-day monitoring of contract guards. However, during the course of this review, several FPS regional officials told us that the Agency Technical Representatives were not fully trained and did not have an understanding of the guards’ roles and responsibilities. These officials also said that the program may not be appropriate for all federal facilities. We believe that if FPS plans to use Agency Tenant Representatives to oversee guards, it is important that the agency ensures that the representatives are knowledgeable of the guards’ responsibilities and are trained on how and when to conduct guard inspections as well as how to evacuate facilities during an emergency. Furthermore, while we support FPS’s overall plans to better manage its contract guard program, we believe it is also important for FPS to have performance metrics to evaluate whether its planned actions are fully implemented and are effective in addressing the challenges it faces managing its contract guard program. DHS’s comments are presented in appendix I. Finally, DHS provided technical clarifications, which we incorporated into the report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to appropriate congressional committees, the Secretary 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 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. In addition to the contact name above, Tammy Conquest, Assistant Director; Jonathan Carver; John Cooney; Collin Fallon; Brandon Haller; Daniel Hoy; Susan Michal-Smith; and Josh Ormond made key contributions to this report. | To accomplish its mission of protecting about 9,000 federal facilities, the Federal Protective Service (FPS) currently has a budget of about $1 billion, about 1,225 full-time employees, and about 15,000 contract security guards. FPS obligated $659 million for guard services in fiscal year 2009. This report assesses the challenges FPS faces in managing its guard contractors, overseeing guards deployed at federal facilities, and the actions, if any, FPS has taken to address these challenges. To address these objectives, GAO conducted site visits at 6 of FPS's 11 regions; interviewed FPS officials, guards, and contractors; and analyzed FPS's contract files. GAO also conducted covert testing at 10 judgmentally selected level IV facilities in four cities. A level IV facility has over 450 employees and a high volume of public contact. FPS faces a number of challenges in managing its guard contractors that hamper its ability to protect federal facilities. FPS requires contractors to provide guards who have met training and certification requirements, but 7 of 7 guard contractors we reviewed were not in compliance with this requirement. Specifically, we reported in July 2009 that 62 percent, or 411, of the 663 guards employed by 7 of FPS's 38 contractors and deployed to federal facilities had at least one expired certification, including those showing that the guard has not committed domestic violence, which make the guards ineligible to carry firearms. As of February 2010, according to FPS data, 435 of the 663 guards are now fully certified, 167 are not fully certified, and 61 guards are no longer working on the contract. FPS's guard contract also states that a contractor who does not comply with the contract is subject to enforcement action. FPS did not take any enforcement actions against these 7 contractors for noncompliance. In fact, FPS exercised the option to extend their contracts. FPS also did not comply with its requirement that a performance evaluation of each contractor be completed annually and that these evaluations and other performance-related data be included in the contract file. FPS also faces challenges in ensuring that many of the 15,000 guards have the required training and certification to be deployed at a federal facility. In July 2009, we reported that since 2004, FPS had not provided X-ray and magnetometer training to about 1,500 guards in one region. As of January 2010, these guards had not received this training and continued to work at federal facilities in this region. X-ray and magnetometer training is important because guards control access points at federal facilities. In addition, once guards are deployed to a federal facility, they are not always complying with assigned responsibilities (post orders). For example, we identified security vulnerabilities when GAO investigators successfully passed undetected through security checkpoints monitored by FPS guards with components for an improvised explosive device concealed on their persons at 10 level IV facilities in four cities in major metropolitan areas. Since July 2009, FPS has conducted 53 similar tests, and in over half of these tests some guards did not identify prohibited items, such as guns and knives. In response to GAO's July 2009 testimony, FPS has taken a number of actions that once fully implemented could help address challenges it faces in managing its contract guard program. For example, FPS has increased the number of guard inspections at federal facilities in some metropolitan areas. FPS also revised its X-ray and magnetometer training; however, guards will not all be fully trained until the end of 2010, although they are deployed at federal facilities. FPS recognized that its guard program has long-standing challenges and in 2009 contemplated a number of changes to the program, including assuming responsibility for all guard training and/or federalizing some guard positions at some federal facilities. However, FPS has not taken any actions in pursuing these ideas. |
BOP is responsible for approximately 219,600 inmates in federal custody. About 81 percent, or approximately 176,900 inmates, are housed in 119 of BOP’s own federal institutions—operating at different security levelshoused in privately managed contract facilities—generally housing low- —and about 13 percent, or approximately 29,400 inmates, are security inmates. BOP has eight operational divisions to oversee major BOP program areas, including the Correctional Programs Division and the Health Services Division, that manage the administration of mental health services. BOP’s Psychology Services Branch, which the Correctional Programs Division oversees (see fig. 1), provides most inmate mental health services in BOP-operated institutions, including the provision of individualized psychological care and 11 different treatment programs, which we describe in appendix II. BOP’s Health Services Division manages psychiatry and pharmacy services. Most mental health treatment is provided in what BOP calls its mainline, or regular, institutions. Acutely mentally ill inmates in need of psychiatric hospitalization, such as some inmates suffering from schizophrenia or bipolar disorder, may receive these services at one of BOP’s five psychiatric referral centers, which provide inpatient psychiatric services as part of their mission. About 71 percent of BOP’s psychiatrists work at the psychiatric referral centers with inmates most in need. At other BOP- operated institutions, psychiatrists focus primarily on medication management. BOP implemented a mental health care level designation system for both institutions and inmates in 2010. The system identifies the mental health needs of each inmate and matches the inmate to an institution with the appropriate resources. Institution mental health care levels range from 1 to 4, with 1 being institutions that care for the healthiest inmates and 4 being institutions that care for inmates with the most acute needs. Inmate mental health care levels are also rated in this manner from level 1 to level 4. Table 1 describes each inmate mental health care level and the number of inmates by designation level. For a list of all BOP institutions and their respective mental health care level designations, see appendix III. For more information on the process of assessing inmates’ mental health issues and designating care levels, see appendix IV. Among inmates with a level 4 mental health care designation the most common diagnosis among both male and female inmates was schizophrenia or another psychotic disorder, followed by a personality disorder diagnosis. Appendix V contains information on inmate diagnoses by inmate mental health care level designation and gender. Inmates in contract facilities are predominantly low-security criminal aliens, designated as mental health care level 1 or 2. Inmates who ordinarily would be placed in a contract facility but are designated for a mental health care level higher than 2 are assigned to a BOP-operated facility where BOP can provide the requisite level of care needed to treat the inmate’s mental health condition. At some contract facilities, the contractor may subcontract the health care services, including mental health care services. BOP reviews prison operations through internal program reviews and external accreditation reviews. BOP established its internal program review process to assess each BOP-operated institution’s compliance with applicable regulations and policies, the adequacy of their internal controls, and the effectiveness, efficiency, and quality of their programs and operations. BOP’s Program Review Division, one of its eight operating divisions, leads the process. BOP policy states that each program or operation at each BOP institution, such as psychology services and health services—but also, for example, food services and religious services—is to be reviewed on at least a 3-year basis, but potentially more often depending on the institution’s prior review results. During each review, a team of reviewers with specialized experience visits the institution to assess the institution’s programs based on a set of Program Review Guidelines (PRG). The PRGs provide a framework for the reviewers to test the institution’s compliance with policies and procedures, as articulated through program statements. In particular, program reviews for psychology and health services involve assessments of individual inmate case files, observations of treatment programs, reviews of an institution’s policies and procedures, interviews with staff, and interviews with a small number of inmates. Following a visit to an institution, the Program Review Division issues a report noting deficiencies and findings. BOP defines deficiencies to include deviations from policy or regulation, weaknesses in internal controls, or lack of quality controls. Reviewers also assign one of five ratings to the institution. The Program Review Division sends the final report to the institution and to the staff operating the program area that was assessed. Institutions are required to correct any deficiencies identified during the program review. The five areas are administration and management, physical plant, institutional operations, institutional services, and inmate programs. percent of applicable nonmandatory standards.ACA’s standards into the PRGs for its own program reviews. As a result of BOP’s inclusion of ACA’s standards in its program reviews, ACA relies significantly on findings from BOP’s own program review process and its confidence in this review process, when it reaccredits BOP-operated institutions, according to ACA officials. BOP also requires all of its institutions with a medical care level of 2 or higher to be accredited for ambulatory care by a second external organization, The Joint Commission. ambulatory care standards are not specific to mental health services, but apply to any type of medical or mental health service provided by an institution. For example, one standard requires organizations to provide patients with care, treatment, or services according to their individualized care plan. BOP’s Joint Commission accreditation covers services provided by the institution’s health services unit, including psychiatry and pharmacy services. Certain BOP institutions with specialized medical missions also obtain other Joint Commission accreditations. The Joint Commission’s Table 2 provides information on the different types of internal and external on-site reviews that BOP institutions undergo, and the specific BOP components providing mental health services that each review covers. According to BOP officials, medical care level 1 institutions are not required to be accredited for ambulatory care by The Joint Commission. BOP also conducts on-site assessments of its contract facilities, referred to as Contract Facility Monitoring (CFM) reviews. BOP has designed these reviews to assess whether contract facilities are meeting the performance outcomes that the contract specifies. BOP conducts a CFM review at each contract facility at least annually, and more frequently if BOP finds areas of concern in prior reviews, or if a facility recently became operational. In contrast to the internal program reviews for BOP- operated institutions, CFM reviews cover all aspects of the contract facility’s operations at once, instead of specifically focusing on a single program area, such as psychology services. Contract facilities are also required to obtain ACA and Joint Commission accreditations to comply with contractual requirements. The contracts indicate that these accreditations must be obtained within 24 months after the facility becomes operational, and the facility must maintain these accreditations through the life of the contract. During the 5-year period starting in fiscal year 2008 and ending in fiscal year 2012, costs for inmate mental health services in BOP-operated institutions rose in absolute dollar amount, as well as on an annual per capita—or per inmate—basis. BOP projects continued inmate population growth, and as a result, projections for these costs through 2015 are expected to continue to increase. BOP’s total mental health services costs increased annually from fiscal year 2008 through fiscal year 2012. According to BOP officials, mental health services costs include related expenses from both its Correctional Programs Division and Health Services Division. As shown in table 3, when aggregating these costs, we found that total costs increased annually from $123 million in fiscal year 2008 to nearly $146 million in fiscal year 2012. We also found that in general, despite some annual variations, costs for most components of mental health services rose from the start to the end of the 5-year period. These increases were due in part to a concurrent population increase of more than 11,000 inmates during the period. To adjust for this, we estimated the annual per capita, or per inmate, costs by dividing the total costs for mental health services by the number of inmates—and this figure also increased over time, from about $741 in fiscal year 2008 to about $821 in fiscal year 2012. BOP officials told us that per capita increases are generally due to inflation. With respect to overall cost increases for some programs, including the drug abuse treatment programs and the Sex Offender Management Programs, BOP attributed this growth to an increase in available slots, which has increased inmate participation in these programs. For example, according to BOP data, during the 5-year time period, participation in the Non-Residential Drug Abuse Program (NR DAP) increased by about 51 percent, from 13,361 participants in 2008 to 20,141 in 2012, and participation in the Sex Offender Treatment Program saw an overall increase of about 98 percent, from 373 participants in 2008 to 740 in 2012. Additionally, while the participation rate for the Residential Drug Abuse Program (RDAP) remained relatively constant, BOP reduced the number of inmates on the waiting list by about 31 percent (see app. II). With respect to costs for psychotropic medication, this was the one line item whose related costs showed a downward trend. According to BOP officials, the decline in psychotropic medication costs is likely a result of a number of these medications becoming available in a generic version, which often means lower costs. Including all the same elements in table 3, we projected costs through fiscal year 2015, and expect that mental health services costs will continue to increase (see table 4). In estimating annual future costs, we used fiscal year 2012 as a baseline and discussed with BOP officials their projections for underlying factors that would affect future changes in costs. Specifically, we used their data for anticipated inmate population growth and expected budgetary increases. For example, in its fiscal year 2014 budget, BOP requested an additional $15 million to expand the RDAP, which, according to BOP officials, should enable BOP to reduce the wait list for this program. We also applied national inflation factors for the health care industry to account for inflationary increases. BOP conducts various internal reviews to assess BOP-operated institutions’ compliance with its policies related to mental health services, and BOP policy also requires institutions to obtain external accreditations. While most BOP-operated institutions received good or superior ratings in their psychology and health services program reviews, the majority of reviews we examined did not occur within the BOP-specified time frames. Additionally, BOP has not evaluated the effectiveness of most of its treatment programs and has not developed a plan to do so. Finally, BOP’s program statements related to mental health services, which formally document BOP’s policies and procedures, contain outdated information. BOP’s psychology and health services program reviews identify the extent to which institutions are complying with BOP policies. While most institutions received good or superior ratings on these program reviews, we found that the reviews are not always conducted within the time frames BOP’s policies specify. The Psychology Services Branch also conducts other types of reviews to ensure compliance with mental health policies. BOP’s program review process includes elements that allow the agency to identify whether its institutions are complying with BOP’s mental health services policies, and to be assured that institutions have corrected any problems that the review identified. (See fig. 2.) BOP’s PRGs related to mental health services are developed jointly by either its Psychology Services Branch or its Health Services Division, as appropriate, and its Program Review Division. All of the steps in the PRGs link to specific BOP policies. For example, a psychology services PRG step that requires reviewers to look at a sample of intake screening interviews is based on the agency’s policy that new inmates must receive an intake screening interview within 14 days of arrival, and that inmates’ identified treatment needs receive appropriate follow-up. The psychology services PRGs also contain steps to review any psychology treatment program, such as RDAP, that an institution offers. While not generalizable to all program reviews, the review teams conducting the two psychology services program reviews that we observed followed the applicable PRGs. If a program review identifies a deficiency, BOP has a process in place to ensure that the institution takes action to correct the deficiency. Specifically, an institution must submit to the Program Review Division a corrective action plan or a certification by the warden that staff have resolved the deficiencies. Further, when an institution requests that a program review be closed, it must submit findings from a follow-up review that institution staff have conducted to demonstrate that their corrective actions have resolved the deficiency. Our review of the sample of 47 program review files found that institutions were generally following this process. We found that most institutions in our sample received a good or superior rating in the psychology and health services program review reports we examined. Among those reviews we examined, about 89 percent and 77 percent of institutions, respectively, received a good or superior rating. The lowest rating among the psychology services program reviews was acceptable, while one institution received a deficient rating for its health services program review. The most common deficiencies cited in the psychology services program review reports related to the care provided in residential treatment programs, and a variety of issues related to suicide risk assessments, suicide watch logs, and follow-up care after a suicide watch. Examples of the deficiencies BOP reviewers found in psychology services and health services program reviews, as well as examples of corrective action steps to address them, are included in appendix VI. We found BOP was not always in compliance with the time frames stated in its policies for when program reviews should occur. About 65 percent of the psychology services program reviews that we examined were not conducted within the time frame stated in BOP policy, including about 23 percent that were more than 6 months late, based on the institution’s prior ratings. (See table 5.) For example, one institution that had received an acceptable rating—and therefore should have been reviewed 24 months later—did not get reviewed again for more than 38 months. Among the 47 health services program review reports that we examined, about 70 percent did not occur within BOP’s established time frames, including 6 percent that occurred more than 6 months late. According to BOP officials, institutions that do not receive timely program reviews are required to use their staff to conduct an internal operational review using the relevant PRGs, which provides assurance to BOP that the institution is compliant with the agency’s policies. However, these operational reviews do not provide the same level of independence provided through BOP’s program review process. According to BOP policy, institutions that previously received a superior or good rating are to be reviewed within 36 months. Institutions that received an acceptable rating are to be reviewed within 24 months, and institutions with a deficient rating are to be reviewed within 18 months. Program Review officials told us that the tardiness of the program reviews was often due to staffing issues at the institution or within the Program Review Division. For example, one program review for an institution that had received an acceptable rating was delayed by 16 months, in part because one reviewer did not complete the required training in time to conduct the program review. Program Review officials told us that institutions can also request to postpone a review when, for example, a key staff position is vacant, such as the clinical director of the institution’s health services unit. According to Program Review officials, when an institution requests a program review postponement, the Program Review Division considers the results of the institution’s annual operational reviews to help determine whether it would be prudent to adjust the institution’s review schedule. Additionally, the Assistant Director for the Program Review Division approves any deviation in schedule. Although it is important that BOP officials review and approve postponements of program reviews, when reviews are postponed the delays can be lengthy, even for institutions with the lowest ratings. For example, BOP officials told us that to reduce travel costs, they delayed the review of an institution rated acceptable by 14 months to combine its review with that of another nearby institution’s review. Of the 11 institutions in our sample with an acceptable rating in their prior psychology services program review, 4 received their next review more than 6 months late and 3 of those were more than a year late. In contrast, among the 36 institutions with a prior rating of good or superior, 7 had their next review more than 6 months late, including 2 more than a year late. Because institutions with an acceptable rating are to be reviewed within 24 months—compared to 36 months for facilities with higher ratings—a 1-year delay is potentially more problematic . According to A Guide to the Project Management Body of Knowledge, which provides standards for project managers, agencies should place the highest priority on oversight of facilities, programs, or operations that are most at risk of not meeting key performance objectives; in BOP’s case this would be institutions with the lowest ratings. Therefore, when scheduling postponed reviews, proper risk management would call for BOP to give highest priority to those institutions with the lowest ratings. Because delays in program reviews may hamper BOP’s ability to adequately monitor inmate care, it is important for BOP to minimize delays, especially for the lowest-rated institutions. Furthermore, with BOP’s inmate population expected to increase through 2020,important for BOP to ensure that it conducts timely program reviews to identify potential problems with access to care or compliance with its treatment policies that growing institutional crowding might exacerbate. it will be even more Program Review Division officials take steps to share information learned from program reviews with other relevant BOP officials. For example, officials from the Program Review Division and the chiefs of every division that they review, including the Psychology Services Branch and the Health Services Division, meet quarterly and discuss deficiencies identified during the previous quarter. Program Review officials also send wardens a summary that lists the most common deficiencies identified during the previous quarter’s reviews to alert the wardens to focus attention on certain program areas. For example, a November 2012 quarterly report stated that the most frequent psychology services deficiency cited was that not all mental health care level 3 inmates had a treatment plan or were being seen on a monthly basis. An additional review activity that BOP’s Psychology Services Branch conducts is certification reviews of 2 of the 10 current residential and nonresidential psychology treatment programs—RDAP and the Challenge Program. the program adheres to the 10 elements of a modified therapeutic community (MTC), the treatment model BOP uses for residential psychology treatment programs. (See app. VII for additional information on the elements of a MTC.) Psychology Services officials told us they would like to expand the certification process to all eight residential treatment programs, but expansion was contingent on securing additional funds for travel because the certification reviews are done at the program location. The Challenge Program is a residential program designed to facilitate favorable institutional adjustment and successful reintegration into the community through the elimination of drug abuse or the management of mental illness. The Challenge Program targets high-security inmates with a history of drug abuse or a major mental illness. During the course of most of our review, BOP had 11 psychology treatment programs. At the end of fiscal year 2012, BOP discontinued one of its programs, the Habilitation Program. There are no remote review procedures for the Commitment and Treatment Program—a civil commitment treatment program for persons certified as sexually dangerous—because BOP has not yet issued a relevant program statement. was receiving.remote reviews of suicide risk assessments to evaluate whether the assessments are well reasoned and, for at-risk inmates, treatment began when the inmate was on suicide watch. In addition to requiring program reviews, BOP policy also requires institutions to obtain external accreditations to assess whether they are meeting external standards of care. ACA assesses all facets of correctional institutions, including mental health services, while The Joint Commission focuses on the services provided by the institution’s Health Services Unit. In both accreditation reviews, mental health care represents a small component of the review’s overall focus. ACA identifies seven standards specific to mental health care, four of which are mandatory. For example, one standard specifies what should be covered during an inmate’s mental health screening.mandatory. If, during the on-site review, examiners find insufficient compliance with a standard, the institution must submit documentation to The Joint Commission that it has resolved the issue prior to being granted full accreditation. All of The Joint Commission’s standards are We reviewed the most recent ACA and ambulatory care Joint Commission accreditation reports for our sample of 47 institutions. For the 47 institutions in our sample, we reviewed 37 Joint Commission accreditation reports. Nine of the 47 institutions were medical care level 1 institutions and therefore not required to be accredited by The Joint Commission. An additional institution changed from a Level 1 to a Level 2 institution and had not gone through accreditation. Level 1 institutions serve the healthiest inmates. found limited findings related to mental health care in both the ACA and Joint Commission accreditation reports, meaning that the institutions generally were complying with applicable standards. Findings from our analysis are detailed in appendix VI. We also reviewed the accreditation reports of the four BOP-operated institutions that have Joint Commission accreditations for behavioral health care. All four institutions received full accreditation. One of the institutions had no findings, and for two institutions, The Joint Commission examiners found that the suicide risk screenings did not specify the inmate’s protective factors, which are factors that decrease an inmate’s risk of suicide. Evaluations: An evaluation determines whether a program is meeting its intended outcomes. Intended outcomes of psychology treatment programs could include lower recidivism rates, lower rates of misconduct, or better management of mental illness symptoms. BOP’s ORE has not evaluated and has not yet developed a plan to evaluate 7 of BOP’s 10 treatment programs to assess whether they are meeting their established goals; of the 3 others, ORE completed two reviews over 11 years ago and has one under way. Evaluation can play a key role in program management, providing feedback on both program design and execution, and providing agencies with important information to improve performance. ORE completed its review of RDAP in 2000 and the Bureau Rehabilitation and Values Enhancement (BRAVE) Program in 2001 and found positive results. For example, inmates who participated in RDAP had less recidivism after 3 years of release than inmates who did not go through the program. BOP used the results from ORE’s RDAP and BRAVE evaluations in its budget justifications to support continued funding in these areas. In addition, ORE is currently working on an evaluation of the Sex Offender Treatment Program. ORE officials said this study will likely take a number of years because they are examining the program’s effect on recidivism rates, which requires waiting until after the inmates have been released for some period of time. BOP has not yet developed a plan for evaluating any additional psychology treatment programs. As part a statutory requirement, BOP is to provide an annual report containing statistics demonstrating the relative reductions in recidivism associated with major inmate programs (including residential drug treatment, vocational training, and prison industries programs).BOP officials told us they have begun to develop an approach to complete the first report, which they plan to submit to Congress in 2016. BOP officials said that as of June 2013, they were in the process of determining which psychology treatment programs to include in the 2016 report and could not provide us with documentation as to what programs they were considering or the criteria they would use to determine which programs would be included. Furthermore, BOP was unable to provide documentation as to whether the first report would focus solely on recidivism or whether the report would also include additional outcomes that these programs are intended to affect, such as inmate disciplinary actions or self-management of a mental illness. After we provided a draft of this report to DOJ for comment, Given the annual reporting requirement and the lack of clarity regarding how BOP intends to meet this reporting requirement, it is important that BOP develop a plan, within its available resources, for evaluating its psychology treatment programs. The plan would indicate whether the evaluations would focus solely on recidivism, or also include additional outcomes. Standard practices for project management call for agencies to define specific goals in a plan, as well as to describe how the goals and objectives are to be achieved; including identifying the needed resources and target time frames for achieving desired results. With a plan, BOP could have greater assurance that the activities necessary to conduct the evaluations of the psychology treatment programs, as well as any needed program changes that may be identified during those evaluations, would be completed in a timely manner. More than half of the BOP program statements—which outline BOP’s formal policies and procedures—related to mental health services are out of date, despite BOP’s acknowledgment that policies need to be current. Five of the eight program statements we identified as related to inmate mental health services have not been updated within the past 5 years, including two that have not been updated in 18 years (see app. VIII).For example, although BOP’s psychology services program statement states that it “is periodically updated to reflect the rapidly changing nature of professional psychology within a correctional setting,” BOP has not updated the statement since 1995. Psychology Services officials told us that they want to update the program statements for psychology services and institution management of mentally ill inmates, both of which were last updated in 1995. BOP needs to negotiate with its union on all changes to existing program statements that affect the conditions of employment of members of the collective bargaining unit, if the unit chooses to negotiate. Until recently, BOP, in conjunction with the union, has placed a higher priority on negotiating other program statements. In May 2013, the union and BOP came to an agreement to restart the negotiation process and BOP’s Psychology Services Branch was drafting changes to the two program statements. However, until program statements are updated, they will continue to contain information that does not reflect current practices or relates to systems or processes that are no longer in use. For example, in the 18 years since the program statements for psychology services and institution management of mentally ill inmates were last updated, BOP’s total inmate population increased significantly; BOP revamped its system for assessing and classifying mental illness in the inmate population; and several new medications, programs, and treatment models have been established. The outdated program statements, which officially articulate BOP policy, also do not reflect important developments in the provision of mental health services, such as the increased emphasis on evidence- based treatments. According to the BOP program statement on management directives, program statements serve as the formal policies guiding agency operations, thereby setting the expectations for how BOP-operated institutions should operate. BOP states that less formal documents, such as memos, should generally not be used to communicate requirements or instructions because these documents are not authenticated, numbered, annually reviewed, or historically traced. We found, however, that in the absence of officially updated policy in key areas related to mental health services, the Psychology Services Branch is relying on internal memos to implement some changes. For example, in 2009, BOP’s assistant directors for the Correctional Programs Division and the Health Services Division issued a memo to all wardens to implement the newly established mental health care level designations for inmates. The memo contains the necessary details about how inmates should be designated to the four different mental health care levels, making obsolete the elements of the program statement that describe an older inmate classification system. Formally documented policies and procedures provide guidance to staff in the performance of their duties and help to ensure activities are performed consistently across an agency, according to the standards for internal controls in the federal government. Standards for internal controls also require that agencies regularly review their policies and procedures and update as necessary. BOP officials said they plan to update the agency’s outdated program statements and implement the revised program statements, but have not said when this process will begin or when it will be completed. Taking action to update and implement its program statements regarding inmate mental health care would help BOP better position itself to ensure consistent adherence to policies and reduce any confusion that may alter the provision or quality of inmate mental health care. By updating the program statements, BOP reduces the risk of, among other things, having psychology staff not understanding their required duties and inconsistently implementing treatment program activities, which may lead to unintended variation in services and outcomes for inmates across BOP-operated institutions. BOP does not track its contractors’ costs of providing mental health services to the 13 percent of BOP inmates housed in privately managed fixed-price contracts that govern the facilities. The performance-based,operation of BOP’s privately managed facilities give flexibility to the contractors to decide how to provide mental health services. Nevertheless, BOP assesses the contractors’ compliance with contract requirements and accreditation standards related to mental health through Contract Facility Monitoring (CFM) reviews, external accreditation reviews, and other reviews. BOP tracks the overall daily cost for housing the 13 percent of federal inmates—who are generally designated as mental health care level 1—in its 15 contract facilities, but BOP does not track the specific costs of providing mental health services to these inmates. This is because the BOP contracts that govern the operation of these privately managed facilities are performance-based, fixed-price contracts that only require the contractors to provide BOP with their costs on a per inmate per day basis. According to officials from BOP’s Administration Division, which oversees contracting for BOP, the structure of the fixed-price contract model prohibits BOP from asking contractors to provide more specific cost information. While other contract models exist, guidance from the Office of Federal Procurement Policy within the Office of Management and Budget encourages agencies to issue fixed-price contracts, when appropriate, because they provide greater incentive for the contractor to control costs and perform efficiently. BOP officials told us that because the contracts are performance-based, when contractors do not meet the terms of work in the fixed-price contract, BOP reduces the contract price to reflect the value of the services actually performed. BOP officials told us they have done this for deficiencies related to mental health. For example, BOP officials stated that from 2008 to present, they imposed deductions ranging from over $75,000 to $1,000,000 on contractors for 91 deficiencies, including 6 for mental health, found during the CFM reviews. The mental health deficiencies that make up some of these deductions were mostly related to mental health screenings not being completed in a timely manner or in accordance with standards. Two of the three BOP contractors we spoke with—which are the primary contractors responsible for operations at 11 of the 15 private facilities — said that they track mental health services costs internally and take them into account when calculating the per diem inmate cost they use when Additionally, two of the primary contractors bidding for BOP contracts.told us that they subcontract for health services, including mental health services, and do not know the subcontractors’ specific cost for providing mental health services. We spoke with one subcontractor that told us it tracks these costs internally. We requested this cost information from that subcontractor and two of the three primary contractors we spoke with, but were unable to obtain this information because the contractors consider it proprietary and confidential. BOP uses a number of approaches to assess each contractor’s compliance with its mental health requirements and standards. These include CFM reviews; reports from external reviews that accrediting bodies perform; reports from internal reviews that the contractors conduct; and the monthly, less formal inspections and continuous monitoring activities performed by the two to four BOP staff stationed on- site at each privately managed facility—one of whom is a contracting officer. BOP officials stated that the combination of these various accountability mechanisms gives them assurance that the contract facilities are providing the appropriate mental health services to federal inmates. BOP conducts annual on-site CFM reviews at each contract facility, the objective of which is to assess whether the contract facilities are meeting performance outcomes outlined in the contract. Following a CFM review, BOP issues a report to the facility noting deficiencies and findings from the review. With respect to mental health, each contract requires that “all inmates are screened for mental health, substance abuse, and other behavioral problems and receive appropriate intervention, treatment, and programs to promote a healthy, safe, and secure environment.” According to BOP, this language is more generic than prescriptive because of the contracts’ performance-based nature. The contract also specifies that private facilities must obtain and maintain ACA and Joint Commission accreditation. BOP officials told us that while BOP gives contractors discretion in deciding how to deliver mental health services—and does not dictate adherence to BOP’s mental health policies—they believe that requiring contractors to achieve and sustain the same accreditations as BOP institutions helps ensure a high level of service. BOP developed a Quality Assurance Plan that sets out the areas that BOP is to assess during the CFM reviews. The plan includes auditing check lists that cover the spectrum of services that BOP requires its contractors to provide, and includes six specific steps for assessing contractors’ provision of mental health services. BOP staff with expertise in medical and mental health issues are part of the review team conducting the reviews, and the six steps include components such as checking that all inmates are screened for mental health, substance abuse, and other behavioral problems and receive appropriate intervention, treatment, and programs. BOP’s CFM process is designed to determine overall contractor performance. Our review of the recent CFM reports for all 15 private facilities, related discussions with three primary contractors that manage 14 of BOP’s 15 contract facilities and one subcontractor, and our direct observation of a CFM review at 1 contract facility found that the process generally was implemented in accordance with policy. In addition, our review of the CFM review time frames for the 15 contract facilities from 2008 through 2012 found that the reviews are generally taking place on time, with each facility being reviewed at least once annually. According to BOP officials, they track and characterize the deficiencies from the CFM reports at a high level, such as whether they are related to health services, but they do not specifically track whether those deficiencies are related to mental health. Across the CFM review reports we assessed, we found four policy areas where deficiencies that could be related to mental health services were cited at more than 1 facility— Inmate Classification and Program Review, Health Information Management, Patient Care, and Medical Designation and Referral Services for federal Inmates. In particular, the deficiencies in these policy areas involve the identification and documentation of inmate program needs; inmate health records having missing, incomplete, or inaccurate information; and health documents not being written so that correctional staff can understand the inmate’s health needs. Inmate program needs, inmate health records, and other health documents may include mental health information. For more information on the deficiencies BOP identified in the CFM reports, see appendix VI. On completion of the CFM, BOP reviewers provide the contract facility with their report. BOP requires the contract facility to prepare a corrective action plan within 30 days and submit it to the on-site monitors and BOP Privatization Management Branch. BOP’s on-site staff review the corrective action plan, and if they accept the plan, they oversee its implementation to ensure that the facility is taking action and that the actions appropriately address the deficiency. Our conversations with the on-site monitors indicated that this oversight is taking place at the locations we visited. Our analysis found that of the 100 CFM reviews conducted from 2008 through 2012 that required a contract facility to submit a corrective action plan, 16 were not submitted within the 30 days. However, those that missed the deadline were all submitted no later than 2 months after the specified deadline. If the on-site staff reject the plan, they can discuss issues with the contract facility staff and supervisors within BOP’s Privatization Management Branch—which oversees contractor compliance—to provide feedback so the contractor can make needed changes and resubmit the plan for approval. If BOP continues to have concerns about the corrective action plan, it can file a “notice of concern.” However, BOP officials told us this is a rare occurrence that has not happened recently because most contractors have been working with BOP for some time and are familiar with the contract requirements. BOP officials also told us that all the staff involved with overseeing contractor compliance meet regularly to discuss any common findings and observations from the CFM reviews and the corresponding corrective action plans. They said the objective of their discussions is to ensure that staff are aware of the findings and to facilitate any future changes to the structure of the contracts that the Privatization Management Branch staff may need to undertake to address some of these issues. Like BOP-operated facilities, contract facilities are also required to obtain ACA and Joint Commission accreditations and are assessed under the same standards, and contract facilities must be accredited no later than 24 months after becoming operational. According to BOP officials, establishing a 24-month window for contract facilities to receive accreditation is appropriate because this is consistent with the requirements for BOP facilities. Once a contract facility is accredited, both ACA and The Joint Commission evaluate it once every 3 years to substantiate continued accreditation. As of April 2013, 13 of the 15 BOP contract facilities have received ACA and Joint Commission accreditations. The 2 contract facilities that have not received ACA and Joint Commission accreditations became operational in 2011 and therefore must undergo their reviews in 2013 to meet the contract’s requirements. Once ACA and The Joint Commission complete their respective reviews, they provide BOP with copies of their reports to verify that the contract facility is in compliance with the accreditation standards. If the facility is not compliant with any of the standards, BOP requires the contract facility to develop and submit to both BOP’s on-site staff and the Privatization Management Branch a corrective action plan that outlines the changes the facility is making to comply with the accreditation standards. The on- site staff review the plan and verify that the corrective actions have been implemented. ACA and The Joint Commission also require the contractors to provide them with copies of the respective corrective action plans, and each accrediting body conducts its own follow-up to confirm that actions have been taken before finalizing an accreditation decision. Our analysis of the most recent ACA accreditation reports for the 13 contract facilities that were reviewed found that all but one of the facilities were compliant with all ACA standards related to mental health services, including pharmacy care, psychology, and psychiatry services. The facility that was found not compliant with all of ACA’s mental health-related standards was as a result of the facility’s failure to develop and utilize a health care staffing plan and the reviewers’ related concerns about the mental health staffing levels at the facility. Our review of the most recent Joint Commission accreditation reports found that 6 of the 13 contract facilities were fully in compliance with the ambulatory care standards we determined were related to mental health services—a small subset of the 192 standards by which they are assessed. The Joint Commission found the remaining 7 facilities to be either partially or insufficiently compliant with these standards. The areas related to mental health in ambulatory care accreditation standards that were most frequently cited include medication management, such as medication labeling and storage issues, and the lack of documentation of the competency of medical staff, including mental health staff. In addition to the ambulatory care accreditation that contract facilities are required to obtain, 1 of the 7 facilities specifically chose to also be accredited on behavioral health standards, and that facility was found to be insufficiently compliant with 3 of those standards. These compliance issues related to: inmate assessments not including information on addictions other than alcohol or drugs; inmate treatment plans not including goals and metrics to measure an inmate’s progress; and the lack of documentation of an assessment of clinical competence for staff being hired. For more information on the specific ambulatory care and behavioral health standards for which the contract facilities were not in compliance, see appendix VI. In addition to accreditation and its own reviews, BOP conducts oversight of contract facilities by requiring them to conduct routine internal assessments of their operations. BOP requires contractors to develop a Quality Control Plan, which serves as the basis for these internal reviews, and to share the results of their reviews with the BOP on-site monitors, who verify in their monthly reviews that the internal reviews have occurred. According to officials from the contractors that manage 14 of BOP’s 15 contract facilities, when they develop their Quality Control Plans, they generally use BOP policies and accreditation standards as a resource to ensure that the company’s policies either meet or exceed BOP’s own standards. For example, one contractor noted that it requires inmates who have just completed suicide watches to be seen by a mental health provider daily for the first 5 days, weekly for the next 2 months, and then monthly thereafter. This requirement is more specific than BOP’s own policies, which leave discretion to the chief psychologist to determine how frequently an inmate needs to be seen by mental health staff. According to BOP officials, the contractors’ Quality Control Plans are much more detailed than BOP’s Quality Assurance Plan because the contractors are monitoring many more areas than BOP does in order to ensure they are properly prepared for BOP’s review. Our review of the Quality Control Plans that we received from two of the three primary contractors and the subcontractor we spoke with found that all of their Quality Control Plans had mental health-related elements that were aligned with those in BOP’s Quality Assurance Plan, and two of the three plans assessed additional areas beyond those established in BOP’s plan. For example, each of the Quality Control Plans contained steps to review psychological assessments of inmates in the special housing units, which are also included in BOP’s plan. An example of a plan going beyond BOP’s plan is that one contractor has reviewers evaluate inmate medical records to determine whether the psychiatrist documented that less restrictive treatment options have been exercised without success. Providing mental health services to the federal inmate population is an important part of BOP’s broader mission to safely, humanely, and securely confine offenders in prisons and community-based facilities. As BOP’s inmate population has grown, so have its costs for mental health services. Likewise, as the inmate population is projected to continue to increase and BOP plans to continue maximizing inmate participation in its treatment programs, it is expected that future costs for mental health services will also rise. Given the fiscal pressures facing BOP—as with the rest of the government—it is critical that the agency focus its efforts on ensuring the prudent use of resources. At the same time, it is important for BOP to provide mental health services that comply with its internal policies and external accreditation requirements. Program reviews provide important insight into whether these requirements are being met and inmates are being provided the appropriate services. We found that BOP was frequently unable to complete required monitoring within its own established time frames. To its credit, BOP schedules program reviews with the intention that those institutions with the lowest ratings are reviewed more frequently, and any delays in reviews require approval by BOP officials. However, when reviews are postponed, the delays can be lengthy—sometimes over a year—even for those institutions with the lowest ratings. Because delays in program reviews hamper BOP’s ability to adequately monitor inmate care, when scheduling postponed reviews BOP should take action to minimize delays and give highest priority to those institutions with the lowest ratings. BOP would have greater assurance that it is effectively using its resources if it had better information on whether the programs were meeting their intended objectives and if any program changes were needed. While BOP has evaluated a few, but not all, of its psychology treatment programs and is in the process of determining what information to include in its statutorily required report related to recidivism, it would be beneficial for BOP to develop a plan that identifies the resources necessary and target time frames to carry out future evaluations specifically related to psychology treatment programs, consistent with standards for project management. With such a plan, BOP would have greater assurance that the activities necessary to conduct the evaluations of the psychology treatment programs, and any needed changes identified through the evaluations, would be completed in a timely manner. Finally, BOP has many outdated program statements related to mental health services, including two which are more than 15 years old. According to BOP, program statements serve as the formal policies guiding agency operations across the entire federal prison system, setting the foundation for how all institutions should operate. BOP policy states that less formal documents, such as memos, should generally not be used to communicate requirements or instructions, yet BOP is relying on internal memos to implement some key policy changes. By updating and implementing mental health care-related program statements, BOP would better ensure that its policies reflect currently accepted treatment practices and standards. This would also ensure that all BOP staff have a common set of guidelines to direct their activities, which would also better ensure appropriate services and outcomes for inmates across BOP- operated institutions. To improve BOP’s ability to oversee BOP-operated institutions’ compliance with inmate mental health policies and monitor the effectiveness of treatment programs for mentally ill inmates, we recommend that the Director of BOP take the following two actions: when program reviews are delayed, ensure institutions with the lowest ratings receive the highest priority for the completion of reviews; and develop a plan to carry out future evaluations of BOP’s psychology treatment programs, within available resources; the plan should include the identification of necessary resources and target time frames. To ensure policies related to inmate mental health care accurately reflect current practices, we recommend that the Director of BOP take the following action: develop and implement updated program statements to ensure that these statements reflect currently accepted treatment practices and standards. We provided a draft of this report to DOJ for review and comment. DOJ did not provide official written comments to include in this report. However, in an e-mail received on June 27, 2013, a BOP audit liaison official stated that BOP concurred with the first and third recommendations and partially concurred with the second recommendation, which called for the Director of BOP to assess which psychology treatment programs could be evaluated within the agency’s existing resources and develop a plan to conduct future evaluations. After we provided the draft to DOJ for comment, BOP provided additional information about its program evaluation plans, which we reviewed and incorporated in this report as appropriate. Specifically, as part of the additional information, BOP officials stated that the agency is in the process of developing an approach to assess which additional programs to evaluate. According to the BOP officials, as of June 2013, they are making plans to complete the first report required under the Second Chance Act of 2007 and are in the process of determining which psychology treatment programs to include in the report. However, BOP officials could not provide any documentation as to the criteria to be used in selecting which programs would be included in the report or whether the report would include information on outcomes, in addition to the required outcome on recidivism. After evaluating the additional information BOP provided, we modified the second recommendation to reflect the assessments and planning discussions that BOP has under way and to highlight the importance of developing a plan, including elements such as time frames, for such evaluations. BOP also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Director of BOP, selected 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 further questions about this report, please contact Dave Maurer at (202) 512-9627 or [email protected], or 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 report. Key contributors to this report are listed in appendix IX. Our objectives for this report were to address the following questions: 1. What have the costs been to provide mental health services in Bureau of Prisons (BOP)-operated institutions over the past 5 fiscal years, and what are the projected costs? 2. To what extent does BOP assess whether BOP-operated institutions comply with BOP policies for providing inmate mental health services? 3. To what extent does BOP track the costs of providing mental health services to BOP inmates in contract facilities, and to what extent does BOP assess whether these facilities meet contract requirements, including standards of care for inmate mental health services? To address the question on the BOP’s costs over the past 5 fiscal years and projected costs to provide inmate mental health services in BOP- operated institutions, we interviewed officials from BOP’s Administrative Division, Psychology Services Branch, and Health Services Division to understand what constitutes mental health services, what costs are relevant to providing these services, what factors drive changes in cost, and BOP’s current practices for developing budgets and expenditure plans in these areas. Because BOP does not report a comprehensive mental health services cost, as costs are included in two BOP divisions (the Health Services Division and the Correctional Programs Division), we analyzed obligated funds for fiscal years 2008 through 2012 for these two divisions. Specifically, within Health Services, we examined obligations for psychiatry staff and for pharmaceuticals, including psychotropic medication. Within Correctional Programs, we looked at the obligated funds for Psychology Services, psychology staff training, drug abuse treatment programs, and Sex Offender Management Programs. To determine the per capita costs for the same time period, we divided the total cost by the inmate population at the end of the fiscal year in all BOP- operated institutions. In addition, to project future costs, we discussed with these same officials their methods for cost projections and independently examined BOP’s population projection and expected staffing positions for fiscal years 2013 through 2015. We limited our projections to 3 years, since the further into the future an estimate is, the less reliable it becomes. Additionally, there could be future changes in law or agency initiatives that may significantly impact the integrity of longer- term projections. To determine projected costs, we used the total cost of inmate mental health services for fiscal year 2012 as the baseline, and adjusted this by BOP’s projected population and the IHS Global Insight Outlook inflation factor. For the projected per capita costs, we divided the projected cost by the projected population. To assess the reliability of BOP’s obligation data, we (1) performed electronic data testing and looked for obvious errors in accuracy and completeness, and (2) interviewed agency officials knowledgeable about BOP’s budget to determine the processes in place to ensure the integrity of the data. We determined that the data were sufficiently reliable for the purposes of this report. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999), and Project Management Institute, A Guide to the Project Management Body of Knowledge, Fifth Edition © (Newtown Square, Pennsylvania: 2013). A Guide to the Project Management Body of Knowledge provides standards for project managers. provided to inmates and oversight of staff working at the institutional level. We also interviewed officials from BOP’s Office of Research and Evaluation (ORE) to determine what evaluations ORE has conducted of psychology treatment programs in the past and what evaluations are ongoing or planned for the future. We assessed BOP’s evaluation planning against project management standards. To understand BOP’s program review process, and the psychology and health services findings from recent program reviews, we conducted additional site visits to two institutions for the purpose of shadowing program review staff as they performed a psychology services program review. We chose the two institutions because they provided different levels of care—one institution was a mental health care level 4 and another was a mental health care level 1—and because the program reviews were being conducted within the time frame of our study. While the observations from these visits are not generalizable to all BOP institutions or to all program reviews, the visits provided important insights into the program review process. In addition, we conducted a content analysis of recent psychology and health services program review reports. To conduct the content analyses, we selected a simple random sample of 47 BOP institutions from the study population of 94 BOP institutions that had been operating long enough to undergo a program review as of August 31, 2012. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 7 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Due to the small size of the population, we used a hypergeometric distribution to estimate the 95 percent confidence intervals for our sample estimates. For each of the 47 institutions included in our sample, we received from BOP the most recent psychology and health services program review reports. In order to minimize the chance of nonsampling errors occurring in our file review, we took the following steps. A GAO analyst first reviewed each psychology and health services program review report to capture the dates of each review to determine the timeliness of the review in relation to the previous review, and the deficiencies identified in the final program review report. BOP defines deficiencies as deviations from policy or regulation, weaknesses in internal controls, or lack of quality controls. A separate GAO analyst verified each of the data elements collected. Our content analysis captured all deficiencies cited in psychology services reviews and deficiencies related to pharmacy and psychiatry in health services reviews. A GAO analyst independently created categories for the psychology and health services deficiencies and then sorted the deficiencies into the applicable categories. A separate GAO analyst verified the categorization of the psychology and health services deficiencies. For psychology services program review reports, we also received and reviewed additional documentation from BOP including (1) institutional responses to the program review’s findings (which include a corrective action plan to address any identified deficiencies), (2) the Program Review Division’s acceptance of the institution’s submitted corrective actions, (3) the institution’s submission of results from a follow-up audit conducted by institution staff to ensure that deficiencies were resolved, and (4) the Program Review Division’s closure of the program review. According to this additional documentation, we determined whether institutions were submitting their corrective action plans and follow-up audit results in accordance with BOP policy. We also reported illustrative examples of deficiencies and the corrective action plans that institutions developed to address deficiencies. We did not review this additional documentation from the health services program review reports because most of the deficiencies cited in the reports were unrelated to inmate mental health care. To understand the accreditation process for BOP institutions, we interviewed officials and reviewed standards from the American Correctional Association (ACA) and The Joint Commission, the two accrediting organizations for BOP institutions. We also interviewed an official from the National Commission on Correctional Health Care, another organization that accredits correctional health care programs, to understand differences in standards among the three accrediting organizations. We conducted a content analysis of the most recent ambulatory care accreditation reports from ACA and The Joint Commission for the same random sample of institutions that we used for the analysis of program reviews. We reviewed 37 Joint Commission ambulatory care accreditation reports.care accreditation reports, we focused on findings related to psychiatry and pharmacy care, as these were the areas covered by the review most applicable to inmate mental health care. The Joint Commission’s accreditation is for those services provided by the institution’s health services unit and does not include psychology services. Because of the level of detail presented in the reports, findings related to pharmacy care are not specific to the administration of psychotropic drugs. We also reviewed the findings from The Joint Commission’s behavioral health accreditation reports for the four BOP institutions with behavioral health accreditations. For our review of the ambulatory We interviewed officials from the union representing BOP correctional workers who are involved in contract negotiations to gain an understanding of the negotiation process required to institute changes to mental health-related policies. Finally, to obtain context about correctional mental health programs, we interviewed correctional mental health experts, including representatives from the American Psychological Association, academics, and practitioners who have worked in the correctional setting. While the views of these experts are not representative of all correctional mental health experts, they provided us with perspectives on BOP’s inmate mental health care system. To address the question about the extent to which BOP tracks the costs of providing mental health services to BOP inmates in contract facilities, and the extent to which BOP assesses whether these facilities meet contract requirements and established accreditation standards for inmate mental health services, we reviewed the contracts for all of the 15 contract facilities that housed BOP inmates during the course of our review to see what cost information they included. We also reviewed federal guidance from the Office of Management and Budget on recommended contracting mechanisms for federal agencies. We spoke with BOP officials responsible for procurement and the contracting process as well as each of the three primary contractors that operate 14 of BOP’s 15 contract facilities, and one of the subcontractors that provides mental health services for one of the primary contractors to discuss the extent to which they track the costs of providing mental health services to inmates in contract facilities. One primary contractor that managed 1 of BOP’s 15 contract facilities declined to participate in interviews because the contract was terminated as of May 31, 2013. To understand BOP’s requirements for the provision of mental health services and oversight activities for the contract facilities, we reviewed each contract for the 15 contract facilities. We also reviewed BOP’s Quality Assurance Plan, the contractors’ Quality Control Plans, and the ACA and Joint Commission accreditation standards to identify the policies and procedures related to mental health that guide the various reviews of contract facility operations. We also reviewed the most recent contract facility monitoring reports, and ACA and Joint Commission accreditation review reports to determine the deficiencies identified that may be related to mental health. We also met with officials from BOP’s Administration Division, Privatization Management Branch, and Program Review Division who are responsible for overseeing contracts to understand each unit’s oversight activities, how the units communicate with each other and with contract facility staff, and how BOP contracts are structured. In addition, we spoke with officials from ACA and The Joint Commission to understand their accreditation standards and oversight activities. We also interviewed officials from each of the three primary contractors that operate 14 of BOP’s 15 contract facilities as discussed above, as well as one subcontractor that provides mental health services for one of the primary contractors, to discuss the types of mental health services provided and internal and external oversight mechanisms for contract facility operations. In addition, we conducted site visits to two contract facility, one to observe the Contract Facility Monitoring (CFM) review process, and another to observe operations. We chose the first facility because the review was being conducted at the facility during the time frame of our study. We chose the second because it was a fairly new contract, which would provide a comparison to the first facility with a more established contract. While the selection of these two contract facilities does not facilitate generalizations, our observations and conversations with staff provided important context on the operations of privately operated prisons. To understand the deficiencies BOP identified in its contract facility monitoring reports that may be related to mental health, we performed a content analysis of all of the most recent reports from BOP’s 15 contract facilities’ monitoring reviews to determine the most frequent findings related to mental health. For our analysis, we determined that a deficiency may be related to mental health if it is related to pharmacy, psychiatry, or psychology services within the contract facility. We also reported illustrative examples of deficiencies. Similarly, for each of the 15 contract facilities, we analyzed the most recent accreditation reports from the ACA and Joint Commission reviews to determine the most prevalent findings related to mental health services. To understand the types of mental health services that are being assessed and the extent to which BOP’s review differs from the contract facility’s internal reviews, we obtained the Quality Control Plan from the subcontractor and two of the primary contractors and compared these plans with BOP’s Quality Assurance Plan, which is used to guide the contract facility monitoring process. One contractor was not willing to provide its plan because it considers the information to be proprietary and confidential. We conducted this performance audit from April 2012 to July 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. Appendix II: Bureau of Prisons’ Psychology Treatment Programs’ Descriptions and Numbers of Participants for FY 2008 and 2012 Program description NR DAP is available to inmates at every institution. The purpose of the NR DAP program is to afford all inmates with a drug problem the opportunity to receive drug treatment. NR DAPs are conducted for 90- 120 minutes per week for 12 to 24 weeks. RDAP targets inmates who volunteer for drug abuse treatment and have a verifiable and diagnosable substance use disorder. Inmates in RDAP complete a minimum of 500 hours of programming in 9 to 12 months. BOP also offers RDAPs for inmates with co-occurring substance use disorders and serious mental health disorders. BOP may reduce, by up to 1 year, the sentence of an inmate convicted of a nonviolent offense who successfully completes RDAP. Challenge Program The Challenge Program is a residential program designed to facilitate favorable institutional adjustment and successful reintegration into the community through the elimination of drug abuse or the management of mental illnesses. The Challenge Program targets high-security inmates with a history of drug abuse or a major mental illness. The BRAVE program is a residential program intended to facilitate favorable institutional adjustment and reduce instances of misconduct. The program encourages inmates to interact in a positive manner with staff members and take advantage of opportunities to engage in self- improvement during their incarceration. BRAVE targets inmates who are 32 years old or younger, with a sentence of at least 60 months, and who are serving a sentence with BOP for the first time. BRAVE includes 350 hours of programming over 6 months. Habilitation Program The Habilitation Program was a residential program that targeted high- security, low-functioning inmates who could not successfully adapt to a penitentiary environment, but who may have the ability to function well at medium-security level institutions. The Habilitation Program was discontinued in fiscal year 2012. The Skills Program is a residential program designed for inmates with significant cognitive limitations and psychological difficulties that create adaptive problems in prison and in the community. Inmates participating in the program must have a serious mental illness or behavioral disorder and a need for intensive treatment services. STAGES is a residential program that provides treatment to male mental health care level 3 inmates with a primary diagnosis of borderline personality disorder. Individuals with borderline personality disorder have long-term patterns of unstable or turbulent emotions that often result in impulsive actions and chaotic relationships with other people. The program is designed to increase the time between the inmate’s disruptive behaviors and foster living in the general population or a community setting. The program includes 12 to 24 months of residential treatment. Program description Step-Down Units provide an intermediate level of mental health care for seriously mentally ill inmates. These residential units provide intensive treatment for inmates released from psychiatric hospitalization or may function as Step-Up Units to intervene and house inmates before they require hospitalization. The Resolve Program is a trauma treatment program for female inmates. The Resolve Program consists of two components: a psycho- educational workshop and a nonresidential program for inmates with trauma-related disorders. SOTP-NR is a voluntary, moderate-intensity program designed for low- to moderate-risk sexual offenders. Inmates in SOTP-NR must complete no less than 144 hours of programming over the course of 9 to 12 months. SOTP-R is a voluntary, high-intensity program designed for high-risk sexual offenders. Inmates in SOTP-R must complete no less than 400 hours of programming over the course of 12 to 18 months. The Commitment and Treatment Program is a civil commitment program for persons certified as sexually dangerous persons. It is a civil commitment program for the confinement and treatment of persons deemed sexually dangerous by the court. The program was established in response to requirements from the Adam Walsh Child Protection and Safety Act of 2006. — = Program was not operating. NA= Not available The STAGES Program was activated in fiscal year 2012. The number of inmates participating in the Sex Offender Management Programs includes those inmates participating in both SOTP-NR and SOTP-R. Participation in the Commitment and Treatment Program is defined as the number of new participants each year. Therefore, the numbers represent the number of new inmates admitted each year and do not reflect the total number of inmates in the program for each fiscal year. The Bureau of Prisons (BOP) conducts program reviews of each program area at all of the agency’s institutions. According to the results of the program review, institutions receive one of five ratings: superior, good, acceptable, deficient, and at risk. The scores indicate the institution’s level of compliance with BOP’s policies and strength of internal controls. We reviewed the most recent psychology services and health services internal program review reports for the 47 BOP institutions in our sample. We found that 89.4 percent of the institutions were rated as good or superior in the psychology services program reviews, compared with 76.6 percent rated as good or superior in the health services program reviews. Table 7 provides information on the rating levels garnered by the institutions. We also analyzed the most frequently cited deficiencies identified in the psychology services and health services reports that we reviewed. Among the findings from the psychology services program review reports, 10 institutions had a deficiency related to care provided to inmates in a residential treatment program. Table 8 shows the most frequently cited deficiencies in the psychology services and health services program review reports that we reviewed. The table also includes examples of deficiencies in each category. Following a program review, BOP institutions are required to submit a corrective action plan to the Program Review Division addressing all reported deficiencies. Institutions must submit these plans within 30 days of when the program review report is issued. Table 9 provides examples of corrective actions submitted by BOP institutions in response to deficiencies identified in psychology services program review reports. BOP requires that all of its institutions obtain accreditation from the American Correctional Association (ACA) and that all institutions with a medical care level of 2 or higher obtain accreditation for ambulatory care from The Joint Commission. We reviewed the most recent accreditation reports from ACA and The Joint Commission for our sample of 47 BOP institutions. Only 37 of the BOP institutions had Joint Commission accreditation reports because nine are medical care level 1 facilities and are not required to obtain Joint Commission accreditation and the final institution recently changed to a medical care level 2 institution but had not yet received its Joint Commission accreditation. In our review of the most recent ACA accreditation reports, we found one deficiency that although not directly related to a mental health standard, had a connection with mental health services. ACA reported that correctional officers in the special housing unit were not conducting required 30-minute checks of inmates that help ensure that inmates are not attempting suicide or harming themselves or others. The institution responded that it would reemphasize the importance of the checks and that lieutenants, who are generally responsible for the day-to-day staffing of correctional services, would check the logs on every shift to ensure the checks were taking place. The Joint Commission’s ambulatory care standards relate to all aspects of an institution’s health services. The Joint Commission accredits only those services at BOP institutions that are provided by the institution’s health services unit. Table 10 provides information on The Joint Commission findings at BOP institutions related to psychiatric care and pharmacy care. In our review of each of the recent Contract Facility Monitoring (CFM) reports for the 15 private facilities, we found four main policy areas where deficiencies that could be related to mental health care were cited at more than 1 facility—Inmate Classification and Program Review, Health Information Management, Patient Care, and Medical Designation and Referral Services for Federal Inmates (see table 11). We determined that these deficiencies may be related to mental health because they can involve mental health professionals, such as psychiatrists, psychologists or licensed professional counselors; pharmacy care, which can include psychotropic medications; or health information that may include information on mental health. Our analysis of the most recent ACA accreditation reports for the 13 contract facilities that have been reviewed found that all but one of the facilities were compliant with all ACA standards related to mental health services involving pharmacy care, and psychology and psychiatry services. The facility that was found not compliant with all of ACA’s mental health-related standards was as a result of the facility’s failure to develop and utilize a health care staffing plan and the reviewers’ related concerns about the mental health staffing levels at the facility. Our review of the most recent Joint Commission accreditation reports for each of the 13 contract facilities The Joint Commission reviewed found that 6 of the 13 were fully in compliance with the ambulatory care standards related to mental health services. The Joint Commission found the remaining 7 facilities to be either partially or insufficiently compliant with the ambulatory care accreditation standards related to mental health services (see table 12). In addition to the ambulatory care accreditation that contract facilities are required to obtain, 1 of the 7 facilities specifically chose to also be accredited on behavioral health standards, and that facility was found to be insufficiently compliant with three of those standards. Appendix VII: Bureau of Prisons’ Elements of Modified Therapeutic Communities Element of a modified therapeutic community Examples of standards contained in each element Community as method Inmates can verbalize the program philosophy. Feedback from the group is a routine intervention. Treatment plans and interventions are directly tied to the inmate and his or her peers. Group sessions are dominated by peer interactions. The unit is separate from the general population. The community philosophy is posted. Group rooms and unit are decorated with treatment themes. All participants are involved in sanitation. Participants are engaging in positive behaviors. A team approach to treatment is used. Inmates can verbalize the rules and norms of the modified therapeutic community. Problem behaviors are dealt with as a treatment team and by the group. Incentives are based on achievement of personal growth. Staff and inmates display mutual respect in their interactions. Staff model appropriate communications and behavior. Staff meet weekly for scheduled time as a treatment team. Record keeping should provide a story about the inmate with obvious individuality. Staff conduct daily rounds in the community. Staff function as a team. Supervision is skill focused and conducted through regular, direct observation. Supervisors provide training and conduct semi-annual needs assessments of each staff member. Staff have determined expectations for participants for each treatment phase. Participants can describe the behaviors expected of them as well as prohibited behaviors. Participants can describe their treatment goals and treatment plan. Inmates and staff provide an orientation to new inmates to the unit. Element of a modified therapeutic community Examples of standards contained in each element Community activities A programming schedule is posted. Senior participants role model and actively seek to help junior participants. Community meetings are held daily, and all staff are present whenever possible. Homework and group projects are interactive in nature and require all to participate. Inmates receive journals and use them sequentially. Inmates complete journals during nongroup time and have them reviewed in group. Journal concepts are evident in all aspects of the program. Staff test inmate behavior, not just knowledge. Small therapy groups include participants from every phase. Participants remain in the same process group with the same facilitator throughout treatment. Farewell and welcome rituals are utilized for incoming and departing group members. Group sessions include discussions and expressions of painful emotions in a prosocial manner. Sessions are dominated by peer interactions. Community jobs are described, posted, and selected based on therapeutic need. Participants are able to describe their jobs and how they relate to the modified therapeutic community and recovery. Staff monitor job assignments and work groups in the community and use incentives and sanctions to promote positive behavior and reduce negative behavior. In addition to the contacts named above, Joy Booth, Assistant Director; Dawn Locke, Assistant Director; Eva Rezmovic, Assistant Director; Helene Toiv, Assistant Director; Lori Achman; Pedro Almoguera; Carl Barden; Carol Cha; Billy Commons; Katherine Davis; Eric Hauswirth; Valerie Kasindi; Amanda Miller; Julie Silvers; Julia Vieweg; and William Woods made significant contributions to this report. | BOP is responsible for the care and custody--including mental health care--of more than 219,600 federal inmates. BOP identifies and treats inmates' mental health disorders, and has procedures in place to assess the provision of mental health services in its 119 facilities, and 15 private prisons operating under contract. GAO was requested to provide information on BOP's costs and oversight of inmate mental health services. This report addresses: (1) BOP's costs to provide these services; (2) the extent to which BOP assesses whether its institutions comply with BOP policies for providing services; and (3) the extent to which BOP tracks the costs of providing mental health services to inmates in contract facilities, and assesses compliance with contract requirements. GAO analyzed obligated funds for fiscal years 2008 through 2012 for the two BOP divisions responsible for mental health services at BOP institutions, examined the most recent review reports for a random sample of 47 BOP institutions and all 15 contract facilities, examined BOP's policies, and interviewed BOP officials. During a 5-year period--fiscal years 2008 through 2012--costs for inmate mental health services in institutions run by the Bureau of Prisons (BOP) rose in absolute dollar amount, as well as on an annual per capita basis. Specifically, mental health services costs rose from $123 million in fiscal year 2008 to $146 million in fiscal year 2012, with increases generally due to three factors--inmate population increases, general inflationary increases, and increased participation rates in psychology treatment programs such as drug abuse treatment programs. Additionally, the per capita cost rose from $741 in fiscal year 2008 to $821 in fiscal year 2012. It is projected that these costs will continue to increase with an estimated per capita cost of $876 in fiscal year 2015, due, in part, to increased program funding and inflation. BOP conducts various internal reviews that assess institutions' compliance with its policies related to mental health services, and it also requires institutions to obtain external accreditations. BOP's internal program reviews are on-site audits of a specific program, including two that are relevant to mental health services--psychology and health services. Most institutions in GAO's sample received good or superior ratings on their psychology and health services program reviews, but these reviews did not always occur within BOP-established time frames, generally due to lack of staff availability. When reviews were postponed, delays could be lengthy, sometimes exceeding a year, even for those institutions with the lowest ratings in previous reviews. Moreover, BOP has not evaluated whether most of its psychology treatment programs are meeting their established goals and has not developed a plan to do so. BOP is developing an approach for reporting on the relative reduction in recidivism associated with major inmate programs, which may include some psychology treatment programs. Using this opportunity to develop a plan for evaluating its psychology treatment programs would help ensure that the necessary evaluation activities, as well as any needed program changes, are completed in a timely manner. Further, BOP's program statements--its formal policies--related to mental health services contain outdated information. Policy changes are instead communicated to staff through memos. By periodically updating its program statements, BOP would be better assured that staff have a consistent understanding of its policies, and that these policies reflect current mental health care practices. BOP collects information on the daily cost to house the 13 percent of federal inmates in contract facilities, but it does not track the specific contractor costs of providing mental health services. The performance-based, fixed-price contracts that govern the operation of BOP's contract facilities give flexibility to the contractors to decide how to provide mental health services and do not require that they report their costs for doing so to BOP. BOP uses several methods to assess the contractors' compliance with contract requirements and standards of care. BOP conducts on-site reviews to assess the services provided to inmates in contract facilities, including those for mental health. BOP uses results from these reviews, as well as reports from external accrediting organizations, the presence of on-site monitors, and internal reviews conducted by the contract facility, to assess contractor compliance and to ensure that the contractor is consistently assessing the quality of its operations. GAO recommends that BOP (1) take steps to prioritize the completion of postponed program reviews, (2) develop a plan to evaluate treatment programs, and (3) develop and implement updated program statements. BOP concurred with the first and third recommendations and partially concurred with the second. GAO considered additional information provided by BOP about its plan to conduct evaluations and modified this recommendation accordingly. |
The Medicare Part D program offers beneficiaries an outpatient prescription drug benefit through various plan sponsors who offer coverage through drug plans, which may vary in terms of their benefits and costs. Enrollment in Part D consists of several steps and requires coordination among various organizations, such as CMS, plan sponsors, and SSA. If beneficiaries are not satisfied with certain aspects of the Part D program, they may file a complaint with CMS, a grievance with their respective plan sponsors, or they can file with both. CMS oversees the complaints and grievances processes and may rely on complaints and grievances data to undertake compliance actions against specific plan sponsors. The Medicare Part D benefit is provided through private organizations— such as health insurance companies—that offer one or more drug plans with different levels of premiums, deductibles, and cost sharing. Part D plan sponsors offer outpatient prescription drug coverage either through stand-alone prescription drug plans (PDPs) for those in traditional fee-for- service Medicare, or through Medicare Advantage prescription drug (MA-PD) plans for beneficiaries enrolled in Medicare’s managed care program, known as Medicare Advantage. In 2007, CMS entered into more than 600 individual contracts with about 250 plan sponsors to provide Part D benefits. Under these contracts, PDP sponsors offered about 1,900 individual plan benefit packages and sponsors of MA-PDs offered about 1,700. The majority of Part D enrollees, about 70 percent, were enrolled in PDPs during this time. Enrollment across contracts varies widely, and is highly concentrated—the 4 largest contracts accounted for nearly 40 percent of total Part D enrollment in 2007. Beneficiaries enroll in the Part D program when they first become eligible for Medicare or during an annual coordinated election period and, once enrolled in a drug plan, typically have one opportunity each year to change their plan selection. Processing a Part D enrollment involves multiple, timely, and accurate electronic data exchanges among federal agencies, private health plans, and pharmacies. For instance, data exchanges occur between plan sponsors and CMS to verify benefit eligibility. Pharmacies rely on this information to ensure that payments for beneficiaries filling their prescriptions are processed appropriately. During the enrollment process, beneficiaries choose one of three options for paying their share of their Part D premiums—direct billing, automated withdrawal from financial accounts, or automatic deductions from social security payments, called premium withholds. As of January 2008 about 20 percent of Part D enrollees—4.8 million beneficiaries—opted to have premiums withheld from their social security payments, which requires coordination among plan sponsors, CMS, and SSA. When a beneficiary elects this option, CMS provides enrollment and payment information it receives from plan sponsors to SSA for processing. SSA then deducts premium amounts from beneficiaries’ monthly social security payments and provides CMS with information on the amount of premiums it deducted in order for CMS to pay the appropriate plan sponsors. Beneficiaries can express dissatisfaction with any aspect of the Part D program, other than coverage determinations, by filing a complaint with CMS or filing a grievance directly with their respective plan sponsors (see fig. 1). The processes for resolving complaints and grievances are independent of one another and the status of individual complaints and grievances is tracked separately. Although CMS encourages beneficiaries to first file a grievance with their respective plan sponsors, a beneficiary can choose to seek resolution by directly contacting CMS first to file a complaint or by filing a complaint and grievance simultaneously. Beneficiaries typically file complaints by calling CMS’s 1-800-Medicare toll-free number or by contacting one of CMS’s 10 regional offices through telephone, fax, mail, or e-mail. For complaints filed through the toll-free number, customer service representatives (CSRs) enter details about the complaints into the 1-800-Medicare database, and assign the complaint to specific contracts administered by plan sponsors. CSRs also categorize the complaint in several ways, including by (a) the nature of the complaint using 20 categories and over 180 subcategories, such as whether the complaint relates to enrollment, pricing, or customer service; and (b) the complaint’s issue level or level of urgency, which corresponds to one of three issue levels-—immediate need, urgent, or routine—depending on the beneficiary’s risk of exhausting his or her medication supply while resolution of the complaint is pending. The information included in the 1-800-Medicare database is uploaded each day into the CTM—CMS’s centralized database of complaints information. For complaints filed with the CMS regional offices, regional staff similarly categorize complaints by their nature and issue level and input them directly into the CTM. Most complaints in the CTM are assigned to specific contracts administered by plan sponsors who utilize their own staff to resolve beneficiaries’ concerns. For complaints beyond the control of plan sponsors, such as those involving premium withholding and certain enrollment issues, plan sponsors request, through the CTM, that CMS resolve the complaint. Once complaints are resolved, the resolution date must be entered into the CTM. CMS requires that immediate need complaints be resolved within 2 calendar days, and encourages that urgent and routine complaints be resolved within 10 and 30 calendar days respectively. According to CMS policy, beneficiaries should be notified once their complaints are resolved. Beneficiaries also have the right to express dissatisfaction by filing a grievance directly with their plan sponsors via telephone, fax, mail, or e-mail. Plan sponsors enter information about the grievances in their internal tracking systems and assign individual grievances to their staff, who work to resolve them. Plan sponsors are required to resolve grievances within 30 days, but can allow for a 14-day extension in some cases. Plan sponsors must inform beneficiaries of the outcome of the grievances process, and beneficiaries who are dissatisfied may choose to file a complaint with CMS on the same issue. CMS is responsible for overseeing the Part D program, which includes overseeing the complaints and grievances processes and ensuring that beneficiaries’ problems are addressed. To oversee the complaints process, CMS staff monitor data within the CTM, including calculating complaint rates and resolution times for each Part D contract administered by a plan sponsor. Specifically, CMS monitors resolution time frames to determine whether plan sponsors resolve complaints assigned to their contracts within applicable time frames. To aid its oversight of the grievances process, CMS requires plan sponsors to categorize grievances into 1 of 11 categories, which differ from CTM categories, and submit quarterly reports for each of their contracts on the number of grievances by category (see app. I). CMS uses these data to calculate grievance rates to identify plan sponsors with outlier contracts. According to CMS officials, the agency can initiate a range of actions against plan sponsors it determines have noncompliant processes (see fig. 2). For example, CMS can make a formal compliance call to plan sponsors to discuss identified issues. However, if CMS’s monitoring indicates that plan sponsors are not taking corrective actions in response to the compliance call, CMS may pursue more stringent compliance actions. For example, the agency may send formal written notices of noncompliance, which notify plan sponsors of their noncompliance and explicitly inform them that they must address the problems. For plan sponsors that remain noncompliant, CMS can send warning letters that notify plan sponsors that their performance is unacceptable; request that plan sponsors submit written corrective action plans that show formal plans to come into compliance; or audit the plan sponsors. In the most extreme cases of noncompliance, CMS can impose intermediate sanctions, which include suspension of enrollment, payment, or marketing activities. CMS can also impose a civil monetary penalty or terminate or decline to renew a Part D contract. Most complaints related to enrollment issues and while both the number of complaints and the time needed to resolve them decreased as the Part D program matured, ongoing challenges continued to pose problems for some beneficiaries. The majority of complaints were related to delays and errors in processing beneficiaries’ enrollment and disenrollment requests and were resolved. In addition, a small proportion of complaints involved cases where beneficiaries were at risk of depleting their medication supplies. Further, trends in complaints data suggest that beneficiaries reported fewer complaints over time and their problems were resolved more quickly as they, plan sponsors, and CMS gained experience with the Part D benefit. However, the complaints data also revealed some ongoing challenges facing the program, including problems related to data system coordination between CMS and plan sponsors and between CMS and SSA, which continued to present difficulties for some beneficiaries. During the 18-month period from May 1, 2006, through October 31, 2007, 629,792 complaints were filed with CMS—an average monthly complaint rate of 1.5 complaints per 1,000 beneficiaries. The majority of complaints—about 63 percent—were related to problems beneficiaries experienced when trying to enroll in or disenroll from a plan, and about 21 percent were related to pricing and coinsurance issues. The remaining 15 percent of complaints were spread among the other 18 CTM categories, and included complaints related to customer service and marketing of plans (see fig. 3). The vast majority—about 73 percent of the enrollment and disenrollment complaints, or 290,000 complaints—were assigned to five CTM subcategories and were related to delays and errors in processing beneficiaries’ enrollment or disenrollment requests. According to CMS officials, such problems occurred when enrollment records between CMS and plan sponsors differed or contained errors, and thus extra time was needed for CMS and plan sponsors to identify and correct the errors and ensure beneficiaries were enrolled in their plans of choice. Approximately 47,000 (or more than 35 percent) of the complaints that were categorized as pricing and coinsurance issues were related to beneficiaries who experienced problems having their premiums automatically deducted from their social security payments. Specifically, these complaints included cases in which the wrong amounts were deducted from beneficiaries’ social security payments, the correct amounts were being deducted but were not forwarded to the appropriate plan sponsor for payment, or premiums had not yet been deducted when beneficiaries expected otherwise. According to CMS officials, many of the complaints related to accurately deducting premiums and forwarding payments to plan sponsors were due to problems with data exchanges between CMS and SSA. In addition, CMS officials indicated that beneficiaries are not always aware that it can take several months for SSA to process a request for premium deductions; therefore, they may file complaints when premiums are not immediately deducted from their social security payments. Many of the remaining pricing and coinsurance complaints were filed because some beneficiaries complained they were charged too high of a coinsurance amount for their prescriptions. In addition to complaint categories, the CTM also contains information on the “issue level” of complaints (immediate need, urgent, routine), and the dates complaints were filed and resolved. We found that about 73 percent of complaints were unrelated to beneficiaries at risk of depleting their supplies of medication and were considered routine. About 20 percent of complaints were considered immediate need, meaning beneficiaries had between 0 and 2 days of medication remaining, and about 7 percent of complaints were considered urgent, meaning beneficiaries had 3 to 14 days of medication remaining. Further, using CTM dates, we found that 99 percent of all complaints filed between May 2006 and October 2007 were resolved, on average, in 25 days. Although immediate need and urgent complaints were resolved, on average, much more quickly—12 days for immediate need complaints and 16 days for urgent complaints—these average resolution times still exceeded CMS’s resolution time frames. Finally, we found that 44 percent of all complaints involved issues, such as those related to premium deductions from social security payments, which were beyond the control of plan sponsors, and thus required CMS intervention for resolution. When compared to complaints that plan sponsors could resolve independently, these complaints took, on average, twice as long—34 days compared to 17 days-—-to resolve. According to CMS officials, the lengthier resolution times for complaints requiring CMS intervention reflected the fact that these complaints were often related to delays associated with reconciling data between the agency and plan sponsors or SSA. Trends in the complaints data indicate that beneficiaries reported fewer problems and their problems were resolved more quickly. For example, while the average monthly complaint rate was 1.5 per 1,000 beneficiaries during the period, the monthly complaint rate declined by 74 percent from its peak of 2.86 complaints per 1,000 beneficiaries in May 2006 to .73 in October 2007 (see fig. 4). In addition, the average time needed to resolve beneficiaries’ complaints declined by 73 percent, from a peak of 33 days in July 2006 to 9 days in October 2007 (see fig. 5). The decline in average resolution time for complaints CMS resolved during this period was even more pronounced, falling from 51 days to 11 days. According to CMS officials, the decline in monthly complaint rates and average resolution times reflected improved implementation of the Part D program since the initial election period, and improved familiarity of the program among beneficiaries, plan sponsors, and CMS itself. While trends in the complaints data highlighted declines in the monthly complaint rate and average resolution times, they also revealed some ongoing challenges facing the program. Specifically, the data confirmed information-processing issues related to beneficiaries’ requests for enrollment changes and automatic premium withholds from their Social Security payments remained. For example, despite the trend in the overall complaint rate discussed earlier and as shown in figure 4, the complaint rate nearly doubled, from .72 in December 2006 to 1.40 in January 2007. This was due largely to a spike in the number of complaints related to delays or errors when CMS and plan sponsors processed beneficiaries’ enrollment and disenrollment requests following the end of the 2007 annual coordinated election period. More specifically, according to CMS officials this increased complaint rate was due largely to the sheer volume of transactions processed during this time each year. The officials told us that while they expect to continue to see an increase in complaints each year following the annual coordinated election period, they expect the magnitude of such increases to diminish as the program matures. In addition, the general trend of increasing complaint rates from January 2007 through May 2007 reflected increasing numbers of complaints related to beneficiaries’ requests for automatic withholding of premiums that can occur when beneficiaries elect to change plans. According to CMS officials, the timing of when SSA processes the premium withhold request may affect the accuracy of the deduction, and result in complaints. For example, as required by law, SSA must process cost-of-living adjustments for beneficiaries’ social security payments on an annual basis, and according to SSA, they begin this processing in November of each year. To process these adjustments for recipients who are also enrolled in Part D and have chosen the premium withholding option, SSA must rely on CMS enrollment information to determine the amount to deduct for Part D premiums. However, because beneficiaries may have elected to change plans during the Part D annual coordinated election period, which runs from November 15 through December 31 of each year, SSA’s calculations may not account for premium differences related to beneficiaries’ subsequent enrollment changes. CMS officials indicated that there is no easy solution to the data coordination and timing issues between CMS and SSA at the root of this problem. However, CMS and SSA have formed several work groups to identify improvements, including improved data system exchanges, which could help reduce complaints related to this issue. In the interim, CMS has undertaken outreach efforts to plan sponsors and beneficiaries to inform them of potential delays related to requests for automatic premium withholds, letting them know that such requests may take several months to process. Finally, while we found that CMS and plan sponsors resolved complaints, including immediate need and urgent complaints, more quickly as the Part D program matured, a substantial percentage of such complaints were not resolved within CMS’s time frames. Specifically, during the period from May 2006 through October 2007, 53 percent of immediate need complaints (66,001) and 27 percent of urgent need complaints (10,476) were not resolved within the applicable time frames. Further, progress in meeting the time frames, particularly for immediate need cases, largely stagnated from March 2007 to October 2007, as the proportion of cases not meeting the time frame hovered around 30 percent each month (see fig. 6). Grievances data reported by plan sponsors for their contracts contained limitations and anomalies and did not yield sufficient insight into beneficiaries’ experiences with Part D. In contrast to the data CMS collects on complaints, CMS only requires plan sponsors to submit quarterly reports on the total number of grievances they received in 11 CMS-defined categories for each of their Part D contracts. Therefore, CMS does not have information about whether a grievance is related to a beneficiary’s medication supply or whether it was ultimately resolved. As a result, we were unable to determine the extent to which beneficiaries’ grievances related to medication supply issues, the extent to which plan sponsors were resolving grievances, or whether they were resolving them in a timely manner. In addition to their limited nature, we identified a number of anomalies in the grievances data that raise questions about their accuracy and usefulness in drawing conclusions about beneficiaries’ experiences with Part D. Among these anomalies, we found that grievances were concentrated in a small number of contracts, and at a rate that was significantly disproportionate to their respective enrollments, raising questions about whether plan sponsors were reporting grievances data for their contracts in a comprehensive and consistent manner. For example, in 2006 plan sponsors reported grievances data for 522 contracts, 19 of which accounted for 80 percent of all grievances but only 49 percent of enrollment. The concentration was more pronounced in 2007, when 11 of the 604 contracts for which grievances data were reported accounted for 90 percent of all grievances but only 42 percent of enrollment. We also found significant variations in the number of grievances reported for contracts with similar levels of enrollment, and in the number of grievances filed between 2006 and 2007. For example, in 2006, while the two largest contracts each averaged about 3 million enrollees, one contract had more than 140,000 grievances, for an average monthly grievance rate of 4.22 per 1,000 beneficiaries, while the other contract had fewer than 4,000 grievances, for a grievance rate of .11 per 1,000 beneficiaries. In addition, in contrast to the decline in the monthly complaint rate that we identified, available data show an increase in the average monthly grievance rate between 2006 and 2007. Specifically, while a total of 310,215 grievances were reported in 2006, for an average monthly grievance rate of 1.23 per 1,000 beneficiaries, there were a total of 726,440 grievances reported for the first 3 quarters of 2007 alone, for a rate of 3.38 per 1,000 beneficiaries. We found that this variation was predominately due to differences in the number of grievances reported for three contracts, which had a total of 70 grievances for 2006, and 495,961 for the first 3 quarters of 2007, despite having nearly identical levels of total enrollment in each year. Finally, the proportion of grievances assigned to categories varied significantly between 2006 and 2007, a change that is inconsistent with trends in the complaints data. For example, while over 60 percent of the 2006 grievances were assigned to the enrollment and disenrollment category—a percentage generally similar to the complaints data filed with CMS—they assigned approximately 5 percent of the 2007 grievances to this category. In commenting on a draft of this report, CMS indicated that the variation between the two years was likely due to data collection issues that existed during the early implementation of Part D. For example, CMS suggested that the grievances data reported by plan sponsors in 2006 included nongrievances or erroneously categorized grievances in the enrollment and disenrollment category. While CMS has a systematic oversight process for complaints, it lacks a similar oversight framework for plan sponsor-reported grievance processes. To oversee the complaints process, CMS has established a framework consisting of several key elements, which include standard operating policies and procedures and a centralized repository of complaints data, and staff that routinely review and assess the complaints data and take actions against plan sponsors it determines have noncompliant processes. In contrast to complaints, CMS’s oversight of plan sponsors’ grievances processes has been more limited. CMS developed guidance for classifying grievances, required plan sponsors to report summary grievances data for each of their Part D contracts, and periodically reviewed these data. However, limitations in these oversight elements have resulted in plan sponsors reporting incomplete and inconsistent data to CMS, and there is little assurance that beneficiaries’ grievances are resolved or that they are resolved in a consistent fashion. To ensure a level of consistency in how complaints are tracked and resolved, CMS developed standard operating procedures for both its caseworkers and plan sponsors. These procedures provide guidance on how complaints should be entered into the CTM as well as how caseworkers and plan sponsors should resolve them. For example, CMS’s guidance includes requirements to enter key dates for each complaint, such as the dates complaints were filed and resolved, and information about how individual complaints should be categorized by their nature and issue level. Specifically, CMS’s guidance to plan sponsors provides information about how they can utilize the CTM to access, review, and document case resolution, or request CMS assistance in the event they are unable to achieve resolution. Through its guidance, CMS has been able to ensure consistency in terms of the information the CTM contains about each complaint. Further, it has allowed the agency to create, through the CTM, a reliable source of data from which it can monitor the complaints process. CMS also dedicated significant resources to ensure that beneficiaries’ complaints are addressed. Specifically, CMS officials estimated that several hundred staff members throughout the agency have some responsibility for the oversight of the complaints process. For example, some regional staff members are responsible for reviewing plan sponsors’ case notes included in the CTM to verify their resolution of complaints or for directly resolving complaints beyond the control of plan sponsors. In addition, other CMS staff members routinely analyze CTM data to identify trends in complaint rates and track issues related to the performance of individual plan sponsors, such as resolution times. For example, on a quarterly basis, CMS staff members analyze complaint rates for individual contracts both by overall complaints and by three CTM categories, and then compare complaint rates among contracts. Based on this comparison, CMS staff assign a star rating to each contract. Further, CMS has dedicated staff in the Office of the Medicare Beneficiary Ombudsman (OMO) who utilize complaints data to identify systemic problems affecting the implementation of Part D. When OMO staff identify problems, such as those related to delays in processing enrollment requests and withholding premiums from Social Security payments, they alert high-level CMS managers, who in turn are responsible for initiating corrective actions. CMS officials informed us that the agency may rely on a variety of actions, ranging from formal compliance calls to the termination of a plan sponsor’s Part D contract when it identifies a plan sponsor that is noncompliant with requirements for the complaints process. CMS officials indicated that their use of such actions has been limited because informal conference calls with plan sponsors have frequently been sufficient to correct problems identified through complaints. For example, although CMS officials said that they would require plan sponsors with contracts that received a one or two star rating for 2 consecutive quarters to submit a business plan describing how they would improve their performance, they have never had to do so because their informal calls to such plan sponsors have thus far been sufficient to correct problems. However, in some cases, CMS has taken more stringent actions. For example, as of February 2008, CMS had issued 144 notices of noncompliance and 22 warning letters, and initiated 3 audits against plan sponsors that did not meet their contractual performance requirement to resolve 95 percent of immediate need complaints within 2 days.45, 46 Additionally, CMS had not terminated any plan sponsors’ Part D contract or levied civil monetary penalties in response to issues related to compliance with the complaints process. To determine compliance with the performance requirement, CMS measures the number of days that have elapsed between the date the complaint was assigned to the contract and when it was resolved. CMS officials noted that they will consider developing additional performance requirements, such as a requirement related to complaint rates, in the future. However, the officials noted that they would want to examine data trends from at least a 3-year period before doing so. medication. CMS also does not have a mechanism to verify that plan sponsors have effectively resolved complaints. While CMS caseworkers review plan sponsors’ notes in the CTM, they do not routinely take a sample of complaints and follow up with beneficiaries to validate the plan sponsors’ resolution actions. CMS officials indicated that the agency does not have the resources to perform such a comprehensive check and stated that beneficiaries who are dissatisfied with their plan sponsor’s resolution could file another complaint directly with CMS. In contrast to complaints, CMS’s oversight of plan sponsor grievances processes has been more limited. CMS provided plan sponsors with general guidance for determining whether beneficiaries’ problems were grievances or coverage determinations, which are addressed through a separate process. CMS also provided plan sponsors with time frames for resolving grievances, periodically reviewed plan sponsor grievances data, and began auditing plan sponsors’ grievances processes in 2007. However, although CMS’s guidance to plan sponsors included examples of how they could classify beneficiaries’ problems, several plan sponsors we interviewed said that this guidance was not detailed enough and raised concerns about whether plan sponsors were accurately differentiating among inquiries (i.e., general questions about the Part D program), grievances, or coverage determinations. CMS officials acknowledged that some plan sponsors have incorrectly classified inquiries as grievances. Further, in its 2007 audits of plan sponsors’ grievances processes, CMS found numerous cases where plan sponsors did not correctly differentiate between grievances and coverage determinations, supporting plan sponsors’ concerns about the adequacy of the existing guidance. Such confusion about how to classify grievances increases the likelihood that plan sponsors report erroneous or inconsistent information to CMS and that they rely on the wrong processes to address beneficiaries’ concerns. CMS does not require plan sponsors to report certain information on grievances for each of their Part D contracts, such as resolution dates, that is essential for determining whether beneficiaries’ grievances are being resolved, and devotes few resources to reviewing what plan sponsors have reported for their contracts. Instead, on a quarterly basis, each plan sponsor reports the total number of grievances for 11 categories for each of its contracts. CMS officials also could not explain many of the anomalies we identified in the grievances data, such as substantial variation in the enrollment category from 2006 to 2007 and considerable variation in the grievance rates between contracts with similar levels of enrollment. Further, they acknowledged that they had not undertaken efforts to review the data in detail or to assess their overall reliability. In fact, more than a year into the program, CMS officials were still uncertain as to whether grievances had been reported for all contracts, and as of May 2008, agency analysis was limited to calculating annual grievance rates for each contract that did report grievances. CMS officials recognized that their efforts to oversee the grievances process have been limited, as they have chosen to focus their attention on other oversight issues such as appeals and coverage determinations and have devoted resources to program implementation issues, such as enrollment of dual-eligible beneficiaries. In the event that plan sponsors are not properly responding to beneficiaries’ grievances, CMS officials stated that the issues could be resolved through the complaints process. Therefore, by focusing its attention largely on complaints, the agency expressed confidence that plan sponsors are addressing beneficiaries’ issues. While the agency strongly believes in providing plan sponsors the latitude to implement their individual grievances processes, CMS expects to devote more resources to the oversight of grievances processes as the program matures. January 1, 2006, marked a new era in the Medicare program as the federal government began offering outpatient prescription drug coverage to eligible Medicare beneficiaries. The program is currently in its third year of operation, and millions of individuals have chosen to enroll. While trends in complaints data suggest that CMS and plan sponsors have improved program operations over time, lingering operational issues continue to pose challenges to some beneficiaries. This has hindered their ability to enroll in their plans of choice, have their premiums accurately deducted from their social security payments, or ensure that their problems related to critical medication supply issues are resolved in a timely manner. While CMS is taking action to address some of these operational issues related to complaints, its continued effort to address these operational challenges will be key to achieving further improvement. Furthermore, CMS does not have reliable grievances data to identify problems and needed improvements and ultimately ensure that beneficiaries’ concerns are addressed. This is particularly important given that CMS encourages beneficiaries to utilize the grievances process as their first line of redress when trying to resolve problems. Without reliable grievances data, CMS cannot ensure that plan sponsors are fulfilling their obligations and provide a full assessment of beneficiaries’ experiences with the program. To improve oversight of the Medicare Part D grievances process, and provide added assurance that beneficiaries’ grievances are being resolved, we recommend that CMS undertake efforts to improve the consistency, reliability, and usefulness of grievances data reported by plan sponsors for each of their contracts. Such efforts include enhancing its existing guidance for determining whether beneficiaries’ problems are grievances, requiring plan sponsors to report information regarding the status and issue level of grievances, and conducting systematic oversight of these data. We provided a draft of this report for comment to the Administrator of CMS. In its written comments (see app. II.), CMS remarked that our report did an “impressive job” describing the complex processes employed to monitor complaints and grievances regarding Medicare Part D. The agency concurred with the report’s recommendation to undertake efforts to improve the consistency, reliability, and usefulness of grievances data reported by plan sponsors for each of their contracts, and highlighted steps it already has taken to implement it. CMS took issue with the report’s conclusion that its oversight activities were focused almost exclusively on resolving complaints with little attention devoted to plan sponsors’ grievances processes, and noted that it felt some information, such as details concerning attestations made as part of sponsors’ Part D applications, had been omitted from our report. In addition to these comments, CMS provided detailed, technical comments that we incorporated as appropriate. Consistent with the recommendation to improve the consistency, reliability, and usefulness of grievances data, CMS noted that it has been working to provide Part D sponsors with more comprehensive guidance, enhance its oversight activities, and undertake corrective actions as needed. CMS stated that it recently provided guidance to plan sponsors regarding statutory definitions of grievances, coverage determinations, and appeals to facilitate accurate reporting of these data to CMS. For example, CMS cited its 2008 Reporting Requirements Technical Specifications, released this spring, as part of its efforts to further educate plan sponsors about the differences between coverage determinations and grievances. CMS further stated that it would consider adding data elements related to plan sponsors’ timeliness and quality of grievances resolution to its calendar year 2010 Reporting Requirements. CMS took issue with the report’s conclusion that its oversight activities were focused almost exclusively on resolving complaints with little attention devoted to plan sponsors’ grievances processes. The agency noted that it considered this conclusion misleading and felt it did not appropriately weigh all components of CMS’s oversight of plan sponsors’ grievances processes, such as plan sponsor audits, which include a review of grievances processes. In addition, CMS noted that the report did not consider a component of the Part D application, in which sponsors must attest that they will establish and maintain grievances processes in accordance with federal regulations. Finally, while agreeing with the report’s statement that the average resolution time for immediate need and urgent complaints exceeded CMS’s required time frames, CMS noted that its analysis of more recent complaints data demonstrated that case resolution time frames had improved and were trending towards CMS’s standard time frames. We recognize that CMS has audited the grievances processes of some plan sponsors, and the report highlighted key findings from these audits. While we believe CMS can rely on such audits to improve its oversight in the future, the agency did not begin auditing plan sponsors until 2007, and has yet to audit a number of plan sponsors. Further, while we recognize the attestation component of the application requirement, we believe that such attestations provide only limited assurance that beneficiaries’ grievances are being resolved appropriately. We do not believe CMS will be able to ensure that plan sponsors are abiding by their statements until CMS audits the grievances processes of all plan sponsors. Finally, we did not evaluate CMS’s findings on resolution time frames from its more recent data, because the data CMS used to conduct their analyses of resolution time frames were from a time frame beyond the scope of our work. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Kathleen King 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. Susan Anthony, Assistant Director; Jennie Apter; Shirin Hormozi; David Lichtenfeld; and Jennifer Whitworth made key contributions to this report. Beneficiaries and providers (including pharmacies and physicians) can file complaints with the Centers for Medicare and Medicaid Services (CMS) regarding Medicare Part D. Within the Complaint Tracking Module (CTM), beneficiary complaints are assigned to 14 categories and provider complaints to 6 categories, which are further delineated into 186 subcategories. CMS requires that plan sponsors report grievances based on 11 CMS-defined categories, which are somewhat similar to the CTM categories, but do not include subcategories. A description of the complaints and grievances categories is listed below. | Medicare Part D coverage is provided through plan sponsors that contract with the Centers for Medicare & Medicaid Services (CMS). As of April 2008, about 26 million beneficiaries were enrolled in Part D. When beneficiaries encounter problems with Part D, they can either file a complaint with CMS or a grievance with their plan sponsors. CMS centrally tracks complaints data and plan sponsors must report summary data on grievances for each of their contracts. GAO provided information on (1) complaints and what they indicate about beneficiaries' experiences with Part D, (2) whether grievances data provide additional insight about beneficiaries' experiences, and (3) CMS's oversight of the complaints and grievances processes. To conduct its work, GAO reviewed CMS's complaints and grievances data and interviewed the plan sponsors of eight, judgmentally selected contracts, which accounted for 40 percent of 2006 enrollment. While the number of complaints filed with CMS and the time needed to resolve them has diminished as the Part D program has matured, complaints data indicate that ongoing challenges pose problems for some beneficiaries. From May 1, 2006, through October 31, 2007, about 630,000 complaints were filed; most complaints were related to problems in processing beneficiaries' enrollment and disenrollment requests. The monthly complaint rate declined by 74 percent over the period, and the average time needed to resolve complaints decreased from a peak of 33 days to 9 days. However, trends in the complaints data also indicate ongoing implementation issues, such as information-processing issues related to beneficiaries' requests for enrollment changes and automatic premium withholds from Social Security payments. In addition, CMS and plan sponsors did not resolve a significant proportion of complaints related to beneficiaries at risk of depleting their medications in accordance with applicable time frames. Due to limitations and anomalies, the grievances data that plan sponsors reported for their contracts did not provide sufficient insight into beneficiaries' experiences with Part D. Specifically, these data did not include information about whether beneficiaries who filed grievances were at risk of depleting their medications or whether plan sponsors were resolving grievances in a timely manner. In addition, GAO identified a number of anomalies in the grievances data, raising questions about whether plan sponsors were reporting these data consistently and accurately. For example, reported grievances were concentrated in a small number of plan sponsors' contracts and at a rate that was significantly disproportionate to their respective enrollment levels; varied considerably among contracts with similar levels of enrollment; and increased from 2006 to 2007, in contrast to patterns in complaints data. CMS's oversight efforts thus far have focused almost exclusively on resolving complaints with little attention devoted to plan sponsors' grievances processes. CMS routinely monitors the status of complaints and has taken actions against plan sponsors who failed to comply with requirements for the complaints process. In contrast, CMS oversight of plan sponsor grievances processes has been more limited. CMS provided plan sponsors with general guidance for classifying grievances and periodically reviewed these data. However, several plan sponsors indicated that the guidance was insufficient, increasing the likelihood that plan sponsors report erroneous and inconsistent information to CMS and that they rely on the wrong processes to address beneficiaries' concerns. Further, CMS could not explain many of the anomalies in the grievances data that GAO identified. |
The HHS National Incidence Study has shown since the early 1980s that children of all races and ethnicities are equally likely to be abused or neglected; however, African American children, and to some extent other minority children, have been significantly more likely to be represented in foster care, according to HHS data and other research. Nationally, African American children made up less than 15 percent of the overall child population in the 2000 Census, but they represented 27 percent of the children who entered foster care during fiscal year 2004, and they represented 34 percent of the children remaining in foster care at the end of that year, as shown in figure 1. African American children were more likely to be placed in foster care than White or Hispanic children, and at each decision point in the child welfare process the disproportionality of African American children grows. Although racial disproportionality is most severe and pervasive for African American children, Native American children also experience higher rates of representation in foster care than children of other races or ethnicities. Just over 2 percent of children in foster care at the end of fiscal year 2004 were Native Americans, while they represented less than 1 percent of children in the United States. However, there can be significant variation by state and county. It is especially important to understand local variations for Hispanic and Asian children, since they are underrepresented in foster care nationally and in most states, but are overrepresented in some counties and states. For example, in a single county in California, Hispanic children represented 30 percent of the population but 52 percent of the county’s child welfare cases. There are various options for placing children in temporary and permanent homes through the child welfare system. Temporary options include foster care with relatives or non-relatives—whether licensed or unlicensed—and group residential settings. According to HHS, approximately one-fourth of the children in out-of-home care are living with relatives, and this proportion is higher for Hispanic and African American families. For permanent placements, adoption and guardianship are options under federal law in addition to the child’s reunification with their parents. One important difference is that adoption entails terminating parental rights, while guardianship does not. (See table 1.) In the last decade, several federal laws have been enacted to help states reduce the number of children who enter and remain in foster care. These laws include the Multi-Ethnic Placement Act of 1994, as amended in 1996 by the Interethnic Adoption Provisions included in the Small Business Job Protection Act (MEPA-IEP). MEPA-IEP is intended to eliminate race- related barriers to adoption by prohibiting foster care and adoption agencies that receive federal funds from delaying or denying placement decisions on the basis of race, color, or national origin of either the adoptive or foster parent or child. MEPA-IEP also required states to diligently recruit potential foster and adoptive families that reflect the ethnic and racial diversity of children in the state who need foster care and adoptive homes. MEPA-IEP was followed by the Adoption and Safe Families Act of 1997 (ASFA), which established expedited time frames to place children in permanent homes through reunification, adoption, or guardianship and for terminating parental rights. ASFA recognized that guardianship may be an appropriate permanency option for some children in foster care and it encouraged adoption by establishing adoption incentive payments for states. The Promoting Safe and Stable Families (PSSF) program also created under ASFA supported the need to strengthen and reunify families. This program expanded dedicated funding for services that could help prevent the removal of children from their homes or could expedite children’s return home from foster care. In addition to family preservation and community-based support services, PSSF services include time-limited reunification services and adoption promotion and support services. States are required to allocate “significant portions” of their funding for each of these four service categories. (See table 2.) One of the prerequisites to finding children temporary and permanent homes is for states to ensure that criminal background checks have been conducted for prospective foster care and adoptive parents. Congress had prohibited states from receiving federal foster care or adoption assistance support on behalf of eligible children who are placed in the home of a foster or adoptive parent who had certain types of convictions. States had been allowed to opt out of certain federal criminal background requirements by providing alternative plans to ensure children’s safety, which were assessed as part of an HHS review process. According to HHS, eight states had been approved to use alternative plans. However, requirements for conducting federal background checks have recently changed: a provision of the Adam Walsh Safety and Protection Act of 2006, which was developed in response to concerns about child predators, establishes additional federal requirements for criminal background checks of prospective foster or adoptive parents and eliminates states’ ability to opt out of the federal requirements, effective October 2008. Federal funds account for approximately half of states’ total reported spending for child welfare services, with the rest of funding coming from states and localities. In fiscal year 2004, total federal spending on child welfare was estimated to be $11.7 billion based on analysis of data from over 40 states. These federal funds come from sources that are dedicated to child welfare as well as those that are provided to states under the federal block grant structure for broader purposes. Titles IV-E and IV-B of the Social Security Act are the principal sources of federal funds dedicated for child welfare activities. Title IV-E provides the majority of dedicated federal funds for support payments to foster families, adoption assistance, and related administrative costs on behalf of children who meet certain federal eligibility criteria. Title IV-E foster care maintenance and adoption assistance payments are authorized as open- ended entitlements. States may claim federal reimbursement for a specified amount of the costs for every eligible child who is placed in a licensed foster home. In addition, Title IV-E established subsidies paid to families who provide adoptive homes to children who states identify as having special needs that make placement difficult. In 2003, 2004, and 2005, states designated more than 80 percent of adoptions as special needs adoptions enabling families to receive federal financial subsidies, according to HHS data. Total federal expenditures, including administrative costs, for Title IV-E programs were about $6.8 billion in fiscal year 2006. Title IV-B authorizes funds to states for broad child welfare purposes, including child protection, family preservation, and adoption services. In contrast to Title IV-E funds, Title IV-B funds are appropriated annually and totaled about $700 million in 2006. Federal block grants such as the Temporary Assistance for Needy Families (TANF) and the Social Services Block Grant (SSBG) provide additional sources of funds that states can use for child welfare purposes. Block grants and other sources of non-dedicated funds made up about 44 percent of total federal funds spent on child welfare in 2004, or about $5.2 billion, according to the most recent research available. Under these block grants, states have discretion to provide direct social services for various populations, including child welfare families, the elderly, and people with disabilities. (See fig. 2.) In 1994, the Congress authorized the use of flexible funding demonstration waivers to encourage innovative and effective child welfare practices. These waivers, typically authorized for 5 years, allowed states to use Title IV-E funds to provide services and supports other than foster care maintenance payments. For example, states could use waivers to provide subsidies to legal guardians or services to caregivers with substance abuse problems. Waiver demonstrations must remain cost-neutral to the federal government and they must undergo rigorous program evaluation to determine their effectiveness. As of May 2007, according to HHS, 14 states have one or more approved Title IV-E child welfare waiver demonstration projects, involving one or more programmatic components, such as subsidized guardianship. With regard to guardianship specifically, four states have completed demonstrations that involved subsidized guardianships as of May 2007, seven states have active guardianship demonstrations, and one state has not yet implemented its guardianship demonstration. HHS’s ability to approve new Title IV-E waivers expired in 2006, however, and Congress has not reauthorized this program. The Administration’s fiscal year 2008 budget proposes, for the fifth consecutive year, to implement a “Child Welfare Program Option,” which would restructure the Title IV-E foster care program. Under this proposal, states could forego open-ended entitlement foster care funding in exchange for a pre-determined grant. Unlike the open-ended funds, the grant could be spent on the entire range of child welfare purposes and for any child (regardless of the child’s federal foster care eligibility status). States taking this option would need to continue to ensure child safety protections, maintain existing state funding for child welfare, and participate in federal assessments of state child welfare programs, known as Child and Family Services Reviews. Under this proposal, the Title IV-E Adoption Assistance program would continue as an entitlement program, according to an HHS official. In 2006, HHS approved two states to pilot the program option over the next 5 years under its Title IV-E waiver demonstration authority, which expired in that year. Final evaluation results for these pilots will not be available for at least 5 years. States are required to enact policies and meet certain federal standards related to child welfare programs, and HHS evaluates how well state child welfare systems achieve these federal standards through its Child and Family Services Reviews (CFSR). Implemented in 2001, these reviews focus on states’ performance in ensuring children’s safety, permanency, and well-being over a range of child welfare services, using various outcome measures. To address any areas identified as not in substantial conformity with these outcome measures, the state develops a program improvement plan. To evaluate states’ performance on these measures, HHS also relies, in part, on its Adoption and Foster Care Analysis and Reporting System (AFCARS) to capture, report, and analyze information collected by the states. In addition, AFCARS is used to generate annual reports on foster care and adoption programs nationwide. HHS provides states with training and technical assistance to help them develop and implement their CFSR performance improvement plans, build state agency capacity, and improve the state child welfare system. Technical assistance providers in this network include HHS’s Children’s Bureau, 10 regional offices, and various National Resource Centers. An additional resource is the department’s Child Welfare Information Gateway, a Web site that provides access to information and resources to help protect children and strengthen families. A complex set of interrelated factors influence the disproportionate number of African American children who enter foster care as well as their longer lengths of stay, and our review found that poverty and the lack of appropriate homes are particularly influential. Major factors affecting children’s entry into foster care included African American families’ higher rates of poverty, families’ difficulties in accessing support services so that they can provide a safe home for vulnerable children and prevent their removal, and racial bias and cultural misunderstanding among child welfare decision makers. Factors often cited as affecting African American children’s length of stay in foster care included the lack of appropriate adoptive homes for children, greater use of kinship care among African Americans, and parents’ lack of access to supportive services needed for reunification with their children. In responding to our survey, states considered three main groups of factors as contributing to African American children’s entry into foster care: These groups included high rates of poverty and other poverty- related issues, challenges in accessing supports and services in impoverished communities, and racial bias or cultural misunderstanding among decision makers. Of the many factors that have been found to influence African American children’s disproportionate entry into foster care, the most often cited factors that emerged in our survey were African American families’ higher rates of poverty and issues related to living in poverty. Poverty-related factors included the large number of single parents among African American households, a high rate of substance abuse, and greater contact with public officials who have mandatory responsibilities to report incidents of abuse and neglect. (See fig. 3.) In our survey, poverty was cited as a key factor for entry: 33 states reported that high rates of poverty in African American communities may increase the disproportionate number of African American children entering foster care compared to children of other races and ethnicities. Researchers and child welfare officials in states we visited also noted the importance of poverty as a contributing factor. Across the nation, an estimated 23 percent of all African American families lived below the poverty level compared to only 6 percent of Whites, making African Americans nearly four times more likely to live in poverty, according to U.S. Census data. Since foster care programs primarily serve children from low-income families, this could account for some of the disproportionate number of African American children in the foster care system. However, our review of our survey results, interviews, and studies indicate that factors unrelated to poverty are also at play in foster care placements. In addition, child welfare directors in 25 states reported that the greater number of African American single-parent households was also a factor contributing to African American children’s entry into foster care to at least a moderate extent. According to the most recent National Incidence Study, children of single parents had a 77 to 87 percent greater risk of harm than children from two-parent families. Across the nation, 35 percent of African American family households were headed by single females with children under 18 years of age compared to 9 percent for Whites and 19 percent for Hispanics, according to U.S. Census data. In addition, nearly half of the child welfare directors responding to our survey considered higher rates of substance abuse in African American households as contributing to the proportion of African American children in foster care. (See fig. 3.) Despite this perception, national data show that African Americans have nearly the same rate of substance abuse as Whites. However, 65 percent of African American children were removed from their homes because of parental substance abuse and placed in foster care, compared to 58 percent of White children, according to our analysis of AFCARS fiscal year 2004 data. Finally, child welfare directors in 14 states responded that African American children’s greater contact with officials mandated to report child abuse and neglect played a role in the children’s entry to foster care. Several researchers we interviewed noted that low-income families come into contact with a greater number of mandated reporters because they have more interaction with some public services. In fact, as noted in an HHS report, the top three sources of reports to child protective services hotlines in 2003 were educational staff, law enforcement officials, and social services personnel, of which the latter two disproportionately interact with low-income individuals. In our survey, African American families’ challenges in accessing supports and social services was also viewed as influencing African American children’s entry to foster care. African American and other families living in impoverished neighborhoods often do not have access to the kinds of supports and services that can prevent problems in the home from leading to abuse or neglect. Such supports and services include affordable and adequate housing, substance abuse treatment, and family services such as parenting skills and counseling. Access to legal representation in courts responsible for making decisions about children reported to have been abused or neglected was also as a factor as influencing African American children’s entry into foster care. (See fig. 4.) According to our survey, child welfare directors in 25 states reported that the lack of affordable housing options was a factor that may increase the proportion of African American children entering foster care to at least a moderate extent. For low-income families, affordable public housing is a critical support that can help families stay together and allow for in-home services, thereby decreasing the chances of children being removed from their families, but in some areas, there is a shortage. For example, child welfare officials in a California county told us they have a waiting list estimated at around 20,000 applicants for public housing. Families involved in the child welfare system often live in communities that lack resources and services, including drug treatment services and job training, which they either do not receive or must travel long distances to obtain, according to an HHS study. In our survey, 25 states reported that the lack of substance abuse treatment and 24 states reported that the limited access to preventive services were factors that may increase the proportion of African American children entering foster care to at least a moderate extent. The state survey responses may reflect the fact that a higher percentage of African American families live in impoverished neighborhoods that lack such resources. Child welfare officials in all of the states we visited as well as researchers noted that lack of adequate supportive services contributed to disproportionality. For example, during a site visit, a Minnesota child welfare official noted that wealthier families may be able to draw upon support services, like family and substance abuse counseling, that can help keep the children with their families. However, poorer families, without access to supportive services, may have a more difficult time weathering a problem such as substance abuse or emotional issues. Even after they are reported to child welfare, families can have difficulty in gaining access to the types of services that would allow a child to remain with the family and risk being removed to foster care. According to HHS’s 2005 Child Maltreatment report, about 40 percent of children identified as victims of maltreatment do not receive services such as counseling and family support services. With regard to substance abuse treatment services, one study found significant gaps in services for families involved with the child welfare system, with only 31 percent of at- risk children and families with substance abuse problems receiving treatment. There is also some evidence that African American families, in particular, are not offered the same amount of support services when they are brought to the attention of the child welfare system. As one study found, race was a significant factor in whether families received mental health related services, even after controlling for age, type of maltreatment, behavior of the child, and gender. A Texas state child welfare official reiterated this point, telling us that in her experience, African American children are less likely than children of other races or ethnicities to receive in-home services. According to 20 states responding to our survey, once African American families come into contact with the child welfare system, they often have difficulties obtaining adequate legal representation in court, and this contributed to their disproportionate numbers in foster care. Local court officials and others we interviewed observed that higher income families can afford private legal representation, which can help prevent their child’s removal to foster care, but lower-income parents usually do not have this option. In one state we visited, we were told that public attorneys assigned to child welfare families often do not meet parents before they appear in court and have little time to review case files, putting parents at a disadvantage in unfamiliar legal settings. In addition, the Pew Commission on Children in Foster Care found that parents in dependency hearings were often inadequately represented because of a lack of time, preparation, and resources, including attorney compensation. Coupled with African American parents’ greater distrust of the child welfare system, racial bias or cultural misunderstanding among decision makers also emerged in our survey as major factors contributing to the disproportionate number of African American children entering foster care. These decision makers include mandated reporters, child welfare caseworkers, and those involved in judicial rulings about these children. (See fig. 5.) Families’ distrust of the child welfare system was cited by child welfare directors in 28 states as a factor contributing to the entry of African American children into foster care to at least a moderate extent. According to state child welfare officials and some researchers we interviewed, African American families’ distrust of the child welfare system stems from their perception that the system is unresponsive to their needs and racially biased against them. Child welfare officials and researchers said that many African Americans in poor communities perceive child welfare caseworkers as more intent on separating African American parents from their children than on working within their communities to address child safety issues. As an example of how this dynamic might occur, a neighborhood-based service provider we interviewed in California described a situation in which a mother fleeing domestic violence at home did not seek public services for herself and her children—despite the evident need for clothing and therapy—because child welfare had once before removed her children and she did not trust the system to be helpful. These experiences in turn can shape the families’ dynamics in their initial contacts with mandated reporters, caseworkers, and judges. Casey Family Programs staff in an interview noted that African American families in such circumstances may not seek services because of such distrust, which in turn increases the risk of a child’s removal. In our survey, 23 state child welfare directors reported that they considered racial bias or cultural misunderstanding on the part of those reporting abuse or neglect, such as teachers, medical professionals, or police officers, as a factor in the disproportionate representation of African American children entering foster care to at least a moderate extent. In support of this view, some studies have found that medical professionals are more likely to report low-income or minority children to child protective services, even controlling for other factors, such as type of abuse. In addition, bias or cultural misunderstanding on the part of child welfare caseworkers and juvenile and family court judges are viewed as playing a role in the proportion of African American children entering foster care. In our survey, child welfare directors in 21 states reported that caseworker bias, cultural misunderstanding, or inadequate training was a factor that contributes to entry. To a lesser extent, bias or cultural misunderstanding was considered a factor in judicial rulings as well. HHS and a few state child welfare officials we interviewed also noted that class and educational differences between caseworkers and families also contributed to cultural misunderstandings. As one researcher noted, even well-meaning decision makers at any stage of the child welfare process may have faulty assumptions about racial, ethnic, or socio-economic groups. Studies that have tried to control for other factors to determine if race or racial bias was a predictor for entry into foster care have produced varied results. One study using California data found that, after controlling for poverty and maltreatment, African American children were more likely to be removed from their homes and placed in foster care compared to White children, when income was accounted for. However, another study using Baltimore, Maryland, data found African American children did not have an increased likelihood of being removed from their homes and placed in foster care. Although research on racial bias or race as a predictor for entry into foster care is not always consistent, a recent review of the current literature by the Casey-Center for the Study of Social Policy Alliance for Racial Equity in the Child Welfare System concluded that race is an important factor that affects the decision to place children into foster care. In responding to our survey, states considered certain groups of factors as contributing to African American children’s length of stay in foster care, thereby increasing their disproportionality: These included challenges in finding appropriate adoptive homes for those unable to be reunified with their families, the impact of kinship foster care on length of stay, and other challenges affecting children’s ability to exit foster care to be reunified with their families. Certain factors made finding permanent homes for African American children more challenging, according to states responding to our survey, thereby contributing to longer lengths of stay for African American children. These factors included an insufficient number of appropriate adoptive homes, difficulties in finding families that will adopt older African American children, and the belief that African American children are more likely to be diagnosed as having special needs. (See fig. 6.) State officials from 29 states cited the insufficient number of appropriate adoptive homes as a factor that may increase African American children’s length of stay in foster care to at least a moderate extent. For African American children, lengths of stays in foster care averaged 9 months longer compared to White children in 2004, according to our analysis of AFCARS data. This is partly due to the fact that African American children constituted nearly half of the children legally available for adoption in 2004 and waited significantly longer than other children for an adoptive placement. State officials we interviewed described challenges in recruiting appropriate adoptive families for African American children. These challenges include the difficulty many states have in recruiting adoptive families of the same race and ethnicity of the children waiting for adoption and the unwillingness of some families to adopt a child of another race. An additional challenge was finding adoptive African American families who are able to meet state licensing requirements, including housing and background checks, for an appropriate adoptive home. In New York, for example, local officials explained that state requirements for a certain number of bedrooms can prevent poor African American families from being able to meet licensing requirements needed for adoption—this can be especially an issue in high-cost urban areas in which there is limited affordable housing. In three states we visited, child welfare officials also told us that African American families who were interested in adopting were sometimes prevented from doing so because a member of the household had a prior criminal record, even though child welfare officials had determined that the person would not be a risk to the child. The age of foster children awaiting adoption also contributes to the challenges in finding appropriate adoptive families, with greater difficulties in placing older children. According to research, prospective adoptive parents are more inclined to adopt younger children, and older children may also have less interest in being adopted. In our survey, 21 states reported that a factor accounting for the longer lengths of stay for African American children waiting to be adopted was that many of them were also older. According to a 2003 study comparing a cohort of children whose parents’ rights were terminated at the same time, children who were both older and African American had longer wait times between the termination of parental rights and adoption. State officials we visited echoed this finding, noting that child welfare agencies have a difficult time trying to find adoptive homes, particularly for older African American children. In our survey, 16 states also considered the greater likelihood of African American children being diagnosed as having medical and other special needs as a factor affecting African American’s length of stay to at least a moderate extent. According to HHS data, African American children in foster care in 2004 were only slightly more likely to have been diagnosed as having medical conditions or other disabilities (28 percent) than White children in foster care (26 percent). Children with special needs may require additional support services, and some African American families may have less access to support services that would enable them to take on this extra responsibility. The impact on African American children is supported by HHS adoption data that shows that 23 percent of African American children who were adopted out of foster care had a medical condition or disability, compared to 31 percent of White children in the same category. African American children are more likely than White and Asian children to enter into the care of relatives. Although kinship care is associated with longer lengths of stay, child welfare researchers and officials we interviewed consider these placements to be positive options for African American children because they are less stressful to the child and maintain familial ties. In addition, some researchers associate the use of kinship care with fewer foster care placements and lower rates of re-entry. Kinship care also has some drawbacks. For example, a 1999 GAO study found that kinship care might increase a child’s risk of harm because caregivers may be unwilling to enforce court-ordered restrictions on parental visits. In responding to our survey, 18 states reported that the use of kinship care was a factor contributing to longer lengths of stay in foster care for African American children to at least a moderate extent. This view is supported by research findings indicating that children living with relatives generally spend more time in foster care than children living with non-relatives. For example, a study cited in a HHS report showed that 42 percent of children in foster kinship care remain there for more than 2 years compared to 36 percent of children in non-kin foster care. Moving a child from kinship foster care to adoption can be difficult for caregivers who need financial assistance or wish to retain family ties. Several child welfare officials said that there is a financial disincentive to adopt children who are only eligible for financial subsidies and services while they are in foster care, especially for grandparents and others living on a fixed income. Even when states offer financial subsidies to help families adopt these children, relatives may be reluctant to terminate their relatives’ rights. An alternative is for these caregivers to provide a permanent home for their relative’s children through legal guardianship in which caregivers are afforded legal decision-making authority over the child without terminating the birth parent’s rights. Some of the same factors that states view as contributing to African American children’s entry also contribute to their difficulties in exiting foster care and being reunified with their families. In our survey, nearly half of the states considered the lack of affordable housing, distrust of the child welfare system, and lack of substance abuse treatment as factors contributing to African American children’s longer lengths of stay. The lack of such supports and other services in many poor African American neighborhoods contributes to children’s longer stays in foster care because services can influence a parent’s ability to reunify with their child in a timely manner, according to our survey, interviews, and research. (See fig. 7.) In our survey, nearly half of the states reported a lack of affordable housing options for African American parents, and state and county child welfare officials said that housing issues often delay family reunification, resulting in longer lengths of stay in foster care. According to child welfare officials and researchers we interviewed, poor families can lose their housing once their children have been removed because the TANF program requires children to be living with caregivers for them to qualify for TANF child-only benefits. For example, a county official in California noted that about 70 percent of families in that county experience a housing crisis when their children are removed. If families cannot afford to remain in their homes without TANF benefits, then they must seek other alternatives to create homes suitable for reunification with their children. Furthermore, if families do maintain their housing or find other housing they can afford, the standards that parents must meet before their children can be returned home from foster care are often higher than when the children were removed. According to a private foundation that assists 13 state and local child welfare agencies around the country in addressing disproportionality, a parent living in poverty might be unable to meet housing requirements needed for reunification, such as having a bedroom for each child, even though the appropriateness of the parent’s housing had not been the original basis for a child’s removal. According to 25 states in our survey, parents’ distrust of the child welfare system was also a factor contributing to African American children’s longer length of stay in foster care to at least a moderate extent. We were told that African American families in some communities do not trust child welfare agencies because families in their communities have had adversarial relationships with various public organizations, including schools, public health, and criminal justice systems. The lack of substance abuse treatment, mental health services, and other support services in African American communities are additional factors that can slow African American children’s reunification with their parents, thereby contributing to longer stays in foster care. According to our survey, 23 state child welfare administrators reported the lack of substance abuse treatment services as factors contributing to African American children’s longer stays in foster care to at least a moderate extent. An HHS study found that state officials lack the resources to provide substance abuse and other types of treatment services sufficient to help African American families and those of other racial and ethnic minorities move toward reunification and adoption. Court officials in California said that initiatives to refer drug offenders to treatment programs instead of incarceration have increased competition for accessing publicly funded substance abuse programs, adding to the difficulties families may face in making changes needed for reunification. In addition, when services are available, it may take 2 years for a parent to complete a substance abuse treatment program, and entry into such programs may be delayed if there are waiting lists for services. Most states we surveyed reported implementing a range of child welfare strategies–often good practices generally–that researchers and experts believe may also be promising for reducing the number of African American children in foster care. These strategies are intended to reduce bias in decision making and increase access to supportive services for families and the availability of permanent homes for foster children. Fewer states reported focusing attention on disproportionality through such actions as convening task forces or passing state legislation to study the issue. States that did more directly address disproportionality agreed that certain key elements were central to their efforts: these elements were data analysis to identify problems and strategies to address them, leadership to sustain change across time, and collaboration with different social services agencies to access programs and resources needed outside the child welfare system. HHS has provided some support to states for reducing the proportion of African American children in foster care through conferences, workshops and various Web sites, but states reported that they would benefit from having additional guidance in analyzing information and from the dissemination of strategies that other states have found promising. Researchers and child welfare administrators stressed that no single strategy was sufficient to fully address disproportionality. Some strategies states reported on have the potential to reduce bias or improve decision making. Other strategies are intended to improve access to support services for parents, and still others could increase the availability of permanent homes for children waiting in foster care (see table 3). To help mitigate the influence of racial and other forms of bias in child welfare decision making processes, states implemented a range of strategies such as including family members in discussions of placement options, providing training for case workers to strengthen their cultural competency, implementing tools to help caseworkers make more systematic decisions, and reaching out to educate mandated reporters about reporting requirements. (See fig. 8.) Among these strategies, states expected that including families in the decision making process and training culturally competent staff would most reduce disproportionality. All states we surveyed had implemented strategies to include families in the decision making process to some degree, and every state we visited told us they were using this method to help address disproportionality. There may be differences in the extent to which states involved families, ranging from occasional discussions with family members to more formal approaches of “family group conferencing,” which follows a specific model of engaging family members in decisions about the child’s placement through three phases including monitoring and follow up. This approach can help address caseworker bias, as one researcher explained, because it increases caseworkers’ exposure to the lifestyles of the community they are serving and helps bridge misunderstandings. Some studies of this strategy show that it holds promise for African American families. According to an evaluation in Texas, family group decision making led to a reduction in foster care placements and an increase in placements with relatives for all children; these findings were especially pronounced for African American and Hispanic children. Specifically, 32 percent of African American children whose families attended such a conference returned home compared to 14 percent whose families received traditional services. Almost all states (45) reported conducting training for caseworkers to strengthen their understanding of different cultures, known as cultural competency training. Such training could include workshops on cultural differences to enable caseworkers to better interpret behaviors and interactions with their clients. Somewhat fewer states (36) reported using initiatives to recruit and retain culturally competent staff. To address bias among caseworkers, some of the states we visited required that their child welfare workers take an intensive program called “Undoing Racism.” This program has participants analyze the ways in which structural racism may affect their decisions through dialogue, reflection, role-playing, and presentations. In addition, officials pointed out that, beyond cultural understanding, caseworkers need to understand the challenges of living with economic disadvantages so that they can work effectively with their clients. For example, one county agency in Iowa required its child welfare workers to spend 1 day using public transportation to get to social service appointments their clients must attend to better understand the time and transportation constraints some people face. Although most survey respondents expected cultural competency training to have an impact on disproportionality, there is little research linking cultural competency training programs to improved outcomes for African American children. However, one 3-year evaluation of a comprehensive cultural competency program in Washington state, which was initiated specifically to address the causes of disproportionality, found that families served by staff trained in this approach had a higher rate of children returning home than African American children in other areas. Because some state data have shown that disproportionality in foster care starts with the differing rates of reporting among races, most states (37) are also conducting educational outreach for those who work with children, such as teachers, health care providers, and social workers, who are required to report suspected abuse and neglect. These efforts may help ensure that mandated reporters are not inappropriately referring families to child welfare. Illinois conducted a widespread public awareness campaign for mandated reporters about how to identify abuse and neglect. Although some child welfare officials expect this outreach strategy to reduce disproportionality, none of the studies we examined assessed its effectiveness in that regard. Over half of states (29) reported using risk assessment tools, which can help caseworkers make more systematic decisions about a child’s safety and the need to remove a child from the home. Caseworkers use these tools when investigating an allegation of child maltreatment to systematically collect information about a family and, based on this information, more objectively assess the level of risk in keeping the child at home. Without such tools, workers may err on the side of unnecessarily removing a child from its family, according to some child welfare officials. Two studies found particular risk assessment tools to be both race-neutral and more accurate predictors of future harm than caseworker judgment alone. A 2004 study of five counties in California found that minority groups often showed a lower risk than Whites when the assessment tool was applied, which means it could help to reduce the representation of some groups in the child welfare system, according to the author. However, some researchers express concern that other risk assessments that rely too heavily on information related to social conditions and poverty might actually contribute to racial bias. Despite the promising research about the value of specific risk assessment tools, only about one- third of the child welfare administrators surveyed who were using this strategy expected it to reduce disproportionality. Child welfare agencies are taking action to improve access to services, such as providing or arranging for mental health treatment, medical care, and housing assistance for low-income people. The strategies states are using for this purpose include collaborating with neighborhood-based services, establishing interagency agreements to improve access to these services, and implementing an alternative approach to the removal of children—known as alternative, dual, or differential response. Just over half of the states who used each strategy reported in the survey that they expected it to reduce disproportionality. (See fig. 9.) Thirty-eight states reported using neighborhood-based support organizations to improve access to and use of support services. Neighborhood-based services can improve access to supports for parents because they are often more conveniently located to parents’ homes and more likely to be staffed by people familiar with issues particular to their ethnic community. For example, child welfare officials in Los Angeles County told us that they went door to door in minority neighborhoods to find service providers beyond those with whom they have historically contracted. They subsequently heard that this collaboration helped to increase trust between the community and the child welfare system and increased use of these services. Similarly, one county in North Carolina convened a task force of schools, police, and community groups to examine and identify what support services were available to families. An HHS report synthesizing the views of child welfare workers in eight states noted that working with community-based services holds promise for reducing disproportionality because they are more accessible and provide services in a culturally appropriate context. Interagency agreements, used by 34 states, may improve families’ ability to obtain services and supports they need from agencies outside of child welfare, which are primarily provided and funded through other state agencies. To address gaps in the provision of services like substance abuse treatment and financial supports, agencies can work with one another in any of the following ways: training staff jointly, sharing information and tracking systems, using common intake and assessment forms, coordinating case management, and placing staff from multiple agencies in the same office. Some child welfare officials told us they were reluctant to share information about overlapping clients because of federal privacy laws, while other local officials described methods they use to share information across systems. For example, the child welfare agency in San Francisco uses court agreements with other agencies, such as juvenile justice and mental health, to share information about families who are involved in multiple systems, and county officials report that these agreements enable them to better serve these families. Although we found no studies on the effectiveness of inter-agency agreements in reducing disproportionality, many child welfare officials expected that this strategy could have an impact. Another approach used by slightly more than half of states is differential or alternative response, which is a way for states to provide services to families when the risk of abuse and neglect is judged to be lower in lieu of removing children from their homes. Differential response can be used when maltreatment is not related to physical and sexual abuse, but instead to conditions of chronic poverty, chemical abuse, or domestic violence. For example, some California counties have three tracks for assessing families, depending on a family’s situation. In the first track, if the case involves abuse and neglect and the risk is considered moderate to high for continued abuse, the caseworker may take action to remove the child with or without the family’s consent, court orders may be involved, and criminal charges may be filed. In the second track, if the risk of continued abuse and neglect is lower, families work with representatives of county child welfare agencies to identify services for improving child and family well-being. In the third track, if an allegation is not considered abuse, the family is linked to services in the community through expanded partnerships with local organizations. Evaluations of alternative response in some states have shown this strategy to have promise for addressing the factors that may lead to the disproportionate number of African American children in care. Evaluations in Missouri and Minnesota found that use of alternative response increased cooperation between families and the child welfare agency. The Minnesota study also found that families who participated in the alternative response system received significantly greater access to support services and also a lower rate of new maltreatment reports than families in a control group. States are also devising strategies to increase the number of permanent homes for African American children who cannot be reunified with their parents so as to reduce the length of time they remain in foster care and increase the likelihood that they will be adopted. To do this, many states are increasing the search for fathers and paternal kin, making efforts to recruit more African American adoptive parents, and providing financial subsidies for caregivers (often relatives) who are willing to act as permanent guardians for foster children. (See fig. 10.) Almost all states surveyed reported that they take action to search for paternal kin when making decisions on where to place a child. Until recently, caseworkers did not routinely gather information on fathers, according to child welfare workers we spoke with. As foster care agencies have placed greater reliance on placing children with relatives, however, fathers and paternal relatives are increasingly being viewed as potential caregivers. Greater efforts to locate fathers and paternal kin are particularly relevant for African American families who are less likely to have a father living with the family at the time of their involvement with the child welfare agency. Officials we visited in Illinois, North Carolina, and New York told us that they had instituted changes so that searching for paternal kin was routine. One county in North Carolina requires social workers to use a structured protocol in contacting and gathering information from the father about family members as potential resources. This approach can allow fathers and other paternal relatives to take a much more active role in their child’s life to prevent out-of-home placements. About two-thirds of states using this strategy expected it to reduce disproportionality, but there is relatively little research on the role of fathers in child welfare cases in general. Although 38 states reported that, to some extent, they are recruiting African American adoptive families, states still face challenges. States are required by law to diligently recruit foster and adoptive parents who reflect the racial and ethnic backgrounds of children. States have adopted various strategies, such as contracting with faith-based organizations and convening adoption support teams, to recruit greater numbers of African American adoptive parents. However, despite these efforts the overall number of African American children adopted by African American parents has not substantially increased in the past 8 years. In addition, HHS’s 2001–2004 review found that only 21 of 52 states were sufficiently recruiting minority families, and a recent report found that the recruitment of minority families was one of the greatest challenges for nearly all states. Using subsidized guardianship as an alternative to adoption may hold particular promise for reducing disproportionality, and more than half of the states surveyed (30) reported using this strategy. African Americans are more likely than White children to be placed with relatives for foster care, and relative foster care is generally longer term. These relative caregivers are also more likely than non-relative foster parents to be low- income. They may be unwilling to adopt because they may find it difficult financially to forego foster care payments or because adoption entails terminating the parental rights of their kin. However, states can provide a way for foster children living with relatives to convert this to a more permanent arrangement by creating subsidized guardianship programs. These programs provide financial subsidies for foster parents (often relatives) who agree to become legally responsible for children, but are unable or willing to adopt. When Illinois and California implemented two of the largest of such programs, they subsequently saw an increase in permanent placements for all children. After instituting their subsidized guardianship programs, over 40 percent of children who were in long-term relative foster care in both states found permanency. In Illinois, this decrease also coincided with a reduction in disproportionate numbers of African American children in foster care. HHS officials also pointed out that these programs can be cost-neutral because the administrative costs associated with maintaining a child in foster care are no longer incurred with permanent legal guardianships. All seven states that used federal waivers to subsidize their guardianship programs with Title IV-E funds did so in a cost-neutral manner, as required by the waivers. Although many states we surveyed are employing the types of strategies that hold promise for reducing the proportion of African American children in foster care, fewer states were focusing attention specifically on disproportionality as a policy issue. Such strategies included establishing councils on disproportionality, requiring child welfare contractors to address disproportionality, and targeting preventive services to African American families. While these strategies may not necessarily be more effective than other strategies, they do represent a public acknowledgment of the issue and may be considered a starting point for further activity. States were much less likely to use these strategies compared with other strategies in our survey. A total of 15 states had established disproportionality councils or commissions that can provide leadership in addressing the issues. According to a report by the National Council of State Legislatures, the Illinois African-American Family Commission has the broad mandate to monitor legislation and programs, and assist in designing new programs on behalf of African American families, as well as facilitate the participation of African Americans in establishing community-based services. In addition, 13 states reported in our survey that they were targeting preventative services to African American families, and 11 states had some requirements for contracted agencies to address disproportionality. For example, child welfare officials in Kentucky reported that they were making a concerted effort to contract with service providers that can demonstrate their knowledge or understanding of the issue of disproportionality. Collecting, analyzing, and disseminating data were considered fundamental aspects of states’ efforts to address disproportionality. These data can include not only disproportionality rates (as described in appendix II), but also information that identifies the extent to which disproportionality occurs, among ages, along the child welfare process, and geographically. For example, a researcher at the University of California at Berkeley has used state data to show that African American infants enter at a much higher rate than other children (see fig. 11). However, this disproportionality grows as children get older, because African American children are also less likely to exit foster care; and the foster care population for all ages then becomes disproportionally African American (see fig. 12). Child welfare officials in most of the states we visited used their data to show that as a child moved through the child welfare process from having a case reported, then investigated, then being removed from the home, disproportionality increased at each decision point. Lastly, researchers in Illinois learned that disproportionality rates were actually higher in the rest of the state than in Cook County, the main urban county containing Chicago and over half of the state’s foster care population. Using data is considered crucial in identifying where disproportionality occurs in the child welfare process in order to devise strategies to most effectively address the issue. For example, when they analyzed state-level data, Texas officials realized that it was difficult to find foster care placements in close proximity to the birth family, making it difficult for African American children to be reunified with their families. To address this problem, Texas provided automated support for tracking the vacancies of foster homes and facilities. Data can also be useful for building consensus among community leaders, practitioners and policy- makers. Researchers in Illinois shared data on disproportionality with child welfare supervisors and caseworkers to increase their awareness that once an African American child is removed from the home, they are more likely to spend longer time in foster care. In Guilford County, North Carolina, child welfare officials shared data to show teachers, who are also mandated reporters, how disproportionality increases as a child moves from being referred, to investigated, to placed into foster care. Despite the importance of data collection, 18 states we surveyed reported that they were not regularly using data in their efforts to address disproportionality. In states we visited, child welfare officials also agreed that sustained leadership was fundamental to the process of identifying and addressing disproportionality. Members of the Child Welfare League of America’s Cultural Competence and Racial Disproportionality and Disparity of Outcomes Committee told us that initiatives generally take root through the efforts of a person or organizations that champion the issue. All of the states we visited had some support from the Casey Foundation, and four states were involved with Casey’s Breakthrough Series Collaborative, which focuses specifically on having child welfare professionals test new ideas and strategies to address racial disproportionality. Without such leadership, officials who have many competing priorities may be reluctant to tackle a politically sensitive issue. For example, child welfare workers in one county expressed concern that their efforts to address disproportionality would diminish when their Social Services Director — who was highly committed to addressing disproportionality—retired. According to the National Conference of State Legislatures, six states have enacted state legislation to address disproportionality. These laws generally create commissions or task forces, require a study of the issue, or fund special projects to address disproportionality. For example, a Texas law required an analysis of data to determine whether child welfare enforcement actions were disproportionately initiated against any racial or ethnic group. In addition, some states included some discussion of African American disproportionality in their state child welfare plans. California, for example, pledged to meet the target of increasing the service provisions specifically for Native American and African American children. Finally, state child welfare officials, researchers, and other experts stressed the need to work across different social service systems because many of the factors that contribute to disproportionality lay outside the child welfare system. For example, one child welfare official we interviewed observed that efforts to address disproportionality in one system (e.g., child welfare) can be undone by lack of diligence in another (e.g., housing). Additionally, some state officials said that there was a need for collaboration among social service agencies, such as juvenile justice and education, because disproportionality in child welfare often results when families have not had their service and support needs met by other agencies. HHS has made available technical assistance, guidance, and information to states on disproportionality at conferences, workshops and through various HHS Web sites. Since 2004, disproportionality and cultural competency have been discussed at training and technical assistance meetings attended by members of HHS’s network of National Resource Centers, and since 2006 these issues have been a priority area for the network, according to HHS officials. Currently, HHS provides states and localities with information on disproportionality through various National Resource Center Web sites and the Children’s Bureau Information Gateway Web site, such as links to literature examining various strategies and audio files of past teleconferences discussing disproportionality. HHS also provides guidance and information on promising approaches as well as technical assistance and training to improve states’ efforts to find minority foster care and adoptive parents through its AdoptUsKids initiative and Web site. In 2003, HHS’s Children’s Bureau also published a study examining disproportionality and the Office of Planning, Research and Evaluation summarizes other published and unpublished research findings on disproportionality on its Web site. Although HHS does not require states to collect or report information on disproportionality, the agency has included state-based data on disproportionality in its Annual Child Welfare Outcomes Report to Congress. In addition, through an initiative known as the Culturally Competent Practice Knowledge Management Initiative, the agency is compiling an inventory of tools and best practices for addressing disproportionality. According to HHS officials, the agency plans to make this information available to consultants within its network of National Resource Centers to use in providing training and technical assistance to states and localities, but as of April 2007, HHS had not determined whether or how to make this information publicly available. As a whole, child welfare administrators we surveyed reported that in their view, their own states should be doing more to address disproportionality but added that having additional resources, including information on promising practices and technical assistance, would be useful in their efforts. Forty-two states reported that additional resources were needed to apply known strategies to reduce the disproportionality of African American children. All six states we visited were using funds from a private foundation, Casey Foundation, to support their initiatives. Similarly, 41 states reported that having information on best practices to address racial disproportionality would be at least moderately helpful to them. In responding to the survey, officials from one state noted that Casey Family Programs had developed helpful strategies to address the issue, and officials from another state noted that having a central federal repository to share information across states, including descriptions and evaluations of promising strategies, would help them more effectively address disproportionality. Twenty-five states also reported that receiving technical assistance from HHS in calculating disproportionality and tracking it over time would be useful. Some of these states volunteered through written comments that this additional assistance would be useful because state and local agencies have limited capacity to analyze or track disproportionality-related data. Nearly all of the states we visited had assistance from local universities or research institutes in analyzing data on disproportionality. California state child welfare officials told us that without the aid of a university researcher, they would not have the ability to help counties that lack the capacity to collect and analyze their data. At the time of our survey, eighteen states reported that they were not regularly analyzing or using data in their efforts to address disproportionality. Some child welfare officials and researchers we interviewed reported that the leadership and efforts made by the Department of Justice, Office of Juvenile Justice and Delinquency Prevention (OJJDP), to address the disproportionate representation of minorities in the juvenile justice system could serve as a model for child welfare. In response to similar issues with racial disproportionality, the Justice Department has overseen states’ efforts in addressing disproportionality in the juvenile justice system, as mandated. To carry out its mission, OJJDP has established reporting requirements for states; provided guidance, technical assistance, and information on promising practices through a centralized location on the OJJDP Web site; and conducted regular conferences and training sessions for over a decade on the issue. According to a key official from OJJDP and a few state juvenile justice coordinators we interviewed, because of the legal mandate and federal funding provided over time, OJJDP’s efforts have helped states implement strategies intended to reduce disproportionate minority contact in the juvenile justice system. As of 2005, nearly all eligible states and territories have devised plans to address disproportionality and regularly submit reports to OJJDP. Federal policies that support services to families and adoption were generally considered helpful in reducing the proportion of African Americans in foster care, but policies that limit funds for prevention and legal guardianship were reported to have a negative effect, according to our review. Although it is difficult to isolate the effect of any one policy, many states reported that federal block grants that can be used to provide services to families help reduce disproportionality. At the same time, even more states reported that other policies constraining the use of federal child welfare funds work against this goal. States generally reported that policies promoting adoption–such as subsidies to families adopting children with special needs and the requirement to recruit minority adoptive parents–have been helpful, but wanted more support for legal guardianship. In particular, states considered the federal policy recognizing legal guardianship as helpful in enabling children to exit foster care, but policies limiting the use of federal funds to pay subsidies to guardians as a barrier. Federal policies that impose time frames on caseworkers for making permanency decisions may shorten the time children remain in care but may also impede states’ ability to reunify children with their parents. According to states we surveyed, having federal block grant funds available to provide services to families contributes to reducing the proportion of African American children in foster care compared to children of other races and ethnicities. However, policies that limit federal child welfare funds for preventive services or other purposes besides maintenance payments to foster care families are viewed as having a negative effect. (See fig. 13.) In our survey, 23 states reported that the ability to use TANF block grant funds to provide parenting classes, substance abuse treatment programs, and payments to guardians who are relatives contributes to a reduction in the proportion of African American children in care in their states. Many officials and researchers we interviewed told us that having an adequate level of preventive services and family supports was particularly relevant for African American families living in poverty. However, as with all block grants, state officials determine the use of these funds and their program priorities. TANF funds used for child welfare in 2004 ranged from zero percent in eight states to 51 percent of Connecticut’s total federal funds for such purposes, according to an Urban Institute report. Some officials from local child welfare agencies we interviewed also noted that because they did not have a steady source of funds for child welfare activities, it was difficult to plan for and provide preventive and family support services to these families. In a recent GAO report, states cited such services as the ones most in need of greater federal, state or local resources. Other policies constrain the amount of federal child welfare funds states can spend on services to support families, and states reported that these policies contributed to the disproportion of African American children in foster care. Of particular concern to 28 states were limitations on the use of federal funds under Title IV-B, which funds preventative and family support services. Under this part of the law, states are entitled to no more than their specified share of annual funding regardless of the number of families they serve in a year. These IV-B prevention funds can help divert children from foster care by providing services to their families and also help children exit foster care by providing supports to adoptive families and guardians. Yet the majority of federal funding for child welfare is distributed as payments for maintaining children already in foster care homes under another part of the law, Title IV-E. Twenty-five states we surveyed reported that the limited use of Title IV-E funds for other purposes besides making maintenance payments to foster care families, such as providing services to families, contribute to the proportion of African American children in care. According to California and Minnesota officials, because the majority of federal child welfare funds are used for foster care payments instead of preventive services, federal funding policies did not align with states’ efforts to reduce the number of children entering foster care by serving at-risk children safely in their homes. Previous GAO work as well as other research has noted that federal child welfare funding favors reimbursement for foster care placements, while providing less support for services to prevent such placements. Every year since fiscal year 2004, the administration has proposed in its budget the creation of a Child Welfare Program Option under which states would have the option to receive federal foster care funds in the form of flexible grants, which they could use to fund a range of child welfare services and activities. This proposal has not been introduced as legislation. In responding to our survey, states considered certain federal policies as helpful in reducing disproportionality, especially adoption policies and the recognition of guardianship. However, states viewed the lack of subsidies for guardianship and policies affecting the licensing of foster care and adoptive families as contributing to disproportionality. Views were mixed on federal policies that impose time frames for making permanency decisions. Among federal policies that affect states’ ability to find permanent homes for children, those that promote adoption were believed to reduce the proportion of African American children in foster care, according to our survey results. Although the recognition of guardianship as a placement option under federal law was also considered helpful, state and local officials reported that the lack of federal reimbursement for subsidies to guardians constrained their ability to place children in such arrangements. (See fig. 14.) In our survey, 22 states reported that the requirement to diligently recruit minority families contributes to a decrease in the proportion of African American children in care. According to officials from Illinois, New York, and North Carolina, the requirement to diligently recruit minority families has had a positive impact on moving African American children into permanent homes. For example, this requirement broadened the role and use of extended family as possible caregivers for children, according to an HHS survey of child welfare workers. State officials told us that it was a challenge to recruit a racially and ethnically diverse pool of potential foster and adoptive parents, as evidenced by the fact that more than half of states are not meeting HHS performance goals for recruitment. State officials noted the shortage of willing, appropriate, and qualified parents to adopt African American children, particularly older children, and researchers also cited a lack of resources among state and local agencies and federal guidance to implement new recruiting and training initiatives. Perhaps because of these challenges, 9 states in our survey reported that the policy requiring diligent recruitment had no effect on the proportion of African American children in care, and 15 states reported that they were unable to tell. Over the last 5 years, African American children as well as Native American children have consistently experienced lower rates of adoption than children of other races and ethnicities, according to HHS adoption data. (See fig. 15.) Providing adoption incentive payments to states generally helps reduce the proportion of African American children in care, according to our survey; however, these benefits may not be sustainable over time. In our survey, 20 states reported that these federal incentive payments provided to states for increasing adoptions contributes to reducing the proportion of African American children in care. A state official from Texas’s child welfare agency told us that in 2005 the state received the highest adoption incentive payments among all states and that the number of African American children adopted has increased each year since 2004. However, states face challenges under this program because they must reach higher benchmarks each year to continue to earn adoption incentive payments. While the total number of adoptions nationally increased significantly in the late 1990s, since 2000 adoption rates have reached a plateau, according to HHS data and other research. Twenty states reported that the federal policy that provides subsidies to parents who adopt a child considered as having special needs contributes positively to reducing the proportion of African American children in foster care. Of African American children who were adopted from foster care in 2004 who states classified as having special needs, the child’s race provided the basis for the classification in 20 percent of cases. In contrast, race was the basis for the classification of about 10 percent of Hispanic, Asian, and Native American adopted children who were determined to have special needs in that year. The federal policy encouraging race-neutral adoptions was believed to have less effect than other policies on the proportion of African American children in foster care. Intended to eliminate race-related barriers to adoption, MEPA-IEP prohibits foster care and adoption agencies that receive federal funds from delaying or denying placement decisions on the basis of race, color or national origin. Although 15 states reported that encouraging race-neutral adoptions would help reduce disproportionality, 18 states responded that this policy had no effect, and an additional 12 states reported that they were unable to tell. An HHS 2003 study of child welfare agencies, staff, and partner agencies noted that confusion and a general lack of knowledge regarding what the law allowed or prohibited hindered its implementation. In support of this finding, child welfare officials we spoke with in Illinois and Texas also noted that child welfare workers may misunderstand or fear that they are not complying with the law’s prohibition. These officials stated that in some cases child welfare workers may be less likely to place African American children with relatives or in African American adoptive homes because they mistakenly believe that the law prohibits or discourages same-race adoptions. Other researchers and officials told us they opposed the law’s intent and were concerned about the detrimental effects of placing children with parents of another race on a child’s well being. Some officials we interviewed stated that race should be given first priority in placing African American children in families for care as is done for Native American children under the Indian Child Welfare Act of 1978 (ICWA). According to a judge we interviewed in North Carolina, the encouragement of race-neutral adoptions led in some cases to African American children being placed in cross-racial homes in which they felt disconnected from their heritage. In addition to adoption, many child welfare officials and researchers we interviewed considered legal guardianship a particularly important way to help African American children exit foster care. Legal guardianship was formally recognized under federal law as another option for placing children in permanent homes. Some African American families, especially relatives, are reluctant to adopt because they do not want to terminate the parental rights of the child’s parent, according to officials and researchers we interviewed. Legal guardianship allows a household to establish a permanent home for a child without terminating the parental rights of the birth parents. Seventeen states in our survey reported that this federal policy was believed to help decrease the proportion of African American children in their states’ foster care systems. In California and Illinois, subsidized guardianships have been found to reduce the number of children in foster care, including African American children. In California about 16,000 children exited the state foster care system between 2000 and 2005 through their kinship guardianship program, and about 43 percent of these children were African American, according to data from state officials. Based on the results of the Illinois waiver and other states with waivers, subsidized guardianships have also been found to be at least cost neutral. However, according to state child welfare directors we surveyed and interviewed, the lack of federal reimbursement for subsidies to guardians constrained states’ ability to place African American children in guardianship arrangements. In many cases, families that could otherwise serve as guardians lack the financial stability to permanently care for children without support, according to officials and researchers we interviewed. However, unless states are one of the seven that have a current federal demonstration waiver for assisted guardianship or kinship permanency programs, states cannot use federal child welfare funds to provide subsidies to legal guardians. According to state and local child welfare officials, states would like to have more flexibility to use Title IV-E funds for supporting guardianship placements, as is done with adoption. In discussions with us, HHS officials stated that the Administration’s proposed Child Welfare Program Option would provide states with the flexibility to use Title IV-E funds for the entire range of child welfare purposes, including assisted guardianship. However, although an HHS official said that guardianship was not considered as permanent as adoption, the results for the child have been found to be essentially the same. In the Illinois evaluation, guardianship and adoption both provide comparable levels of stability for the child and showed similar outcomes in terms of children’s emotional and physical health. Federal policies regarding licensing, such as those that limit reimbursement for costs associated with the use of unlicensed relative caregivers and require criminal background checks on prospective caregivers, contribute to the disproportionality of African American children in foster care, according to states we surveyed. To a lesser extent, state officials reported that federally mandated time frames determining a child’s permanency plan and whether parental rights should be terminated also had a negative effect. (See fig. 16.) States considered federal policies on the licensing and the use of relatives to provide foster care as increasing the proportion of African American children in foster care. In some cases, states permanently place children with unlicensed relatives who are neither adoptive parents nor guardians; however, states cannot claim federal reimbursement for such kinship care. In our survey, 20 states reported that this policy limiting reimbursement for costs associated with the use of unlicensed relative caregivers contributed to the disproportionality of African American children by hindering their ability to place children with relatives. According to researchers and state officials we interviewed, such policies have a disproportionate impact on African American children because they are more likely to live with unlicensed relatives. These relatives may be able to provide safe homes for children but may also be more likely have lower incomes and have difficulty meeting foster care licensing requirements, such as having a certain number of bedrooms. Eighteen states reported that federal policies requiring states to perform criminal background checks on prospective caregivers, including relatives, contributes to disproportionality, while other states reported that these policies had no effect. Among child welfare officials and others we interviewed, some were concerned that federal law requiring states to conduct fingerprinting checks for prospective parents or other types of background checks on all adults in the household may deter some African American relatives from stepping forward as caregivers. However, 16 states saw federal policy on criminal checks as having no effect. This may be in part due to the fact that most states have their own requirements regarding background checks that are similar to or more stringent than federal requirements. Until recently, states could opt out of federal requirements for criminal background checks on prospective foster care and adoptive parents, but that provision was eliminated by the recently enacted Adam Walsh Child Safety and Protection Act. For the eight states that opted out of the federal requirements, federal regulations require them to verify that safety considerations with respect to the prospective foster or adoptive parents have been addressed. Some officials were concerned that the federal policy would limit their ability under previous policy to place African American and other children with relatives and other families. California and New York officials told us that their alternative plans allow them the flexibility to make exemptions case-by-case for foster care, adoptive, or guardianship families, typically relatives, that have past convictions that would otherwise be automatically prohibited by federal law. Although such exemptions make up a comparatively small proportion of total placements for children, state and county officials in California told us that their inability to make these exemptions beginning October 2008— when the prohibition on states’ ability to opt out of federal requirements goes into effect—may have a disproportionate impact in the placement of African American children with relatives or other families who they consider safe and appropriate for children. State officials had mixed views on federal policies that impose time frames on permanency decisions that affect whether children will be reunified with their parents or placed in an alternative home. About a third of states reported that federal policy requiring that states adhere to certain time frames for initiating plans to place children in permanent arrangements and for terminating parental rights contributed to an increase in the proportion of African American children in care. Some state officials and researchers we interviewed said that these time frames were not reasonable for some African American parents who have complex problems, such as substance abuse and mental health issues, that require more time to resolve or if they have difficulty in accessing services. When parental rights are terminated, some children become “legal orphans” and remain in foster care longer than if parents had been given more time to complete their reunification plans. According to an HHS official’s analysis of AFCARS data, the percentage of children who have had their parental rights terminated but who did not find a permanent home and ultimately emancipated out of the foster care system increased from 3.3 percent in 2000 to 6.7 percent in 2005. On the other hand, some child welfare officials reported that the ASFA time frames have been helpful in ensuring that children do not languish in care and have helped reduce the proportion of African American children in care. Issues surrounding the disproportionate representation of African- American children in foster care are pervasive, continuing, and complex. They cut across different points in the child welfare process—from before entry to exit from foster care—and they affect nearly all states in this nation to varying degrees. In efforts to reduce African American representation in foster care, state and local child welfare agencies face numerous challenges. These challenges include ensuring that decisions to place a child in foster care are not influenced by bias or cultural misconceptions about families or communities, and that parent’s difficulties in accessing support services do not prevent a child from returning home. Adding to these challenges is the fact that many supports and services are provided through multiple social service systems and require actions outside the responsibility of child welfare agencies, such as the ability to obtain timely substance abuse treatment for parents or the availability of affordable housing. To facilitate access to services, state and local agencies bear the primary responsibility for coordinating and administering these services. To some extent, federal policies on adoption have supported states’ efforts to reduce the foster care population, but among policies aimed at reducing the number of minority children in foster care, many states experienced challenges recruiting sufficient minority families that reflect the foster care population. African American children have generally seen lower adoption rates than children of other races, and in recent years the adoption rate for all children has reached a plateau. States report being constrained by the lack of federal subsidies for legal guardianship similar to those provided for adoption. Many consider legal guardianship to be more reflective of the cultural values held by some African Americans and other families of color and better suited to the needs of African American and Hispanic families who want to permanently care for related children without necessarily adopting them. As a strategy, subsidizing guardianships has demonstrated its value in providing permanent families for children and in reducing the number of African American children in foster care. It may also be cost-effective, given the experiences of the states that implemented this strategy using federal waivers. This may therefore be the time to reconsider the current distinctions that provide subsidies for adoption but not for guardianship. The importance of collecting and analyzing data by race is considered a crucial first step for addressing racial disparity within child welfare and other systems. Yet some states and localities report a lack of capacity to collect or analyze data that would better allow them to identify the strategies that would be most useful in addressing the problems in their state. HHS provides assistance to states on data analysis and practices through its technical assistance network and related Web sites, although the agency lacks the directive and funding that Department of Justice officials said were instrumental to their efforts to analyze data by race and provide guidance on promising practices. In response to this directive, states that have identified disproportionality in juvenile justice as an issue have regularly submitted reports to OJJDP and have devised plans to address the issue. In child welfare, states identified as being in the forefront of efforts to address disproportionality are relying on private organizations to provide financial and technical assistance. In the absence of research-based evidence on strategies that work for addressing disproportionality, states are seeking out promising practices used in other states. Despite the steps that HHS has taken to disseminate information about these strategies, states report that they need further information and technical assistance to strengthen their current efforts in addressing disproportionality. To assist states in increasing the number of homes available for the permanent placement of African American and other children from foster care, we suggest that Congress consider amending federal law to allow federal reimbursement for legal guardianship similar to that currently provided for adoption. To enhance states’ ability to reduce the proportion of African American children in foster care, the Secretary of HHS should further assist states in understanding the nature and extent of disproportionality in their child welfare systems and in taking steps to address the issue. These actions should include: Encouraging states to regularly track state and local data on the racial disproportionality of children in foster care and use these data to develop strategies that can better enable them to prevent children’s entry into foster care and speed their exit into permanent homes. HHS should also encourage states to make increased use of HHS’s National Resource Centers as a source of technical assistance on this issue. Completing and making publicly available information on disproportionality that the agency is developing under its Culturally Competent Practice Knowledge Initiative so that states have easier access to tools and strategies useful for addressing the issue. We provided a draft of this report to HHS for review and comment. HHS’s written comments are provided in appendix III of this report. Our draft report included a recommendation that HHS pursue specific measures to allow federal reimbursement for legal guardianship. In commenting on the draft report, HHS disagreed with the recommendation, stating that the administration had already proposed a broad restructuring of child welfare funding, known as the Child Welfare Program Option, which would allow states to use federal funds for legal guardianship. Under this proposed restructuring of child welfare, states could choose to remain under the current foster care funding structure or they could instead receive a capped grant for a period of 5 years. States choosing the grant option would have the flexibility to use these funds for a wide range of child welfare purposes, including subsidizing guardianships. The current adoption assistance program would remain the same under this proposal. However, HHS has presented this option in its budget proposals each year since 2004, but no legislation has been offered to date to authorize it. Moreover, if enacted, it is unknown how many states would choose a capped grant that would allow greater program flexibility instead of the current title IV-E foster care entitlement funding. In light of these factors, we suggest that Congress consider taking action to allow adoption assistance payments to be used for legal guardianship. Current evidence indicates that such a change could help states increase the number of permanent homes available for African American and other children in foster care. Furthermore, some states have demonstrated this change can be achieved without increasing program costs. We have changed the final report to delete our recommendation to HHS and to include instead this matter for congressional consideration. In response to our recommendation that HHS take certain actions to further assist states in understanding and addressing the nature and extent of racial disproportionality in their child welfare systems, HHS stated that these actions were consistent with their current technical assistance efforts to encourage and assist states in addressing racial disproportionality. For example, HHS cited the variety of technical assistance available to states in areas such as data analysis and cultural competency. However, HHS did not address the specific actions that we recommended related to encouraging states to regularly track and use child welfare data on racial disproportionality and completing and making publicly available the information on disproportionality that it is developing through its Culturally Competent Practice Knowledge Initiative. We continue to believe that it is important for HHS to take these actions to further equip states to address this complex issue. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, copies of this report will be sent to the Secretary of HHS, 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. Please contact me at (202) 512-7215 if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. For this study, we were asked to analyze (1) the major factors that have been identified as influencing the proportion of African American children entering and remaining in foster care compared to children of other races and ethnicities; (2) the extent that states and localities have implemented strategies that appear promising in addressing African American representation in foster care; and (3) the ways in which key federal child welfare policies may have influenced African American representation in foster care. Although we focused on African American children in this report, we also noted points of similarity or difference with children of other races and ethnicities as appropriate. Overall, to address these three objectives, we used multiple methodologies, including administering a state survey; conducting site visits; interviewing researchers and federal agency officials; conducting a literature review using various criteria; and analyzing federal legislation and policies. More specifically, we conducted a nationwide Web-based survey of state child welfare administrators in 50 states and the District of Columbia between November 2006 and January 2007. To obtain a more in- depth understanding of the issues, especially of any promising strategies to address disproportionality of African American children, we conducted site visits to California, Illinois, Minnesota, New York, and North Carolina, and in addition, conducted telephone interviews with state and local child welfare officials, service providers, and court officials in Texas. These states were selected in accordance with various criteria discussed below. To extend our understanding, we interviewed child welfare researchers identified by others as knowledgeable on issues of racial disproportionality in foster care as well as representatives from national child welfare organizations, such as the Casey Family Programs; the Child Welfare League of America; Black Administrators in Child Welfare, Inc.; and the Center for the Study of Social Policy, on these matters. In addition, we participated in child welfare-related conferences with sessions relevant to these objectives. We also conducted an extensive literature review and analyzed published research on racial disproportionality in foster care and strategies used by states and others to address this issue, and selected the research for this review based on particular criteria described below. At the federal level, we interviewed HHS officials responsible for foster care programs and related data, as well as officials at the Department of Juvenile Justice, which is required by law to address racial disproportionality in the juvenile justice systems. Finally, we analyzed federal child welfare legislation, agency documentation, and policies relevant to foster care that may have an impact on racial disproportionality. We conducted our work between June 2006 and June 2007 in accordance with generally accepted government auditing standards. To obtain state perspectives on our objectives and the relative priority state child welfare agencies place on the challenges they face, we conducted a Web-based survey of child welfare directors in the 50 states and the District of Columbia. The survey was conducted using a self- administered electronic questionnaire posted on the Web. We contacted directors via e-mail announcing the survey and sent follow-up e-mails and made telephone calls as well to encourage responses. The survey data were collected between November 2006 and January 2007. We received completed surveys from 47 states and the District of Columbia (a 92 percent response rate). The states of New Jersey, Maryland, and Rhode Island did not return completed surveys. To develop the survey questions, we relied on information gathered through interviews with researchers, professional associations, and our literature review (see criteria for selecting literature). In addition, in July 2006, we solicited comments from various researchers and other experts on elements used in our survey to ensure their completeness. These elements included a list of factors that contribute to, strategies to address, and federal policies that may affect the disproportionality of African American children in foster care. We received comments on these elements from the Center for the Study of Social Policy, the Black Administrators in Child Welfare, and Westat, and made modifications accordingly. We worked closely with social science survey specialists to develop and pretest the questionnaire. Because these were not sample surveys, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, in the sources of information that are available to respondents, or how the data are entered into a database can introduce unwanted variability into the survey results. We took steps in the development of the questionnaires, the data collection, and data analysis to minimize these nonsampling errors. For example, prior to administering the survey, we pretested the content and format of the questionnaire with five states to determine whether (1) the survey questions were clear, (2) the terms used were precise, (3) respondents were able to provide the information we were seeking, and (4) the questions were unbiased. We made changes to the content and format of the final questionnaire based on pretest results. Because these were Web-based surveys in which respondents entered their responses directly into our database, there was a reduced possibility of data entry error. We also performed computer analyses to identify inconsistencies in responses and other indications of error. In addition, an independent analyst verified that the computer programs used to analyze the data were written correctly. To obtain a more in-depth understanding of issues, we conducted site visits to California, Illinois, Minnesota, New York, and North Carolina. In addition we conducted telephone interviews with Texas state child welfare officials, a researcher a service provider, and a judge in Texas. When viewed as a group, the states we visited reflected diversity in geographic location, rates of African American representation in foster care, strategies and initiatives used to address this disproportion, and program administration (state administered and county administered). In addition, the states we selected collectively covered nearly one-third of children in foster care across the nation. During these visits, we interviewed state and local child welfare officials; juvenile court judges and other child welfare-related legal representatives, such as attorneys and public guardians; community service providers; and others involved in the child welfare systems, such as academic researchers. We also collected information, reports, and data on disproportionality and initiatives to address this issue from state and local child welfare agencies and others during these visits. We cannot generalize our findings beyond the states we visited. To learn more about the major factors, strategies, and federal policies influencing whether African American children enter and remain in foster care compared to children of other races and ethnicities, we conducted a literature review. The literature we reviewed included research articles we identified through databases, such as Lexis-Nexis, J-STOR, and the National Clearinghouse on the Child Abuse and Neglect Information. We used various search terms, such as disproportionality, African American, foster care, child welfare system, and over-representation in searching these databases. We also reviewed literature cited in these studies and those we found on Web sites related to child welfare and disproportionality, as well as literature recommended to us from our interviews. In addition, we conducted a more intensive review about 50 studies identified through these methods that focused on factors affecting entry and length of stay in foster care. For each selected study, we determined whether the study’s findings were generally reliable. Two GAO social science analysts assessed each study’s research methodology, including its research design, sampling frame, selection of measure, data quality, limitation, and analytic techniques for its methodological soundness and the validity of the results and conclusions that were drawn. For all three objectives we also conducted interviews with academic researchers and other experts on disproportionality issues, such as child welfare-related organizations. We identified child welfare researchers for our interviews through our literature review and through recommendations from child welfare officials and stakeholders as knowledgeable on issues of racial disproportionality in foster care. For this study we interviewed academic researchers affiliated with the following universities and research centers: Chapin Hall at the University of Chicago, Children and Family Research Center at the University of Illinois School of Social Work, Jordan Institute for Families at the University of North Carolina, School of Social Welfare at the University of California at Berkeley, University of Minnesota School of Social Work, University of Texas School of Social Work, and Hunter College School of Social Work of the City University of New York. We also interviewed researchers and other staff at the following organizations: Black Administrators in Child Welfare, Casey Family Programs, Center for the Study of Social Policy, Child Welfare League of America, National Association of Public Child Welfare Administrators, National Council of Juvenile and Family Court Judges, Nestor Associates, and Westat. To obtain clarification on the findings of the National Incidence Surveys, we also interviewed the principal investigator of these studies for HHS, also at Westat. To obtain children welfare data we requested and analyzed the U.S. Children’s Bureau AFCARS data from the National Data Archive on Child Abuse and Neglect at Cornell University (NDACAN). AFCARS is a federal database that provides case level data on all children covered by Title IV-B and Title IV-E of the Social Security Act. On a bi-annual basis, all states submit data to the Children’s Bureau concerning each child in foster care and each child who has been adopted under the authority of the state’s child welfare agency. To confirm the reliability of the data, social science methodologists at GAO conducted electronic data testing, comparing our figures with HHS and others who have reported similar data. We also interviewed several officials with NDACAN and HHS who were responsible for the data. We found the data to be sufficiently reliable for the purposes of this report. In calculating the adoption rates reported in figure 15, we used estimates from HHS’s Web site of the total estimated count of adoptions with public agency involvement finalized at year end divided by the number of children waiting to be adopted on the last day of the prior year. Children waiting to be adopted are defined by HHS as those children who have the case goal of adoption and/or have parental rights terminated. According to an HHS official familiar with AFCARS data, the HHS reported numbers of children waiting to be adopted may be imprecise because of variations among states and over time. Accordingly, we also calculated the adoption rate by using the number of children in foster care on the last day of the prior year as the denominator. Under both analyses, African American and Native American children had lower adoption rates between 2001 and 2005 than children of other races and ethnicities. We chose not to report the findings under the second method of analysis because the numbers of children in foster care on the last day of the prior year include many children who are not waiting to be adopted, such as children who have a case goal of reunification and later reunify with their parents, which would greatly underestimate adoption rates. Among researchers and others, disproportionality indexes or ratios are used to characterize the extent of disproportionality in a particular area, whether nationwide, within a state, or within a county or metropolitan area. Table 4 represents the proportion of African American, White, Hispanic, Asian, and Native American children in the foster care system in each state when compared to the overall population of each racial category of children in that state. (See table 4.) In the table, we present disproportionality indexes by state for children in foster care on the last day of fiscal year 2004. In this table, for example, an index number of below 1.00 indicates an under-representation of African American in foster care in a state compared to African American children’s proportions in the general child population in that state, while a number above 1.00 indicates an over-representation of African American children in foster care in a state compared to African American children’s proportions in the general child population in that state. This table also displays this indexing methodology for the other four racial and ethnic categories. Overall, the disproportionality index nationwide for African American children is 2.26, which means that African American children were over- represented in foster care nationally in 2004 at a rate of more than twice their proportions in the U.S. child population. In fiscal year 2004, a total of 36 states had disproportionality indexes of 2.0 or more, and 16 states had disproportionality indexes of 3.0 or more for the number of African American children in foster care at the end of the fiscal year (indexes of 2.0 or more are bolded in the table 4). Within states, disproportionality rates may vary considerably, as noted earlier. To derive each state’s disproportionality index, for example, we divided the proportion of African American children in foster care (the number of African American children in foster care divided by the total number of children in child foster care) by the proportion of the African American children in the general population (the number of African American children in the population divided by the total number in the general population). According to HHS AFCARS data from fiscal year 2004, there were 498,981 children ages 17 years and under in foster care in the United States on September 30, 2004. Of these children, 162,991 were African American. Census population estimates for 2004 show there were 73,258,205 children 17 years old and under in the general population, of which 10,805,487 children were African American. Using the methodology described, we obtained a disproportionality index of 2.26 nationally for African American children in foster care at the end of the fiscal year for 2004. This methodology was used for the other four racial categories. Cindy Ayers (Assistant Director) and Deborah A. Signer (Analyst-in- Charge) managed all aspects of the assignment. Christopher T. Langford, Theresa Lo, and Kimberly Siegal made significant contributions to this report, in all aspects of the work. Interns Lisa McMillen and Ashley Gilbert also contributed with data collection and analysis. In addition, Charles Willson assisted in the message and report development; Jay Smale contributed to the initial design of the engagement and, together with Luann Moy, assessed studies for the literature review; William R. Chatlos provided technical assistance in the development and pre-testing of the Web-based survey; Carolyn Boyce provided technical support in survey research and statistical analysis; George Quinn provided data analytic support; and James Rebbe, Attorney, provided legal support. | A significantly greater proportion of African American children are in foster care than children of other races and ethnicities, according to HHS and other research. Given this situation, GAO was asked to analyze the (1) major factors influencing the proportion of African American children in foster care, (2) extent that states and localities have implemented promising strategies, and (3) ways in which federal policies may have influenced African American representation in foster care. GAO's methodologies included a nationwide survey; a review of research and federal policies; state site visits; analyses of child welfare data; and interviews with researchers, HHS officials, and other experts. A higher rate of poverty is among several factors contributing to the higher proportion of African American children entering and remaining in foster care. Families living in poverty have greater difficulty accessing housing, mental health, and other services needed to keep families stable and children safely at home. Bias or cultural misunderstandings and distrust between child welfare decision makers and the families they serve are also viewed as contributing to children's removal from their homes into foster care. African American children also stay in foster care longer because of difficulties in recruiting adoptive parents and a greater reliance on relatives to provide foster care who may be unwilling to terminate the parental rights of the child's parent--as required in adoption--or who need the financial subsidy they receive while the child is in foster care. Most states we surveyed reported using strategies intended to address these issues, such as involving families in decisions, building community supports, and broadening the search for relatives to care for children. HHS provides information and technical assistance, but states reported that they had limited capacity to analyze data and formulate strategies, and states we visited told us they relied on assistance from universities or others. States reported that the ability to use federal funding for family support services was helpful in keeping African American children safely at home and that federal subsidies for adoptive parents helped move children out of foster care. However, they also expressed concerns about the inability to use federal child welfare funds to provide subsidies to legal guardians. As an alternative to adoption, subsidized guardianship is considered particularly promising for helping African American children exit from foster care. States were also concerned about the lack of flexibility to use federal foster care funds to provide services for families, although states can use other federal funds for this purpose if they consider it a priority. |
NRC issues licenses under the Atomic Energy Act of 1954, as amended, to individuals and entities such as hospitals, research and fuel cycle facilities, and manufacturers that use radioactive materials. The license—termed a “materials license”—permits the licensee to possess, use, and/or transfer radioactive materials under controlled conditions intended to limit the public’s exposure to harmful radiation. According to NRC’s August 1994 annual report, NRC regulates about 6,850 active licenses. Over 38,000 licenses have been terminated for sites previously involved in activities related to radioactive materials. NRC terminates about 350 materials licenses annually. According to NRC, the majority of the licensed operations cause little or no contamination. As a result, most site cleanups are routine and generally take less than 4 years to complete. Cleanups at other NRC-licensed sites, however, are highly complex, and many have been under way for an extended period of time—over 20 years in one case. At the conclusion of the licensees’ operations, NRC currently requires them to decontaminate their facilities, including land, buildings, and equipment, to a level that would allow the site to be used safely for any purpose in the future (unrestricted use). This process is known as “decommissioning.” Decommissioning generally involves many steps. Among other steps, (1) the licensee must develop a site characterization plan documenting the extent and location of contamination, (2) NRC must review and approve the licensee’s plan for decommissioning the site, (3) the licensee must remediate the site and prepare a final site survey documenting the results, and (4) NRC must conduct a survey to confirm that the site has been adequately cleaned up before terminating the license. In our 1989 review of NRC’s decommissioning procedures and criteria, we found that NRC had improperly terminated licenses at two of the eight sites we reviewed. The two sites were released for unrestricted use despite the presence of radioactive contamination in excess of NRC’s decommissioning guidelines. Radioactive contamination at one site was 3 to 320 times higher than the guidelines allow; at the other site, contamination was 2 to 4 times higher than NRC allows. Because of inadequate information, we were unable to determine whether similar problems existed at the other six sites. During congressional deliberations on this topic in August 1989, NRC agreed to (1) review documentation on materials licenses terminated between 1965 and 1985 to assess whether past operations had been properly cleaned up and, if not, (2) identify sites requiring additional cleanup. NRC initiated the review in September 1990 and subsequently expanded it to include all terminated licenses. According to NRC, contractors had examined documentation on about 29,000 (about 75 percent) of an estimated 38,500 terminated licenses through December 1994. NRC has determined that 22 of the 29,000 licenses involved sites that exceed radioactive guidelines for unrestricted use and, consequently, require additional cleanup. Documentation on another 895 of the former licenses was inadequate to determine whether the sites meet NRC’s guidelines. As a result, as of March 15, 1995, NRC was in the process of obtaining additional information about the 895 terminated licenses using, among other things, the personal knowledge of cognizant NRC staff, site visits, and states’ and former licensees’ records of the affected sites. NRC does not expect that a large number of former sites will require additional cleanup, although the total number of these sites will not be known for several years. According to NRC, the contractor will complete its review of the remaining 9,500 terminated licenses in 1996. However, NRC officials told us that it will take several more years to review the contractor’s work and conduct any site inspections that may be needed to assess contamination resulting from these licenses. In March 1990, NRC established a program—termed the Site Decommissioning Management Plan (SDMP)—to help ensure the timely cleanup of sites facing difficult and/or prolonged decommissioning. NRC originally identified 40 sites for increased oversight, guidance, and assistance to help ensure their timely cleanup. The sites, known as SDMP sites, were selected on the basis of the personal experience of the NRC regional and headquarters staff considered most knowledgeable of and familiar with sites facing problematic cleanups. NRC staff included sites within the SDMP program if they met one or more of the following criteria: A licensee’s financial ability or willingness to perform the cleanup was questionable, or other problems existed. The site contained large amounts of contaminated soil, unused settling ponds, or buried waste that could be difficult to dispose of. The site contained unused facilities that had been contaminated for a long time. The license had previously been terminated, but residual contamination at the site still exceeded NRC’s guidelines for unrestricted use. Groundwater at the site was contaminated, or potentially contaminated, by radioactive waste. By 1992, 2 years after the SDMP program was initiated, eight new sites had been added to the program, and only one site had been cleaned up and removed from the program. Dissatisfied with the slow pace of cleanups at the SDMP sites, NRC’s management directed its staff to accelerate those cleanups. As a result, in April 1992 NRC developed an action plan that, among other things, (1) summarized NRC’s existing guidance and criteria for site cleanups, (2) established time frames for major decommissioning milestones, and (3) described the process that NRC would use to establish schedules for timely site cleanups. According to NRC officials, the 1992 action plan represented NRC’s first attempt to explain and formalize its cleanup process. Before the 1992 plan, NRC officials said, the decommissioning process was operated on an adhoc basis. Site owners lacked clear guidance about NRC’s decommissioning requirements, and NRC staff were unclear about how they could best fulfill their decommissioning responsibilities. Since issuing the 1992 action plan, NRC has taken additional action to clarify its requirements for decommissioning. In July 1993, NRC issued new regulations that required licensees and others who use or possess radioactive materials to prepare and maintain adequate documentation on activities that could affect decommissioning at their sites. Furthermore, in July 1994 NRC issued regulations that established time frames for completing decommissioning activities. Under the regulations, licensees are required to complete decommissioning within about 50 to 62 months. The new regulations primarily affect the timeliness of decommissioning future sites. For example, many SDMP sites have encountered delays resulting from inadequate information about past operations. Because little can be done to reconstruct this information, the new requirement for adequate recordkeeping will not apply to these sites. In addition, according to NRC officials, because many SDMP sites face extenuating circumstances that necessitate longer cleanups, they may need to be exempted from the decommissioning time frames. To date, NRC’s efforts have not resulted in the timely cleanup of existing SDMP sites. In fact, little progress has been made. Since 1990, the number of sites in the SDMP program has fluctuated between 40 and 57. In 1993, NRC projected that a total of 11 SDMP sites would be cleaned up by April 1994 and, consequently, removed from the SDMP program. However, only three sites were cleaned up and removed from the SDMP program during that period. Furthermore, interim progress toward the final cleanup at most of the 50 sites in the SDMP program in November 1994, is also behind schedule. According to NRC officials, since April 1993 NRC has, among other things, reviewed numerous (1) plans for decommissioning SDMP sites and (2) reports on the status of decommissioning activities at the sites. According to NRC, these efforts represent substantial progress in remediating SDMP sites. While progress is being made at some SDMP sites, our comparison of NRC’s October 1993 and November 1994 projections for completing interim decommissioning activities found that only two sites had completed their planned activities on schedule. Decommissioning activities at 31 sites were projected to exceed their milestones by 2 to 42 months, and 17 of the 31 sites were expected to exceed their milestones by 12 months or more. We could not determine whether activities at the remaining 17 sites were on schedule because of changes in the scope of decommissioning activities between October 1993 and November 1994. According to NRC’s records, most of the 50 SDMP sites in the program in November 1994 have large amounts of contaminated soil—up to 10 million cubic feet. The contamination resulted from a variety of operations, such as nuclear fuel research, chemical manufacturing, uranium processing, and landfill disposal activities. (App. I provides additional information about the sites, including the location and a description of the contamination present at each of the sites.) According to NRC officials, delays in cleaning up SDMP sites increase the likelihood, over the long term, for human exposure to radiation through the further release and spread of contamination into the environment. However, NRC officials and representatives of the contaminated SDMP sites told us that the sites do not pose any imminent health or safety risk because controls exist to limit the public’s access to contaminated areas. For example, they said fences and posted danger signs have been erected around contaminated property and buildings. In addition, they said the public has little reason to access areas that are obviously contaminated. However, we found that the extent of contamination is not always obvious. Figures 1 and 2 illustrate how a radioactively contaminated site appeared in 1976 and in 1994. Although the site appears to be cleaner in the 1994 photograph, it is not. The barrels of chemical and radioactive waste obvious in the 1976 photograph are still there but, over time, have been covered by top soil. And although most people probably have no reason to access property contaminated with radioactive waste, the representative for this SDMP site told us that hunters sometimes enter the property despite fences and signs alerting them to the danger. Delays in cleaning up contaminated sites can also result in more difficult cleanups. For example, over time, radioactive materials can seep into the water table beneath a site and contaminate the groundwater both on and off the site. Eight SDMP sites have already contaminated the groundwater, and according to a contractor performing NRC’s review of formerly licensed sites, about 1 percent of the former sites (nearly 400) may need to be examined for groundwater contamination. The spread of radioactive waste through soil and water also results in more costly cleanups, a factor that can have a great impact on an owner’s ability and willingness to pay for site cleanups. Finally, according to NRC, continued cleanup delays erode the public’s confidence in NRC’s ability to protect the public from adverse health and safety consequences. A variety of factors have delayed and even halted cleanups at the SDMP sites. For example, at 14 SDMP sites, large volumes of thorium waste cannot be disposed of on-site without an exemption from NRC’s existing requirements, and disposal elsewhere may not be practical or feasible because of the high cost and limited availability of off-site disposal facilities. Litigation, coordination, and negotiations between affected parties also have delayed cleanups at many SDMP sites. Finally, lengthy time frames for NRC’s review and approval of key decommissioning documents have contributed to cleanup delays at nine SDMP sites. NRC permits site owners to bury contaminated waste on-site if radiation levels can be reduced to a point that permits the site to be used for unrestricted purposes. If NRC’s guidelines for decommissioning cannot be met through on-site burial, owners may have to remove the waste and transfer it to a facility licensed to accept low-level radioactive waste. However, neither disposal option is viable for many SDMP sites contaminated with large quantities of radioactive waste. Many SDMP sites cannot meet NRC’s guidelines for on-site disposal, yet off-site disposal may not be feasible or practical because of the limited availability of waste facilities and the high cost of off-site disposal. According to NRC, 30 SDMP sites are contaminated with large amounts of radioactive waste. Fourteen of these sites are contaminated with thorium. Over time, thorium decays to thallium, a radioactive isotope which emits gamma rays that can penetrate and harm the body. In the past, NRC allowed licensees to bury large quantities of thorium, subject to restrictions on the future use of the sites. NRC eliminated this disposal option in 1992. Because of the nature and large quantities of thorium at the 14 sites, radiation doses at the sites would exceed NRC’s guidelines for unrestricted use if the waste were buried. According to NRC, it is too early to tell whether the other 16 sites with large volumes of radioactive waste can meet NRC’s guidelines for on-site disposal because efforts to characterize the sites are still under way. Off-site disposal of large amounts of radioactive waste also may not be feasible. Specifically, only one facility in Utah is currently available to accept large volumes of waste from existing SDMP sites; however, it cannot accept materials that exceed the specified concentration levels established for various radioactive materials. According to NRC, access to waste disposal facilities will continue to be a problem and could even get worse over the next 5 to 10 years until state-sponsored facilities are available to accept the waste. And even when these facilities are available, the manager of the SDMP program acknowledged that it is uncertain whether the facilities will accept the quantities of contaminated materials present at some SDMP sites. Off-site disposal also may not be practical because of the costs involved. For example, the owner of one site contaminated with thorium estimated that on-site disposal would cost less than $2 million, compared to between $135 million and $467 million to dispose of the same waste off-site. In another case, an SDMP site representative estimated that on-site disposal of his site’s waste would cost between $1 million and $6 million, compared to over $100 million for off-site disposal. According to NRC officials, the high cost of off-site disposal is an important consideration because it raises concern about the ability and willingness of owners to pay the costs of decommissioning sites. For example, as a result of the high cost of off-site disposal, owners of one site have threatened to declare bankruptcy if required to transfer their waste off-site. When decommissioning costs exceed an owner’s financial capability, according to NRC officials, NRC has no other recourse but to turn the site over to the Environmental Protection Agency for cleanup under the Superfund program. NRC is taking action to provide additional disposal options for sites with radioactive contamination. In August 1994, NRC solicited views from interested parties on the appropriateness of revising its existing regulations to allow site owners to retain private ownership of their contaminated properties for a 100-year period, subject to land-use restrictions. Comments on NRC’s proposal were overwhelmingly negative. As a result, according to the NRC official responsible for handling comments on the proposal, NRC staff do not intend to pursue this regulatory change. NRC has also proposed a regulation to replace its existing decommissioning guidelines. If adopted, the regulation would permit site owners to exceed regulatory limits for radioactive contamination in certain cases, subject to restrictions on the future use of their properties. According to NRC, a number of significant issues will need to be resolved before this regulatory change can be adopted. Issues include (1) the amount of radiation that will be allowed at the sites, (2) whether existing SDMP sites should be held to new requirements, and (3) the conditions and time frames for returning sites to unrestricted use. Finally, NRC is studying on-site disposal issues at four SDMP sites contaminated with large volumes of thorium. When completed, NRC officials said, the studies may be used to evaluate the appropriateness of on-site disposal at other sites contaminated with large volumes of thorium. NRC expects the studies will take at least 2 years to complete. Litigation, coordination, and negotiations between affected parties also have delayed cleanups at many SDMP sites. According to NRC, for example, litigation has delayed cleanups at six SDMP sites, including one case that has been unresolved for more than 5 years. Litigation has occurred for a variety of reasons. For example, owners of one SDMP site—a sewage treatment facility—have filed a lawsuit against the owners of another SDMP site involved in the manufacturing of medical equipment. According to the owners of the sewage facility, discharges of radioactive waste in the manufacturer’s sewage lines have contaminated the sewage facility. According to NRC, outside parties, such as environmental groups, have also filed lawsuits to stop or impede cleanups at SDMP sites because of environmental and health concerns. Finally, owners of SDMP sites who are embroiled in disputes about NRC’s decommissioning policies and regulations have filed lawsuits against NRC. In addition to litigation, nearly half of the SDMP sites face management and disposal issues that must be coordinated with other federal and state agencies that have jurisdiction over specific aspects of cleanups. In some cases, coordination requirements are perfunctory and have little impact on timely site cleanups. However, in other cases, particularly when states’ requirements differed from those imposed by NRC, substantial delays have occurred. For example, under state regulations the radioactive waste at one SDMP site in Ohio also must be treated as solid waste. As a result, even though the site can meet NRC’s requirements for on-site burial, delays have occurred because of the state’s concerns about whether the company’s proposed disposal cell (waste receptacle) complies with the state’s requirements for the disposal of solid waste. Coordination on this issue has already contributed to cleanup delays of about 3 years, and additional delays will occur until the issue is resolved. Finally, negotiations between current and previous site owners about who is responsible for cleaning up SDMP sites have resulted in delays. For example, at one SDMP site negotiations between the former licensee and the current site owner to determine which one is the responsible party delayed cleanup by at least 2 years; negotiations between parties at another site delayed cleanup by about 6 months. According to the manager of the SDMP program, NRC expects that most future SDMP sites will be identified from NRC’s ongoing review of past cleanups at sites with terminated materials licenses. Consequently, negotiations about who is responsible for site cleanups will likely become a larger issue in the future. NRC’s lengthy time frames for reviewing and approving key decommissioning documents, such as site decommissioning plans, also have contributed to cleanup delays at many SDMP sites. For example, according to NRC documentation, excessive time frames for reviewing and approving documents submitted by SDMP site owners contributed to delays of between 6 months and 22 months at nine sites during 1993. Representatives of owners at 10 of the 14 SDMP sites we contacted also identified concerns about the timeliness of NRC’s reviews. Specifically, they said that NRC’s reviews were “rarely” or “not usually” timely. For example, one representative said that inaction on his site’s application for a materials license was significantly delaying cleanup at the site. In November 1994, NRC estimated that the license would be approved in July 1995—2 years after the owner submitted the application. Decommissioning activities cannot begin at the site until the license is approved. According to NRC, lengthy time frames for reviewing and approving decommissioning documents are the result of a variety of factors, including the availability of staff to perform the reviews. Several SDMP site representatives agreed that NRC staffing, particularly staff turnover, is a problem. For example, one site owner said that during a 4-year period, he had to educate three NRC staff who, at various times, were responsible for overseeing the cleanup of the site, thereby delaying the cleanup. In addition, we found that NRC does not assign staff to work exclusively on the SDMP program or ensure that priorities are set consistently for SDMP’s cleanup activities. Instead, the responsibility for overseeing SDMP sites within NRC has been divided between many headquarters and regional organizations with varying missions and priorities that, according to NRC, often have taken precedence over SDMP’s program activities. According to NRC, it has acted to improve the timeliness of its document reviews. For example, because of a recent reorganization within NRC, additional staff are now available to perform the reviews. Furthermore, between October 1994 and December 1994, NRC tested a system for tracking and assigning staff resources to the reviews. Although NRC is currently reviewing the test’s results, early indications are that the system is more costly than can be justified. As a result, NRC officials said that they will probably need to pursue other methods for managing staff resources for SDMP activities. NRC’s efforts to provide increased assistance to sites facing difficult and lengthy cleanups, while laudable, are unlikely to resolve the numerous and complex issues encountered at existing SDMP sites. Many SDMP site cleanups have been delayed by issues involving litigation, coordination, and negotiation between affected parties, which are issues largely beyond NRC’s control. In addition, in the short term, little can be done to resolve the pressing problems experienced by sites that cannot meet current decommissioning guidelines for on-site disposal without an exemption from NRC’s existing requirements. The limited availability and high cost of off-site waste disposal facilities may be addressed when state-sponsored facilities are available to accept the waste. However, even when these facilities become available, it is unclear whether they will be able to accept the types and quantities of contaminated waste present at a large number of SDMP sites. NRC is exploring additional disposal options for sites that cannot meet its existing requirements. While additional disposal options may facilitate decommissioning at many SDMP sites, a wide variety of difficult issues will need to be thoroughly addressed before any regulatory change can be adopted. For example, because sites would be allowed to have greater concentrations of radioactive contamination than currently permitted, issues about the possibility of future waste migration will need to be resolved to ensure that additional sites do not experience migration problems. NRC will also need to ensure that controls at the sites will be adequate over the long term to safeguard the public from greater exposure to radiation. Decommissioning issues are likely to become even more problematic as the magnitude of NRC’s decommissioning effort grows. NRC’s ongoing review of terminated licenses already has identified 22 sites requiring additional cleanup. Another 895 licenses require additional review to determine if the sites require further cleanup. More sites are likely to be identified as NRC completes its review of the remaining 9,500 licenses. On March 15, 1995, we met with NRC officials, including the Deputy Executive Director for Nuclear Materials Safety, Safeguards and Operations Support, and the Director of the Office of Nuclear Material Safety and Safeguards to discuss and clarify NRC’s written comments on a draft of our report. (NRC’s written comments are included as app. II.) NRC officials agreed that little progress has been made in removing sites from the SDMP program—the ultimate objective of the program. However, they cited several actions by NRC that they believe will contribute to the eventual cleanup of SDMP sites. We have included details on these actions, as appropriate, in the body of this report. We have also clarified and updated information in our draft report on the basis of NRC’s comments. NRC officials stressed that SDMP sites, such as the one illustrated in this report, do not represent an immediate hazard to infrequent intruders. While all SDMP sites exceed NRC’s guidelines for unrestricted use, they said that an individual’s risk of exposure to radiation would occur only if controls at the sites broke down and people took up residence or worked at the sites without adequate precautions. Furthermore, they said that covering barrels of contaminated waste with soil, as was done at the site discussed in this report, helps reduce the overall hazard. We agree that health consequences related to an individual’s exposure to radiation are considered a long-term—not an immediate—risk, provided that an individual’s exposure is controlled and limited. However, we do not fully agree with NRC’s comments about the site discussed in our report. As demonstrated in our report, controls can and do break down. Furthermore, we believe that it is too early to assess the health risk associated with this site. The site, which was used as a landfill, has not yet been characterized to determine the extent and nature of contamination. In addition, records are incomplete or nonexistent about the (1) sources of contamination, (2) adequacy of efforts to cover the contaminated waste, and (3) frequency and duration of any intruder’s access to the property. To assess NRC’s progress in identifying former materials licensees’ sites that require additional cleanup, we interviewed contractor officials performing the work and the NRC manager responsible for overseeing the review. We also examined documentation related to the project, including the contract governing the scope of the work. To assess progress in cleaning up the high-priority SDMP sites and to identify major factors contributing to decommissioning delays in the 21 states in which nuclear materials are regulated by NRC, we interviewed the manager of the SDMP program and other cognizant headquarters and regional NRC officials, including 48 project mangers in three NRC divisions (Low-Level Waste Management and Decommissioning, Fuel Cycle Safety and Safeguards, and Industrial and Medical Nuclear Safety) responsible for providing increased oversight, guidance, and assistance to SDMP sites during 1993. We also contacted owners or their representatives at 14 SDMP sites to obtain their views about the effectiveness of the SDMP program. The sites represent a cross-section of SDMP sites facing difficult decommissioning issues. In addition, we reviewed NRC’s documentation of the origin, intent, and goals of the SDMP program, including NRC’s site selection criteria, the 1992 action plan, annual status reports on the program, and memorandums and policy papers about possible changes in NRC’s decommissioning regulations and policies. Finally, we visited five sites in Michigan, Oklahoma, and Ohio to observe the extent of contamination at some SDMP sites. We conducted our work between May 1993 and March 1995 in accordance with generally accepted government auditing standards. As agreed with your office, 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 appropriate congressional committees, the Chairman of NRC, and other interested parties. We will also make copies available to others upon request. If you have questions, please call me at (202) 512-3841. Major contributors to this report are listed in appendix III. Thorium in slag and soil Uranium in soil and buildings Thorium and uranium in soil and settling ponds Thorium and hazardous wastes in landfill Thorium contamination in ponds and ground Uranium in buildings, soil, settling ponds Depleted uranium in soil and sand Uranium and thorium in sludge Uranium and thorium burial sites Thorium in soil and slag Cobalt-60 in sewage sludge and ash (continued) Anthony A. Krukowski, Regional Management Representative Odell W. Bailey, Jr., Evaluator-in-Charge Joanna C. Allen, 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 reviewed the effectiveness of the Nuclear Regulatory Commission's (NRC) decommissioning program, focusing on: (1) NRC progress in identifying all former licensees' sites that require additional cleanup; (2) NRC progress in ensuring that sites on its Site Decommissioning Management Plan (SDMP) are cleaned up in a timely manner; and (3) factors that impede the timely cleanup of sites. GAO found that: (1) NRC has reviewed about 75 percent of its terminated licenses to identify sites that need additional cleanup and has found 22 sites that exceed its radioactive contamination guidelines; (2) NRC is seeking additional information on another 895 terminated licenses to determine if those sites need additional remediation; (3) NRC will not know the total number of sites that will require additional cleanup until it completes its review; (4) NRC expects to complete its initial review in 1996, but it will take several more years to conduct site inspections to determine contamination levels; (5) although NRC established SDMP in 1990 to ensure the timely remediation of sites facing difficult or prolonged cleanups, it has made little progress in cleaning up those sites; (6) NRC has issued additional regulations that require licensees to document their activities that could affect decommissioning operations; (7) the delays in cleaning up contaminated sites increase the risk of human exposure to radioactive wastes; and (8) factors that have delayed or halted cleanup at SDMP sites include difficulties in disposing of large quantities of a certain radioactive waste, litigation, coordination and negotiations between affected parties, and time consuming administrative reviews of decommissioning documents. |
The Department of the Interior has jurisdiction over more than 500 million acres of land—about one-fifth of the total U.S. landmass—and over 1.8 billion acres of the Outer Continental Shelf. As the guardian of these resources, the department is entrusted to preserve the nation’s most awe- inspiring landscapes, such as the wild beauty of the Grand Canyon, Yosemite, and Denali national parks; our most historic places, like Independence Hall and the Gettysburg battlefield; and such revered national icons as the Statue of Liberty and the Washington Monument. At the same time, Interior is to provide for the environmentally sound production of oil, gas, minerals, and other resources found on the nation’s public lands; honor the nation’s obligations to American Indians and Alaskan Natives; protect habitat to sustain fish and wildlife; help manage water resources in western states; and provide scientific and technical information to allow for sound decision-making about resources. In recent years, the Congress has appropriated about $10 billion annually to meet these responsibilities. With these resources, Interior employs about 73,000 people in eight major agencies and bureaus at over 2,400 locations around the country to carry out its mission. Interior’s management of this vast federal estate is largely characterized by the struggle to balance the demand for greater use of its resources with the need to conserve and protect them for the benefit of future generations. GAO, among others, have identified management problems facing the department and have made many recommendations to improve its agencies and programs. In some cases, Interior has made significant improvements; in others, progress has been slow. As a result, several major management challenges remain. Although Interior, working with USDA’s Forest Service, has taken steps to help manage perhaps the most daunting challenge to its resource protection mission—protecting lives, private property, and federal resources from the threats of wildland fire—concerns remain. In addition, Interior’s programs for managing hardrock mining, oil, and gas operations have not adequately protected federal resources from the environmental effects of these activities. The wildland fire problems facing our nation continue to grow. The average number of acres burned by wildland fires annually from 2000 to 2005 was 70 percent greater than the average number burned annually during the 1990s, and appropriations for the federal government’s wildland fire management activities tripled from about $1 billion in fiscal year 1999 to nearly $3 billion in fiscal year 2005. Experts believe that catastrophic damage from wildland fire will continue to increase until an adequate long- term federal response is implemented and has had time to take effect. While USDA’s Forest Service receives the majority of fire management resources, Interior agencies—the National Park Service, BIA, FWS, and, particularly, BLM—are key partners in responding to the threats of wildland fire. Consequently, most of our work and recommendations on wildland fire management address both departments. The Interior agencies and the Forest Service have not yet developed a cohesive strategy that identifies long-term options and associated funding estimates for addressing wildland fire threats, as we first recommended in 1999; nor have they developed a tactical plan that outlines the critical steps and time frames needed to complete such a strategy, as we recommended in 2005. While the agencies together issued a document in February 2006 titled Protecting People and Natural Resources: A Cohesive Fuels Treatment Strategy, it does not identify long-term options or associated funding estimates. Also, although the agencies have undertaken some tasks over the past 7 years that they stated are important to developing the cohesive strategy that we recommended, we have concerns about when and whether such tasks will be completed as planned. For example, the agencies began developing two modeling systems to help them (1) allocate resources to respond to wildland fires and (2) identify the extent, severity, and location of wildland fire threats to our nation’s communities and ecosystems; these systems are slated for completion in 2008 and 2009, respectively. We are concerned, however, that the agencies’ recent endorsement of significant, mid-course design changes to the resource allocation model may not fulfill key project goals, including determining the most cost-effective allocation of resources. In addition, the agencies currently have no plans to routinely update data in the threat modeling system—this would be necessary, for example, after major fires, hurricanes, or other factors have significantly altered the landscape. Such updated data are necessary to accurately capture the nature of wildland fire threats and to optimize allocation of resources over time. For these reasons, we continue to believe that a cohesive strategy and tactical plan would be helpful to the Congress and the agencies in making informed decisions about effective and affordable long-term approaches to addressing the nation’s wildland fire problems. In addition, in 2006, we reported that the agencies needed to develop better guidance on sharing the costs of suppressing fires among federal and nonfederal entities. In some cases, these entities used different cost- sharing methodologies for fires with similar characteristics, which resulted in inconsistent sharing of costs among federal and nonfederal entities. The cost-sharing method used can have consequences in the millions of dollars for the entities involved. As of January 2007, the agencies were updating their guidance on possible cost-sharing methods and when each typically would be used, but it is unclear how the agencies will ensure that the guidance is followed. Finally, as we testified last month, preliminary findings from our ongoing work indicate that the effectiveness of the agencies’ efforts to contain wildfire suppression costs may be limited because the agencies have not clearly defined their cost-containment goals, developed a strategy for achieving those goals, or developed related performance measures. In addition, for efforts to contain wildfire suppression costs to be effective, once the agencies have defined their cost-containment goals, they need to integrate them with other goals of the wildland fire program—such as protecting life and property—and to recognize that trade-offs will be needed to meet desired goals within the context of fiscal constraints. Under BLM regulations, hardrock mining operators who extract gold, silver, copper, and other valuable mineral deposits from land belonging to the United States are required to provide financial assurances, before they begin exploration or mining, to guarantee that the costs to reclaim land disturbed by their operations are paid. However, we reported in June 2005 that BLM did not have a process for ensuring that adequate assurances were in place. As a result, some assurances may not fully cover all future reclamation costs, some operators do not have financial assurances, and some have either outdated reclamation plans and cost estimates or none at all. When operators with insufficient financial assurances fail to reclaim BLM land disturbed by hardrock mining operations, BLM is left with public land that poses risks to the environment and public health and safety, and requires millions of federal dollars to reclaim. For example, we reported that 48 hardrock operations had ceased to operate and had not been reclaimed since the financial assurance requirement began in 1981; for 43 of these sites, BLM identified a total of about $56 million in unfunded reclamation costs. We also reported that BLM’s system for managing financial assurances did not have current information or track certain information critical to managing the program. In response to our 2005 recommendations, BLM has taken substantial steps to correct these problems. In 2006, the agency modified its system for managing financial assurances to track key data. BLM also began requiring its state office directors to use a newly created report available from the system to ensure that adequate financial assurances are in place, and to (1) develop corrective action plans to address any financial assurance deficiencies with operators and (2) certify that reclamation cost estimates are adequate. If implemented properly, these efforts should ensure that appropriate financial assurances are in place to pay for necessary reclamation of federal lands. The number of oil and gas operations occurring on or under federal lands and private lands for which the federal government retains mineral rights that are permitted by BLM, has increased dramatically—more than tripling from fiscal year 1999 to fiscal year 2004—in part as a result of the desire to reduce the country’s dependence on foreign sources of oil and gas. In June 2005, we reported that BLM has struggled to deal with this permitting workload increase while also carrying out its responsibility to mitigate the impacts of oil and gas development on land that it manages. Overall, BLM officials told us that staff had to devote increasing amounts of time to processing drilling permits, leaving less time to ensure mitigation of the environmental impacts of oil and gas development. For example, two field offices we visited that had the largest increases in permitting activity were each able to meet their annual environmental inspection goals only once in the past 6 years. BLM has authority to assess and charge fees to cover its expenses for processing oil and gas permits, which would enable it to supplement its program resources. While the agency had not exercised this authority at the time of our report, it had begun taking steps to develop a fee structure for these permits. To help BLM better respond to its increased workload, we recommended that the agency finalize and implement this fee structure to recover its costs for processing applications for oil and gas drilling permits. In response to our recommendation, BLM issued a proposed regulation in July 2005 that included a $1,600 fee for processing oil and gas permits. However, the next month, the Congress prohibited Interior from initiating the new fee in the Energy Policy Act of 2005, and the final regulation did not include the proposed fee. Nevertheless, the department has continued to express interest in initiating such a fee and has proposed that the Energy Policy Act be amended to allow the fee to move forward. Similar to the concerns we have about BLM’s protection of environmental resources from oil and gas activities, we reported in 2003 that FWS’s oversight of oil and gas operations on wildlife refuge lands was not adequate. For example, we found that some refuge managers took extensive measures to oversee operations and enforce environmental standards, while others exercised little or no control. We found that such disparities occurred for two primary reasons. First, FWS had not officially determined its authority to require permits—which would include environmental conditions to protect refuge resources—of all oil and gas operations in refuges; we believe the agency has such authority. Second, refuge managers lacked guidance, adequate staffing levels, and training to properly oversee oil and gas activities. We also found that FWS was not collecting complete and accurate information on damage to refuge lands as a result of oil and gas operations and what steps were needed to address that damage. FWS has taken some steps to address recommendations we made to resolve these problems. For example, the agency has implemented training for staff overseeing oil and gas activities and has begun collecting better data on the nature and extent of oil and gas activities. However, FWS has not implemented two key recommendations that would strengthen its ability to protect refuge resources. First, because FWS had not formally clarified its authority to oversee all types of oil and gas operations on refuges, we recommended that the agency (1) determine its authority to oversee such operations and report that determination to the Congress and (2) seek from the Congress any additional authority that might be needed to apply a consistent and reasonable set of controls over all oil and gas activities occurring on national wildlife refuges. To date, FWS has not finalized its determination, but it has indicated that it does not believe it has the authority to require permits of all oil and gas operations that would include steps that must be taken to protect refuge resources. Further, FWS has indicated that it does not believe it needs additional authority to effectively manage oil and gas operations on refuges. We continue to believe, however, that FWS does have the authority to require such permits of all operators. Moreover, because of the effects of oil and gas activities on refuge resources that we previously reported, we also continue to believe that if FWS ultimately determines that it does not have the authority to require permits, it should seek this authority from the Congress in order to adequately protect refuges. Second, although FWS has taken steps to identify the level of staffing it needs to adequately oversee oil and gas activities occurring on national wildlife refuges, it has not—as we recommended—sought the funding to meet those needs through appropriations, its authority to assess fees, or other means. GAO has reported on management weaknesses in Indian programs for a number of years. While the department has taken significant steps in the last 10 years to address these weaknesses, it is still in the process of implementing key trust fund reforms, and several concerns exist about the completion of these reforms. We have also reported on serious delays in BIA’s program for determining whether the department will accept land in trust. In addition, the department could be doing more to assist seven island communities—four U.S. territories and three sovereign island nations—with long-standing financial and program management deficiencies. The Secretary of the Interior administers the government’s trust responsibilities to tribes and individual Indians, including maintaining about 1,450 trust fund accounts for more than 250 tribal entities with assets of about $2.9 billion and about 300,000 individual Indian trust fund accounts with assets of about $400 million. Management of Indian trust funds and assets has long been plagued by inadequate financial management, such as poor accounting and information systems; untrained and inexperienced staff; backlogs in appraisals, determinations of ownership, and record-keeping; lack of a master lease file or accounts- receivable system; inadequate written policies and procedures; and poor internal controls. In response to these problems, the Congress enacted the American Indian Trust Fund Management Reform Act of 1994, which among other things, established the Office of the Special Trustee (OST) to oversee and coordinate the department’s implementation of trust fund management reforms. In December 2006, we reported that OST had made progress implementing reforms, and it estimated that almost all key reforms needed to develop an integrated trust management system and to provide improved trust services would be completed by November 2007. However, OST also estimated that data verification for leasing activities would not be completed for all Indian lands until December 2009. Furthermore, OST’s most recent strategic plan, issued in 2003, did not include a timetable for implementing trust reforms or a date for OST’s termination, as required by the reform act. As a result, we recommended, among other things, that the department provide the Congress with a timetable for completing the trust fund management reforms. The department agreed with our recommendation and stated that it expects to have a timetable for implementing the remaining trust reforms by late June 2007, including a date for the proposed termination or eventual deposition of OST. Although the department’s consolidated financial statements for the fiscal year ending September 30, 2006, received an unqualified audit opinion, the management of Indian trust funds continued to be reported as a material internal control weaknesses, and information security was reported as an internal control weakness. BIA is the primary federal agency charged with implementing federal Indian policy and administering the federal trust responsibility for 1.9 million American Indians and Alaska Natives. BIA provides basic services to 561 federally recognized Indian tribes throughout the United States, including social services, child welfare services, and natural resources management on about 54 million acres of Indian trust lands. Trust status means that the federal government holds title to the land in trust for tribes or individual Indians; land taken in trust is no longer subject to state and local property taxes and zoning ordinances. Many Indians believe that having their land placed in trust status is fundamental to safeguarding it against future loss and ensuring their sovereignty. In 1980, the department established a regulatory process intended to provide a uniform approach for taking land in trust. While some state and local governments support the federal government’s taking additional land in trust for tribes or individual Indians, others strongly oppose it because of concerns about the impacts on their tax base and jurisdictional control. We reported in July 2006 that while BIA generally followed its regulations for processing land in trust applications, it had no deadlines for making decisions on them. Specifically, the median processing time for the 87 land in trust applications with decisions in fiscal year 2005 was 1.2 years— ranging from 58 days to almost 19 years. We also found that while there was little opposition to applications with decisions in fiscal year 2005 from state and local governments, some state and local governments we contacted said (1) they did not have access to sufficient information about the land in trust applications and (2) the 30-day comment period was not sufficient. We recommended, among other things, that the department move forward with adopting revisions to the land in trust regulations that include (1) specific time frames for BIA to make a decision once an application is complete and (2) guidelines for providing state and local governments more information on the applications and a longer period of time to provide meaningful comments on the applications. The department agreed with our recommendations, and BIA has developed a corrective action plan to implement them by June 30, 2007. The Secretary of the Interior has varying responsibilities to the island communities of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, all of which are U.S. territories—as well as to the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau, which are sovereign nations linked with the United States through Compacts of Free Association. The Office of Insular Affairs (OIA) carries out the department’s responsibilities for the island communities. OIA’s mission is to assist the island communities in developing more efficient and effective government by providing financial and technical assistance and to help manage relations between the federal government and the island governments by promoting appropriate federal policies. The island governments have had long-standing financial and program management deficiencies. Specifically, island governments experience difficulties in accurately accounting for expenditures, collecting taxes and other revenues, controlling the level of expenditures, and delivering program services. In December 2006, we reported on serious economic, fiscal, and financial accountability challenges facing the U.S. insular areas of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands. The economic challenges stem from dependence on a few key industries, scarce natural resources, small domestic markets, limited infrastructure, shortages of skilled labor, and reliance on federal grants to fund basic services. To help diversify and strengthen their economies, OIA sponsors conferences and business opportunities missions to the areas to attract U.S. businesses; however, there has been little formal evaluation of these efforts. In addition, efforts to meet formidable fiscal challenges and build strong economies are hindered by financial reporting that does not provide timely and complete information to management and oversight officials for decision making. The insular area governments have also submitted required audits late, received disclaimer or qualified audit opinions, and had many serious internal control weaknesses identified. As a result of these problems, numerous federal agencies have designated these governments as “high-risk” grantees. Interior and other federal agencies are working to help these governments improve their financial accountability, but more should be done. To increase the effectiveness of the federal government’s assistance to the U.S. insular areas, we recommended, among other things, that the department (1) increase coordination activities with officials from other federal grant-making agencies on issues of common concern relating to the insular area governments, such as single audit reports, high-risk designations, and deficiencies in financial management systems and practices and (2) conduct formal periodic evaluations of OIA’s conferences and business opportunities missions, assessing their impact on creating private sector jobs and increasing insular area income. The department agreed with our recommendations, stating that they were consistent with OIA’s top priorities and ongoing activities. We will continue to monitor OIA’s actions on our recommendations. Also in December 2006, we reported on challenges facing the Federated States of Micronesia and the Republic of the Marshall Islands. In 2003, the United States amended a 1986 compact with the countries by signing Compacts of Free Association with the two governments. The amended compacts provide the countries with a combined total of $3.6 billion from 2004 to 2023, with the annual grants declining gradually. We found that for 2004 through 2006, compact assistance to the respective governments was allocated largely to the education, infrastructure, and health sectors, but that neither country has planned for long-term sustainability of the grant programs, taking into account the annual decreases in grant funding. In addition, both countries’ single audit reports for 2004 and 2005 indicated (1) weaknesses in their ability to account for the use of compact funds and (2) noncompliance with requirements for major federal programs. For example, the Federated States of Micronesia’s audit report for 2005 contained 57 findings of material weaknesses and reportable conditions in the national and state governments’ financial statements for sector grants and 45 findings of noncompliance. We recommended, among other things, that the department work with the countries to establish plans to minimize the impact of declining assistance and to fully develop a reliable mechanism for measuring progress towards program goals. The department concurred with our recommendations. Over the years, we and Interior’s IG have reported on the difficulties BLM and other federal land management agencies have had in managing land appraisals. Conducting appraisals is an important function—between November 2003 and May 2006, for example, Interior appraised more than 6.5 million acres of land that was valued at over $7 billion. Land appraisals are needed when Interior agencies are buying, exchanging, or leasing land. Such transactions are an integral part of Interior’s land management in order to achieve specific purposes, such as consolidating existing holdings, acquiring land deemed important for wildlife habitat or recreational opportunities, and opening land to the development of energy and mineral resources. Interior generally requires land acquisitions to be based on market value and, thus, objective land appraisals are essential. Past reports, however, have identified serious problems with Interior agencies’ appraisal programs, particularly with regard to appraisal independence, and have identified millions of dollars that the federal government had lost because of inadequate appraisals. While Interior has made major program changes, significant problems continue. Specifically, to remedy decades of problems with the quality and objectivity of its land appraisals, Interior removed the land appraisal function from its land management agencies and consolidated it into a departmental office—the Appraisal Services Directorate—in November 2003. This was a substantial move in the right direction to help ensure the independence of the appraisal function, and we reported in September 2006 that the objectivity of appraisals has improved since the directorate’s inception. However, we also identified two major remaining challenges. First, there is still wide variation in the quality of appraisals for land transactions involving potentially billions of dollars. For example, about 40 percent of Interior’s appraisals for land transactions that we reviewed did not comply with recognized appraisal standards. This lack of compliance occurred, in large part, because appraisers appeared not to apply the specialized skills needed to perform their duties for certain appraisals. In addition, peer reviews of appraisals were cursory, with reviewers approving appraisals without considering property characteristics that can impact the value of land, such as the presence of roads. Second, the directorate does not have a system for ensuring that it sets and meets realistic time frames for appraisal delivery. Of the 3,500 appraisals completed since the directorate was created, over 70 percent missed their deadlines, with an average delay of 4 months. Delays in delivery of appraisals can impact the ability of land management agencies to carry out land acquisition missions, and some land deals have been scuttled as a result. Since our report last fall, Interior has taken encouraging steps to address our recommendations. For example, Interior has stated that it has implemented a compliance inspection program for appraisals that are considered “high risk” to help ensure that such appraisals comply with recognized appraisal standards. We will continue to monitor the department’s progress in this area. In addition, we currently we have a review under way to evaluate Interior’s management of land exchanges. In addition to the challenges the department faces in adequately maintaining the natural resources under its stewardship, it also faces a challenge in adequately maintaining its facilities and infrastructure. The department owns, builds, purchases, and contracts services for assets such as visitor centers, schools, office buildings, roads, bridges, dams, irrigation systems, and reservoirs; however, repairs and maintenance on these facilities have not been adequately funded. The deterioration of facilities can adversely impact public health and safety, reduce employees’ morale and productivity, and increase the need for costly major repairs or early replacement of structures and equipment. In 2003, we reported that the department estimated that the deferred maintenance backlog was between $8.1 billion and $11.4 billion. In November 2006, the department estimated that the deferred maintenance backlog for fiscal year 2006 was between $9.6 billion and $17.3 billion, an increase of between 18 to 51 percent (see table 1). Interior is not alone in facing daunting maintenance challenges. In fact, we have identified the management of federal real property, including deferred maintenance issues, as a governmentwide high-risk area since 2003. While Interior has made progress addressing prior recommendations to improve information on the maintenance needs of Park Service facilities and BIA schools, the challenge of how the department will secure the significant funding needed to reduce this maintenance backlog to a manageable level remains. While some programs have improved information on their deferred maintenance needs, in February 2006, we reported that similar information is still needed for 16 BIA irrigation projects with an estimated $850 million in deferred maintenance. For example, we found that some of the irrigation projects classified items as deferred maintenance when they were actually new construction, and some had incomplete information on their deferred maintenance needs. To further refine the deferred maintenance estimate for the 16 irrigation projects, BIA plans to hire experts in engineering and irrigation to conduct thorough condition assessments of all 16 irrigation projects every 5 years. The first such assessment was completed in July 2005, with all 16 assessments expected to be completed by 2010. For many years, Interior’s IG has identified revenue collection as a top management challenge for the department because of the significant potential for underpayments given that it collects, on average, over $10 billion annually. Work we have conducted in the past 2 years also raises questions about how and when Interior is collecting authorized revenues from oil and gas leases, geothermal leases, recreational uses, and grazing and whether funds are properly controlled and accounted for. We testified in January 2007 on ongoing work investigating the Minerals Management Service’s (MMS) implementation of the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 and other authorities for granting royalty relief for oil and gas leases. We reported that MMS had issued lease contracts in 1998 and 1999 that failed to include price thresholds above which royalty relief would no longer be applicable. As a result, large volumes of oil and natural gas are exempt from royalties, which significantly reduces the amount of royalty revenues that the federal government can collect. At least $1 billion in royalties has already been lost because of this failure to include price thresholds. MMS has estimated that forgone royalties from leases issued between 1996 and 2000 under the act could be as high as $80 billion. However, there is much uncertainty in MMS’s estimate as a result of, for example, the inherent difficulties in estimating future production and prices, as well as ongoing litigation addressing MMS’s authority to set price thresholds for some leases. Other authorities for granting royalty relief may also affect future royalty revenues. Specifically, under discretionary authority, the Secretary of the Interior administers programs granting relief for certain deep water leases issued after 2000, certain deep gas wells drilled in shallow waters, and wells nearing the end of their productive lives. In addition, the Energy Policy Act of 2005 mandates relief for leases issued in the Gulf of Mexico during the 5 years following the act’s passage, provides relief for some gas wells that would not have previously qualified for royalty relief, and would provide relief in certain areas of Alaska where there currently is little or no production. The U.S. Comptroller General has highlighted royalty relief as an area needing additional oversight by the 110th Congress. Currently, we are assessing MMS’s estimate of forgone royalties in light of changing oil and gas prices, revised estimates of future oil and gas production, and other factors. We are also seeking to identify comprehensive studies that quantify the potential benefits of royalty relief. We intend to issue a report on these issues later this year. In May 2006, we reported that a change in how royalties on geothermal leases are disbursed may result in a change in the amount of royalties collected by the federal government. Specifically, while the Energy Policy Act of 2005 included provisions to encourage geothermal development, it also reduced the royalty percentage the federal government receives. Despite this, the act directs the Secretary of the Interior to seek, for most leases, to maintain the same level of royalty revenues as before the act. This could be accomplished by negotiating different royalty rates based on past royalty history, provided that electricity prices remain constant. Although it is impossible to predict with reasonable assurance how these prices will change in the future, Interior must make its best effort to mitigate the impact of changing prices if federal royalty revenue is 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. However, we reported that MMS does not routinely collect revenue data from electricity sales. Without such knowledge, MMS will have difficulty collecting the same level of royalties from lessees under the new royalty process. To demonstrate its commitment to collect the same level of royalty revenues as prior to passage of the act, we recommended that MMS routinely collect future sales revenues for electricity when royalty payments are due. MMS has plans to address these issues, and we will continue to monitor their efforts. Interior agencies are authorized—and in some cases required—to collect fees for a variety of uses. For example, the Park Service collects fees from air tour operators at selected national parks and from individuals and companies conducting commercial filming. However, we found that the agencies were not collecting such fees in the following cases: In May 2006, we reported that the Park Service was not collecting all required fees from companies conducting air tours in or around three highly visited national parks because of (1) an inability to verify the number of air tours conducted over the three national parks and, therefore, to enforce compliance and (2) confusion resulting from differing geographic applicability of legislation governing air tours in national parks. In May 2005, we reported that the Park Service could be collecting more revenue through the permits it issues for special park uses, such as special events, but was not doing so because park units were not consistently applying criteria for charging permit fees. In addition, the Park Service had not implemented a May 2000 law that required the collection of location fees for commercial filming and still photography, resulting in significant annual forgone revenues. In response to our recommendation, the Park Service began collecting location fees in May 2006. In September 2006, we reported that Interior agencies have been slow to implement authorities for charging fees for recreational uses of federal lands and waters. We also reported that some agencies lacked adequate controls and accounting procedures for collecting fees. Ten federal agencies manage grazing on over 22 million acres, with BLM and the Forest Service managing the vast majority of this activity. In total, federal grazing revenue amounted to about $21 million in fiscal year 2004, although grazing fees differ by agency. For example, in 2004, BLM and the Forest Service charged $1.43 per animal unit month, while other federal agencies charged between $0.29 and $112 per animal unit month. We reported in 2005 that while BLM and the Forest Service charged generally much lower fees than other federal agencies and private entities, these fees reflect legislative and executive branch policies to support local economies and ranching communities. Specifically, BLM fees are set by a formula that was originally established by a law that expired, but use of the formula has been extended indefinitely by Executive Order since 1986. This formula takes into account a rancher’s ability to pay and, therefore, the purpose is not primarily to recover the agencies’ costs or capture the fair market value of forage. Instead, the formula is designed to set a fee that helps support ranchers and the western livestock industry. Other federal agencies employ market-based approaches to setting grazing fees. Using this formula, BLM collected about $12 million in receipts in fiscal year 2004, while its costs for implementing its grazing program, including range improvement activities, were about $58 million. Were BLM to implement approaches used by other agencies to set grazing fees, it could help to close the gap between expenditures and receipts and more closely align its fees with market prices. We recognize, however, that the purpose and size of BLM’s grazing fee are ultimately for the Congress to decide. Interior’s management of contracts and grants has been identified as a management challenge by Interior’s IG for a number of years. Our recent work echoes some of the IG’s concerns, in particular with regard to interagency contracting and grant management for the Chesapeake Bay Gateways grant program. The Department of Defense (DOD) has used interagency contracting to help support the war in Iraq, including contracting with Interior. Governmentwide, the use of interagency contracts to procure goods and services has continued to increase over the past several years. Because of this continued growth, limited expertise in using these contracts, and unclear lines of responsibility, GAO has designated interagency contracting as a governmentwide high-risk area. In our review of 11 task orders Interior issued on behalf of DOD—amounting to about $66 million—we found numerous breakdowns in management controls. Specifically, we found that Interior issued task orders that were beyond the scope of the contract, in violation of federal competition rules; did not comply with additional DOD competition requirements when issuing task orders for services on existing contracts; did not comply with ordering procedures meant to ensure the best value for the government; and inadequately monitored contractor performance. Moreover, we found that the contractor was allowed to play a role in the procurement process normally performed by the government because the officials at Interior and DOD responsible for the orders did not fully carry out their roles and responsibilities. In response to the concerns identified, Interior and DOD initiated actions to strengthen management controls. In our report, we made recommendations to further refine their efforts. In 2005, we also reported on weaknesses in Interior’s GovWorks. GovWorks is a government-run, fee-for-service organization that provides various services, including contracting services, on which DOD has relied. Specifically, Interior did not always ensure that GovWorks contracts received fair and reasonable prices and may have missed opportunities to achieve savings from millions of dollars in purchases. In addition, GovWorks added substantial work—as much as 20 times above the original value of a particular order—without determining that prices were fair and reasonable. We made recommendations to Interior to improve the manner in which GovWorks funds are used to ensure value and compliance with procurement regulations. Interior concurred with our recommendations and identified actions to take to address them. We will continue to monitor their implementation of these actions. In September 2006, we reported on weaknesses in the Park Service’s management of grants provided to nonfederal entities under its Chesapeake Bay Gateways Program. In 1998, Congress passed the Chesapeake Bay Initiative Act to establish (1) a network of locations where the public can access and experience the bay and (2) a grant program to accomplish this objective. From 2000 through 2005, the Park Service awarded 189 grants totaling over $6 million to support the network. However, our review revealed several accountability and oversight weaknesses in the Park Service’s management of these grants, including (1) inadequate training of Park Service staff, (2) a lack of timely grantee reporting on progress and finances, (3) continuing awards to nonperforming grantees, and (4) a backlog of uncompleted grants. To enhance accountability and oversight, we recommended that the department develop and implement a process to determine the extent to which grants are effectively meeting program goals; ensure that staff responsible for grant management are adequately trained; ensure that grantees submit progress and financial reports in a timely ensure that grants are awarded only to applicants who completed any previous grants they received or to applicants who have demonstrated the capacity for completing a grant on schedule. Interior concurred with our recommendations and has plans to implement them. To conclude, Mr. Chairman, I would like to note that in 1993, GAO testified at a broad oversight hearing on Interior before this Committee, similar to today’s hearing. At that time, we testified that Interior faced serious challenges to addressing the declining condition of the nation’s natural resources and related infrastructure under its responsibility. Unfortunately, almost 15 years later, the message in my testimony today is very similar. While some of the programs we evaluated in the past have improved, evaluations of additional programs reveal many of the same persistent management problems—a lack of adequate data to understand the condition of its natural resources and infrastructure and the actions necessary to improve them, a lack of adequate controls and accountability to ensure federal resources are properly used and accounted for, and a lack of adequate strategic planning and guidance for program implementation. Clearly the department needs to address management and control gaps in its programs and ensure its activities are carried out in the most cost-effective and efficient manner, but difficult choices remain for improving the condition of the nation’s natural resources and the department’s infrastructure in light of the federal deficit and long-term fiscal challenges facing the nation. Either new sources of funding need to be identified and pursued, or the department must determine the services it can continue and the standards it will use for maintaining its facilities and lands. As we stated in our testimony nearly 15 years ago, we believe that in reaching these decisions, policy makers should know the full extent of the resource shortfalls facing federal natural resource management agencies. In addition, it is essential for the department to identify the impacts on services and infrastructure that would occur should serious cutbacks be necessary in order to maintain a certain standard of quality. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Committee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Major Management Challenges at the Department of the Interior (2005 Web-based Update—http://www.gao.gov/pas/2005/doi.htm). High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Major Management Challenges and Program Risks: Department of the Interior. GAO-03-104. Washington, D.C.: January 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: January 2003. Major Management Challenges and Program Risks: Department of the Interior. GAO-01-249. Washington, D.C.: January 2001. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. Major Management Challenges and Program Risks: Department of the Interior. GAO/OCG-99-9. Washington, D.C.: January 1999. High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999. Wildland Fire Management: Lack of a Cohesive Strategy Hinders Agencies’ Cost-Containment Efforts. GAO-07-427T. Washington, D.C.: January 30, 2007. Wildland Fire Suppression: Better Guidance Needed to Clarify Sharing of Costs between Federal and Nonfederal Entities. GAO-06-896T. Washington, D.C.: June 21, 2006. Wildland Fire Suppression: Lack of Clear Guidance Raises Concerns about Cost Sharing between Federal and Nonfederal Entities. GAO-06- 570. Washington, D.C.: May 30, 2006. Wildland Fire Management: Update on Federal Agency Efforts to Develop a Cohesive Wildland Fire Strategy. GAO-06-671R. Washington, D.C.: May 1, 2006. Wildland Fire Management: Timely Identification of Long-Term Options and Funding Needs Is Critical. GAO-05-923T. Washington, D.C.: July 14, 2005. Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy. GAO-05-147. Washington, D.C.: January 14, 2005. Wildland Fires: Forest Service and BLM Need Better Information and a Systematic Approach for Assessing the Risks of Environmental Effects. GAO-04-705. Washington, D.C.: June 24, 2004. Wildland Fire Management: Additional Actions Required to Better Identify and Prioritize Lands Needing Fuels Reduction. GAO-03-805. Washington, D.C.: August 15, 2003. Wildland Fire Management: Reducing the Threat of Wildland Fires Requires Sustained and Coordinated Effort. GAO-02-843T. Washington, D.C.: June 13, 2002. Severe Wildland Fires: Leadership and Accountability Needed to Reduce Risks to Communities and Resources. GAO-02-259. Washington, D.C.: January 31, 2002. Western National Forests: A Cohesive Strategy is Needed to Address Catastrophic Wildfire Threats. GAO/RCED-99-65. Washington, D.C.: April 2, 1999. Endangered Species: Many Factors Affect the Length of Time to Recover Select Species. GAO-06-730. Washington, D.C.: September 6, 2006. Endangered Species: Time and Costs Required to Recover Species Are Largely Unknown. GAO-06-463R. Washington, D.C.: April 6, 2006. Wind Power: Impacts on Wildlife and Government Responsibilities for Regulating Development and Protecting Wildlife. GAO-05-906. Washington, D.C.: September 16, 2005. Hardrock Mining: BLM Needs to Better Manage Financial Assurances to Guarantee Coverage of Reclamation Costs. GAO-05-377. Washington, D.C.: June 20, 2005. Oil and Gas Development: Increased Permitting Activity Has Lessened BLM’s Ability to Meet Its Environmental Protection Responsibilities. GAO-05-418. Washington, D.C.: June 17, 2005. Oil and Gas Development: Challenges to Agency Decisions and Opportunities for BLM to Standardize Data Collection. GAO-05-124. Washington, D.C.: November 30, 2004. Endangered Species: More Federal Management Attention Is Needed to Improve the Consultation Process. GAO-04-93. Washington, D.C.: March 19, 2004. National Wildlife Refuges: Opportunities to Improve the Management and Oversight of Oil and Gas Activities on Federal Lands. GAO-03-517. Washington, D.C.: August 28, 2003. Invasive Species: Clearer Focus and Greater Commitment Needed to Effectively Manage the Problem. GAO-03-1. Washington, D.C.: October 22, 2002. Office of the Special Trustee for American Indians: Financial Statement Audit Recommendations and the Audit Follow-up Process. GAO-07-295R. Washington, D.C.: January 19, 2007. Indian Issues: The Office of the Special Trustee Has Implemented Several Key Trust Reforms Required by the 1994 Act, but Important Decisions about Its Future Remain. GAO-07-104. Washington, D.C.: December 8, 2006. Indian Trust Funds: Individual Indian Accounts. GAO-02-970T. Washington, D.C.: July 25, 2002. Indian Trust Funds: Tribal Account Balances. GAO-02-420T. Washington, D.C.: February 7, 2002. Indian Issues: BLM’s Program for Issuing Individual Indian Allotments on Public Lands Is No Longer Viable. GAO-07-23R. Washington, D.C.: October 20, 2006. Indian Issues: BIA’s Efforts to Impose Time Frames and Collect Better Data Should Improve the Processing of Land in Trust Applications. GAO-06-781. Washington, D.C.: July 28, 2006. Indian Irrigation: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Alaska Native Allotments: Conflicts with Utility Rights-of-way Have Not Been Resolved through Existing Remedies. GAO-04-923. Washington, D.C.: September 7, 2004. Columbia River Basin: A Multilayered Collection of Directives and Plans Guides Federal Fish and Wildlife Plans. GAO-04-602. Washington, D.C.: June 4, 2004. Alaska Native Villages: Most Are Affected by Flooding and Erosion, but Few Qualify for Federal Assistance. GAO-04-142. Washington, D.C.: December 12, 2003. Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability. GAO-07-163. Washington, D.C.: December 15, 2006. U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges. GAO-07-119. Washington, D.C.: December 12, 2006. Compacts of Free Association: Development Prospects Remain Limited for Micronesia and Marshall Islands. GAO-06-590. Washington, D.C.: June 27, 2006. U.S. Insular Areas: Multiple Factors Affect Federal Health Care Funding. GAO-06-75. Washington, D.C.: October 14, 2005. Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Underway, but Planning Challenges Remain. GAO-05-633. Washington, D.C.: July 11, 2005. American Samoa: Accountability for Key Federal Grants Needs Improvement. GAO-05-41. Washington, D.C.: December 17, 2004. Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7, 2003. Compact of Free Association: An Assessment of the Amended Compacts and Related Agreements. GAO-03-890T. Washington, D.C.: June 18, 2003. Foreign Assistance: Effectiveness and Accountability Problems Common in U.S. Programs to Assist Two Micronesian Nations. GAO-02-70. Washington, D.C.: January 22, 2002. Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations. GAO-02-119. Washington, D.C.: January 22, 2002. Interior’s Land Appraisal Services: Action Needed to Improve Compliance with Appraisal Standards, Increase Efficiency, and Broaden Oversight. GAO-06-1050. Washington, D.C.: September 28, 2006. Land Acquisitions: Agencies Generally Used Similar Standards and Appraisal Methodologies in CALFED and CVPIA Transactions. GAO-02- 278R. Washington, D.C.: January 23, 2002. Indian Irrigation Projects: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Recreation Fees: Comments on the Federal Lands Recreation Enhancement Act, H.R. 3283. GAO-04-745T. Washington, D.C.: May 6, 2004. National Park Service: Efforts Underway to Address Its Maintenance Backlog. GAO-03-1177T. Washington, D.C.: September 27, 2003. Bureau of Indian Affairs Schools: Expenditures in Selected Schools Are Comparable to Similar Public Schools, but Data Are Insufficient to Judge Adequacy of Funding and Formulas. GAO-03-955. Washington, D.C.: September 4, 2003. Bureau of Indian Affairs Schools: New Facilities Management Information System Promising, but Improved Data Accuracy Needed. GAO-03-692. Washington, D.C.: July 31, 2003. National Park Service: Status of Agency Efforts to Address Its Maintenance Backlog. GAO-03-992T. Washington, D.C.: July 8, 2003. National Park Service: Status of Efforts to Develop Better Deferred Maintenance Data. GAO-02-568R. Washington, D.C.: April 12, 2002. Oil and Gas Royalties: Royalty Relief Will Likely Cost the Government Billions, but the Final Costs Have Yet to Be Determined. GAO-07-369T. Washington, D.C.: January 17, 2007. Recreation Fees: Agencies Can Better Implement the Federal Lands Recreation Enhancement Act and Account for Fee Revenues. GAO-06- 1016. Washington, D.C.: September 22, 2006. Renewable Energy: Increased Geothermal Development Will Depend on Overcoming Many Challenges. GAO-06-629. Washington, D.C.: May 24, 2006. National Parks Air Tour Fees: Effective Verification and Enforcement Are Needed to Improve Compliance. GAO-06-468. Washington, D.C.: May 11, 2006. Oil and Gas Development: Increased Permitting Activity Has Lessened BLM’s Ability to Meet Its Environmental Protection Responsibilities. GAO-05-418. Washington, D.C.: June 17, 2005. National Park Service: Revenues Could Increase by Charging Allowed Fees for Some Special Uses Permits. GAO-05-410. Washington, D.C.: May 6, 2005. Chesapeake Bay Gateways Program: National Park Service Needs Better Accountability and Oversight of Grantees and Gateways. GAO-06-1049. Washington, D.C.: September 14, 2006. Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD Is Not Demonstrated. GAO-05-456. Washington, D.C.: July 29, 2005. Interagency Contracting: Problems with DOD’s and Interior’s Orders to Support Military Operations. GAO-05-201. Washington, D.C.: April 29, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of the Interior is responsible for managing much of the nation's vast natural resources. Its agencies implement an array of programs intended to protect these precious resources for future generations while also allowing certain uses of them, such as oil and gas development and recreation. In some cases, Interior is authorized to collect royalties and fees for these uses. Over the years, GAO has reported on challenges facing Interior as it implements its programs. In addition to basic program management issues, the department faces difficult choices in balancing its many responsibilities, and in improving the condition of the nation's natural resources and the department's infrastructure, in light of the federal deficit and long-term fiscal challenges facing the nation. This testimony highlights some of the major management challenges facing Interior today. The Department of the Interior has made progress in addressing challenges that GAO has identified in such areas as developing and maintaining better data to manage the department's programs and strengthening internal controls. However, numerous important problems remain, as discussed below. Management of resource protection efforts needs to be strengthened. Interior has undertaken steps to improve some of its resource protection efforts, but it has yet to develop a cohesive national strategy to address wildland fire issues, as GAO has recommended. In addition, Interior agencies that manage hardrock mining and oil and gas production on their lands have not effectively carried out their environmental protection responsibilities. Management problems in Indian and island community programs persist. While Interior has implemented major reforms to address weaknesses in managing Indian trust funds and other assets, concerns remain about finalizing organizational changes and delays in decisions about land that the department will take into trust status. In addition, island community programs continue to lack accountability measures. Land appraisals continue to fall short of standards. While Interior has consolidated the land appraisal function into a departmental office to address serious problems with the quality of its appraisals and the millions of dollars that had been lost as a result, a large portion of appraisals that GAO reviewed still did not comply with recognized appraisal standards. Deferred maintenance backlog needs to be addressed. Interior has implemented improved inventory and asset management systems for some programs, but it is not clear how it will address the estimated $17 billion in deferred maintenance. Other programs continue to lack information required to accurately estimate needs. Revenue collection needs more management attention. Interior may not be collecting billions of dollars of revenue from oil and gas royalties; geothermal royalties; and fees from individual recreational uses, air tour operations in and around national parks, and commercial filming and still photography in national parks. Contract and grant management lack needed controls. Because it lacks adequate controls over management of grants and contracts, Interior cannot ensure that millions of dollars in grant and contract funding were used appropriately. |
FAMS was originally established as the Sky Marshal program in the 1970s to counter hijackers. In response to 9/11, the Aviation and Transportation Security Act expanded FAMS’s mission and workforce and mandated the deployment of federal air marshals on high-security risk flights. Within the 10-month period immediately following 9/11, the number of air marshals grew significantly. Also, during subsequent years, FAMS underwent various organizational transfers. Initially, FAMS was transferred within the Department of Transportation from the Federal Aviation Administration to the newly created TSA. In March 2003, FAMS moved, along with TSA, to the newly established DHS. In November 2003, FAMS was transferred to U.S. Immigration and Customs Enforcement (ICE). Then, about 2 years later, FAMS was transferred back to TSA in the fall of 2005. FAMS deploys thousands of federal air marshals to a significant number of daily domestic and international flights. In carrying out this core mission of FAMS, air marshals are deployed in teams to various passenger flights. Such deployments are based on FAMS’s concept of operations, which guides the agency in its selection of flights to cover. Once flights are selected for coverage, FAMS officials stated that they must schedule air marshals based on their availability, the logistics of getting individual air marshals in position to make a flight, and applicable workday rules. At times, air marshals may have ground-based assignments. On a short- term basis, for example, air marshals participate in Visible Intermodal Prevention and Response (VIPR) teams, which provide security nationwide for all modes of transportation. After the March 2004 train bombings in Madrid, TSA created and deployed VIPR teams to enhance security on U.S. rail and mass transit systems nationwide. Comprised of TSA personnel that include federal air marshals—as well as transportation security inspectors, transportation security officers, behavioral detection officers, and explosives detection canines—the VIPR teams are intended to work with local security and law enforcement officials to supplement existing security resources, provide a deterrent presence and detection capabilities, and introduce an element of unpredictability to disrupt potential terrorist activities. FAMS’s budget request for fiscal year 2010 is $860.1 million, which is an increase of $40.6 million (or about 5 percent) over the $819.5 million appropriated in fiscal year 2009. The majority of the agency’s budget provides for the salaries of federal air marshals and supports maintenance of infrastructure that includes 21 field offices. FAMS’s operational approach (concept of operations) for achieving its core mission is based on assessments of risk-related factors, since it is not feasible for federal air marshals to cover all of the approximately 29,000 domestic and international flights operated daily by U.S. commercial passenger air carriers. Specifically, FAMS considers the following risk- related factors to help ensure that high-risk flights operated by U.S. commercial carriers—such as the nonstop, long-distance flights targeted on 9/11—are given priority coverage by federal air marshals: Threat (intelligence): Available strategic or tactical information affecting aviation security is considered. Vulnerabilities: Although FAMS’s specific definition is designated sensitive security information, DHS defines vulnerability as a physical feature or operational attribute that renders an entity open to exploitation or susceptible to a given hazard. Consequences: FAMS recognizes that flight routes over certain geographic locations involve more potential consequences than other routes. FAMS attempts to assign air marshals to provide an onboard security presence on as many of the flights in the high-risk category as possible. FAMS seeks to maximize coverage of high-risk flights by establishing coverage goals for 10 targeted critical flight categories. In order to reach these coverage goals, FAMS uses a scheduling process to determine the most efficient flight combinations that will allow air marshals to cover the desired flights. FAMS management officials stressed that the overall coverage goals and the corresponding flight schedules of air marshals are subject to modification at any time based on changing threat information and intelligence. For example, in August 2006, FAMS increased its coverage of international flights in response to the discovery, by authorities in the United Kingdom, of specific terrorist threats directed at flights from Europe to the United States. FAMS officials noted that a shift in resources of this type can have consequences because of the limited number of air marshals. The officials explained that international missions require more resources than domestic missions partly because the trips are of longer duration. In addition to the core mission of providing an onboard security presence on selected flights, FAMS also assigns air marshals to VIPR teams on an as-needed basis to provide a ground-based security presence. For the first quarter of fiscal year 2009, TSA reported conducting 483 VIPR operations, with about 60 percent of these dedicated to ground-based facilities of the aviation domain (including air cargo, commercial aviation, and general aviation) and the remaining VIPR operations dedicated to the surface domain (including highways, freight rail, pipelines, mass transit, and maritime). TSA’s budget for fiscal year 2009 reflects support for 225 VIPR positions at a cost of $30 million. TSA plans to significantly expand the VIPR program in fiscal year 2010 by adding 15 teams consisting of 338 positions at a cost of $50 million. However, questions have been raised about the effectiveness of the VIPR program. In June 2008, for example, the DHS Office of Inspector General reported that although TSA has made progress in addressing problems with early VIPR deployments, it needs to develop a more collaborative relationship with local transit officials if VIPR exercises are to enhance mass transit security. After evaluating FAMS’s operational approach for providing an onboard security presence on high-risk flights, the Homeland Security Institute, a federally funded research and development center, reported in July 2006 that the approach was reasonable. In its report, the Homeland Security Institute noted the following regarding FAMS’s overall approach to flight coverage: FAMS applies a structured, rigorous approach to analyzing risk and allocating resources. The approach is reasonable and valid. No other organizations facing comparable risk-management challenges apply notably better methodologies or tools. As part of its evaluation methodology, the Homeland Security Institute examined the conceptual basis for FAMS’s approach to risk analysis. Also, the institute examined FAMS’s scheduling processes and analyzed outputs in the form of “coverage” data reflecting when and where air marshals were deployed on flights. Further, the Homeland Security Institute developed and used a model to study the implications of alternative strategies for assigning resources. We reviewed the institute’s evaluation methodology and generally found it to be reasonable. Although the institute’s July 2006 report concluded that FAMS’s operational approach was reasonable and valid, the report also noted that certain types of flights were covered less often than others. Accordingly, the institute made recommendations for enhancing the operational approach. For example, the institute recommended that FAMS increase randomness or unpredictability in selecting flights and otherwise diversify the coverage of flights. To address the Homeland Security Institute’s recommendations, FAMS officials stated that a broader approach for determining which flights to cover has been implemented—an approach that opens up more flights for potential coverage, provides more diversity and randomness in flight coverage, and extends flight coverage to a variety of airports. Our January 2009 report noted that FAMS had implemented or had ongoing efforts to implement the institute’s recommendations. We reported, for example, that FAMS is developing an automated decision-support tool for selecting flights and that this effort is expected to be completed by December 2009. To better understand and address operational and quality-of-life issues affecting the FAMS workforce, the agency’s previous Director—who served in that capacity from March 2006 to June 2008—established various processes and initiatives. Chief among these were 36 issue-specific working groups to address a variety of topics, such as tactical policies and procedures, medical or health concerns, recruitment and retention practices, and organizational culture. Each working group typically included a special agent-in-charge, a subject matter expert, air marshals, and mission support personnel from the field and headquarters. According to FAMS management, the working groups typically disband after submitting a final report, but applicable groups could be reconvened or new groups established as needed to address relevant issues. The previous Director also established listening sessions that provided a forum for employees to communicate directly with senior management and an internal Web site for agency personnel to provide anonymous feedback to management. Another initiative implemented was assigning an air marshal to the position of Ombudsman in October 2006 to provide confidential, informal, and neutral assistance to employees to address workplace- related problems, issues, and concerns. These efforts have produced some positive results. For example, as noted in our January 2009 report, FAMS amended its policy for airport check-in and flight boarding procedures (effective May 15, 2008) to better ensure the anonymity of air marshals in mission status. In addition, FAMS modified its mission scheduling processes and implemented a voluntary lateral transfer program to address certain issues regarding air marshals’ quality of life—and has plans to further address health issues associated with varying work schedules and frequent flying. Also, our January 2009 report noted that FAMS was taking steps to procure new personal digital assistant communication devices—to replace the current, unreliable devices—and distribute them to air marshals to improve their ability to communicate effectively with management while in mission status. All of the 67 air marshals we interviewed in 11 field offices commented favorably about the various processes and initiatives for addressing operational and quality-of-life issues, and the air marshals credited the leadership of the previous FAMS Director. The current FAMS Director, as noted in our January 2009 report, has expressed a commitment to sustain progress and reinforce a shared vision for workforce improvements by continuing applicable processes and initiatives. In our January 2009 report, we also noted that FAMS plans to conduct a workforce satisfaction survey of all employees every 2 years, building upon an initial survey conducted in fiscal year 2007, to help identify issues affecting the ability of its workforce to carry out its mission. We reported that a majority (79 percent) of the respondents to the 2007 survey indicated that there had been positive changes from the prior year, although the overall response rate (46 percent) constituted less than half of the workforce. The 46 percent response rate was substantially less than the 80 percent rate encouraged by the Office of Management and Budget (OMB) in its guidance for federal surveys that require its approval. According to the OMB guidance, a high response rate increases the likelihood that the views of the target population are reflected in the survey results. We also reported that the 2007 survey’s results may not provide a complete assessment of employees’ satisfaction because 7 of the 60 questions in the 2007 survey questionnaire combined two or more issues, which could cause respondents to be unclear on what issue to address and result in potentially misleading responses, and none of the 60 questions in the 2007 survey questionnaire provided for response options such as “not applicable” or “no basis to judge”— responses that would be appropriate when respondents had little or no familiarity with the topic in question. In summary, our January 2009 report noted that obtaining a higher response rate to FAMS’s future surveys and modifying the structure of some questions could enhance the surveys’ potential usefulness by, for instance, providing a more comprehensive basis for assessing employees’ attitudes and perspectives. Thus, to increase the usefulness of the agency’s biennial workforce satisfaction surveys, we recommended that the FAMS Director take steps to ensure that the surveys are well designed and that additional efforts are considered for obtaining the highest possible response rates. Our January 2009 report recognized that DHS and TSA agreed with our recommendation and noted that FAMS was in the initial stages of formulating the next workforce satisfaction survey. More recently, by letter dated July 2, 2009, DHS informed applicable congressional committees and OMB of actions taken in response to our recommendation. The response letter noted that agency plans include (1) ensuring that questions in the 2009 survey are clearly structured and unambiguous, (2) conducting a pretest of the 2009 survey questions, and (3) developing and executing a detailed communication plan. Federal air marshals are an important layer of aviation security. FAMS, to its credit, has established a number of processes and initiatives to address various operational and quality-of-life issues that affect the ability of air marshals and other FAMS personnel to perform their aviation security mission. The current FAMS Director has expressed a commitment to continue relevant processes and initiatives for identifying and addressing workforce concerns, maintaining open lines of communications, and sustaining progress. Similarly, this hearing provides an opportunity for congressional stakeholders to focus a dialogue on how to sustain progress at FAMS. For example, relevant questions that could be raised include the following: In implementing the agency’s concept of operations, how effectively does FAMS use new threat information and intelligence to modify flight coverage goals and the corresponding flight schedules of air marshals? In managing limited resources to mitigate a potentially unlimited range of security threats, how does FAMS ensure that federal air marshals are allocated appropriately for meeting in-flight security responsibilities as well as supporting new ground-based security responsibilities, such as VIPR team assignments? What cost-benefit analyses, if any, are being used to guide FAMS decision makers? To what extent have appropriate performance measures been developed for gauging the effectiveness and results of resource allocations and utilization? How does FAMS foster career sustainability for federal air marshals given that maintaining an effective operational tempo is not necessarily compatible with supporting a better work-life balance? These types of questions warrant ongoing consideration by FAMS management and continued oversight by congressional stakeholders. Mr. Chairman, this completes my prepared statement. I look forward to answering any questions that you or other members of the subcommittee may have. For information about this statement, please contact Steve Lord, Director, Homeland Security and Justice Issues, at (202) 512-4379, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions to this testimony include David Alexander, Danny Burton, Katherine Davis, Mike Harmond, and Tom Lombardi. 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. | By deploying armed air marshals onboard selected flights, the Federal Air Marshal Service (FAMS), a component of the Transportation Security Administration (TSA), plays a key role in helping to protect approximately 29,000 domestic and international flights operated daily by U.S. air carriers. This testimony discusses (1) FAMS's operational approach or "concept of operations" for covering flights, (2) an independent evaluation of the operational approach, and (3) FAMS's processes and initiatives for addressing workforce-related issues. Also, this testimony provides a list of possible oversight issues related to FAMS. This testimony is based on GAO's January 2009 report (GAO-09-273), with selected updates in July 2009. For its 2009 report, GAO analyzed policies and procedures regarding FAMS's operational approach and a July 2006 classified assessment of that approach. Also, GAO analyzed employee working group reports and related FAMS's initiatives for addressing workforce-related issues, and interviewed FAMS headquarters officials and 67 air marshals (selected to reflect a range in levels of experience). Because the number of air marshals is less than the number of daily flights, FAMS's operational approach is to assign air marshals to selected flights it deems high risk--such as the nonstop, long-distance flights targeted on September 11, 2001. In assigning air marshals, FAMS seeks to maximize coverage of flights in 10 targeted high-risk categories, which are based on consideration of threats, vulnerabilities, and consequences. In July 2006, the Homeland Security Institute, a federally funded research and development center, independently assessed FAMS's operational approach and found it to be reasonable. However, the institute noted that certain types of flights were covered less often than others. The institute recommended that FAMS increase randomness or unpredictability in selecting flights and otherwise diversify the coverage of flights within the various risk categories. In its January 2009 report, GAO noted that the Homeland Security Institute's evaluation methodology was reasonable and that FAMS had taken actions (or had ongoing efforts) to implement the institute's recommendations. To address workforce-related issues, FAMS's previous Director, who served until June 2008, established a number of processes and initiatives, such as working groups, listening sessions, and an internal Web site for agency personnel to provide anonymous feedback to management. These efforts have produced some positive results. For example, FAMS revised its policy for airport check-in and aircraft boarding procedures to help protect the anonymity of air marshals in mission status, and FAMS modified its mission scheduling processes and implemented a voluntary lateral transfer program to address certain quality-of-life issues. The air marshals GAO interviewed expressed satisfaction with FAMS's efforts to address workforce-related issues. The current FAMS Director has expressed a commitment to continue applicable processes and initiatives. Also, FAMS has plans to conduct a workforce satisfaction survey of all employees every 2 years, building upon an initial survey conducted in fiscal year 2007. GAO's review found that the potential usefulness of future surveys could be enhanced by ensuring that the survey questions and the answer options are clearly structured and unambiguous and that additional efforts are considered for obtaining the highest possible response rates. To its credit, FAMS has made progress in addressing various operational and quality-of-life issues that affect the ability of air marshals to perform their aviation security mission. However, sustaining progress will require ongoing consideration by FAMS management--and continued oversight by congressional stakeholders--of key questions, such as how to foster career sustainability for air marshals given that maintaining an effective operational tempo can at times be incompatible with supporting a work-life balance. |
CPD manages the Youthbuild program. CPD programs generally fall into three categories: (1) formula grants, of which the largest are the Community Development Block Grant and the HOME Investment Partnership Program, which account for the majority of CPD funding; (2) competitive homeless programs; and (3) competitive nonhomeless programs, including Youthbuild. While no staff are dedicated solely to Youthbuild oversight, CPD monitors the program as part of its oversight responsibilities for 22 programs and initiatives, which 829 staff (233 in headquarters and 596 in field offices) administered as of the beginning of fiscal year 2007. In fiscal year 2006, Congress appropriated $19.1 billion for the CPD programs and initiatives, of which Youthbuild represents a small portion. The first program appropriation for Youthbuild was $40 million for fiscal year 1993. Appropriations reached a high of $65 million in fiscal year 2002, but dropped to $49.5 million in fiscal year 2006, the last year in which HUD was authorized to award grants (see fig. 1). HUD has provided program funding for Youthbuild through an annual competitive grant application process. Any applicant can receive up to a $700,000 grant; however, new applicants and rural/underserved applicants primarily receive grants up to $400,000. Grant awards can last up to 30 months (or longer if the grantee is given an extension), but some grantees use the funds at a much quicker rate and usually reapply every year, while others may take the full 30 months. Prospective grantees are state, private, nonprofit, and local entities that implement the Youthbuild program by serving low-income youth, ages 16 to 24, who demonstrate educational need—either by virtue of being high- school dropouts or by justifying their need for inclusion in the program. According to program regulations, at least 75 percent of the participants must come from very low-income families and have dropped out of high school. The program allows up to 25 percent of the youth to have a high- school diploma or have a slightly higher income; however, data developed by YouthBuild USA show that most organizations report that less than 25 percent of participants have high-school diplomas or General Equivalency Diplomas (GED) upon entering their programs. Also, according to data from YouthBuild USA, a number of the youths have been adjudicated (judicially determined to be delinquent), were on welfare upon entering the program, or lived in public housing (see fig. 2). Other studies we reviewed identified similar participant characteristics. Program regulations require participants to spend 50 percent of their program time receiving job training on construction sites, building affordable housing, and 50 percent receiving academic training. Recently, some of the Youthbuild grantees have added nonconstruction programs to their offerings, such as in the areas of computer repair and health care. Funding for the additional programs has come from AmeriCorps. In 1994, YouthBuild USA, located in Somerville, Massachusetts, became the primary technical assistance contractor for the Youthbuild program. YouthBuild USA is a national support center and intermediary for the program. As such, it provides training, develops materials and handbooks to help grantees replicate the program, conducts peer-to-peer seminars, and disseminates materials on best practices. YouthBuild USA also has established an affiliated network that grantees can choose to join. As of September 2006, 107 of 173 Youthbuild grantees with active grants were affiliates. Since 2002, YouthBuild USA has been using a Web-based system, WebSTA, to collect participant characteristic and performance data from its affiliates. Among the purposes of transfering the YouthBuild program to Labor was better alignment of existing federal workforce and youth training programs. Labor’s Employment and Training Administration offers programs that assist disadvantaged youths, similar to the programs that Youthbuild grantees offer. The Workforce Investment Act (WIA) of 1998 established a variety of programs to serve low-income youths who face barriers to employment. Labor allocates funds for the youth service programs to state and local areas based on a distribution formula. The grants are made to states, and the states in turn allocate funds to approximately 600 local workforce investment boards. The amount of funding available to states is determined by the distribution of unemployed individuals and disadvantaged youths by state. From 2000 through 2005, Labor administered the Youth Opportunity Grant program, which also was authorized by WIA. This grant program focused on improving education and employment opportunities for at-risk youths, ages 14 to 21, in high-poverty areas. Funding for the program was eliminated beginning in fiscal year 2004. In addition, Labor administers the Job Corps program, which began in 1964, and provides education, training and support services to economically challenged youths, ages 16 through 24, who face multiple barriers to employment. Private companies—chosen through competitive contracting processes—and other federal agencies operating under interagency agreements with Labor, operate the Job Corps centers (located throughout the United States and Puerto Rico) on behalf of Labor. Each year, HUD staff rated and ranked grant applications for serving economically distressed areas based on factors outlined in the enacting legislation and detailed in an annual NOFA. The Housing and Community Development Act of 1992 required HUD to establish selection criteria such as the qualifications or potential capabilities of applicants, the feasibility of the proposed Youthbuild program, the potential for developing a successful Youthbuild program, and the applicants’ commitment to obtain outside resources. Accordingly, HUD annually issued a NOFA that described the grant application process, outlined criteria for grant awards, and included scoring factors (see fig. 3). The major factors considered were the capacity and relevant experience of the organization (performance), need and extent of the problem, applicant’s soundness of approach, leveraging of nonhousing funds, and ability to show how it would achieve and measure results. Under these factors, grant applicants had to consider area poverty and high-school dropout rates, describe their management and training capabilities, and offer proof of access to property and the existence of partners to build low-income housing. HUD issued its last NOFA for the Youthbuild program on March 8, 2006, and announced the winning grantees in November 2006. Since fiscal year 2001, HUD has grouped applicants into three separate scoring categories—new, general (that are typically awarded to established Youthbuild organizations), and rural/underserved area grantees. Figure 4 shows the awards by category. The total numbers of grants as well as the grants by the individual categories have varied by year. The awards process also has been competitive. HUD historically funded less than one-third of all the applicants (see fig. 5). Since 1996, the number of applicants funded ranged from about 7 to 44 percent. Although HUD requires grantees to submit closeout reports, which are intended to help evaluate the programs, it has not verified, aggregated, or analyzed data from those reports. Further, the closeout reports do not include other data that could help determine participant characteristics upon entry or the types of jobs they received after completing the program. YouthBuild USA, the technical services provider for HUD, collects quarterly information, but it has not aggregated the information to obtain performance information over the span of a grant. HUD also has encountered significant delays in developing a database intended to gather additional performance information from grantees. Finally, citing resource constraints, HUD has conducted limited on-site oversight of grantees. As a result of a lack of verified and aggregated data or analysis and limited oversight, HUD largely was unable to tell how well the individual Youthbuild grantees performed. HUD requires grantees to submit performance reports, including closeout reports, but HUD has not developed or fully utilized information— particularly from the closeout reports—that could help it assess Youthbuild grantee programs and has lacked resources to conduct comprehensive oversight of grantees. Such information serves as the basis for management and oversight of programs. For instance, HUD states in the instructions for filling out the closeout reports that the reports will be used to monitor and evaluate progress of grantees and programs. Further, the Government Performance and Results Act of 1993 (GPRA) shifted the focus of federal managers from the number of tasks completed or services provided to a more direct consideration of the outcomes or results of the program. GPRA provides a performance-based management framework for agencies to set goals; measure progress toward those goals; deploy strategies and resources to achieve them; and ultimately, use performance information to make the programmatic decisions necessary to improve performance. Accurate and complete performance data that document outcomes are needed to inform Congress and the public about the effectiveness of programs and help agencies conduct effective oversight. The combination of baseline information and intermediate outputs or outcomes can be used to show progress or contribution toward final outcomes, that is, the intended results of carrying out the program. For example, in Youthbuild, baseline information such as the number of participants entering a program with and without GEDs or high-school diplomas could be combined with intermediate outputs and outcomes such as graduation rates and jobs attained, which could then be linked to desired program outcomes such as the number of Youthbuild participants attaining economic self-sufficiency. However, HUD has not set up a system to verify, aggregate, or analyze the data from closeout reports—information and analyses that would form the basis for assessments of grantee performance. Citing resource constraints, HUD filed the reports in the individual grant files in headquarters and field offices and did not further review them. In addition, some basic baseline data are missing from the closeout reports, including the number of participants who enter the programs with a GED or high-school diploma. Such information is necessary to get an accurate count of the number of participants receiving a GED degree or diploma through Youthbuild programs and also provides a basis for comparison with which performance can be measured. Furthermore, while closeout reports require that some performance outputs be collected, including the number of participants receiving GEDs or high-school diplomas, placed in jobs, or entering higher education programs, the reports do not collect other output information such as how many participants were placed in construction-related employment. Citing resource constraints and a need to comply with the Office of Management and Budget (OMB) performance reporting requirements, HUD contracted with YouthBuild USA in 2004 to collect quarterly grantee performance information for all Youthbuild grantees. Programs administered by six federal agencies, including HUD and Labor, are subject to “common measures” reporting which OMB established to provide agencies with the ability to describe, in a similar manner, their core performance outputs across different grantee programs. The common measures include employment or education placements, degrees or certificates attained, and literacy and numeracy skills increased (increases in educational functioning). Consequently, YouthBuild USA provides HUD with program information including participant gender and ethnicity data, GED attainment statistics, grade level improvements, job or school placements, and the number of new and rehabilitated housing units that were completed. HUD uses the reports to provide performance information to Congress and meet OMB reporting requirements. However, because the information is captured on a quarterly basis, it only represents the performance of a program at a particular point in time and YouthBuild USA has not aggregated the information to obtain data for the term of individual grants. As a result, HUD has been largely unable to track program outcomes, but its data will be needed for ongoing program assessments. Moreover, HUD has encountered significant delays in developing a database intended to provide additional performance outcomes on grantee programs. Recognizing this deficiency, HUD officials said that they have been planning for about 3 years to implement an electronic data collection system to help HUD measure the success of Youthbuild programs, along with its other nonhomeless competitive grant programs. However, the system’s implementation has been delayed because of funding and technical problems. As a result of not systematically collecting or analyzing needed information from closeout reports, relying predominately on limited point-in-time program information, and not being able to utilize a planned database to aggregate performance outcomes, HUD is limiting its ability to assess grantees. Further, although the YouthBuild Transfer Act shifted oversight of grants issued in fiscal year 2007 to Labor, HUD will be required to continue monitoring existing Youthbuild grants for approximately the next 3 years. Therefore, the data HUD has at its disposal or could develop will continue to be valuable for ongoing assessments of the program. In addition to not having or utilizing available performance data, HUD has exercised limited on-site review and oversight of grantee performance. According to HUD’s Office of Inspector General, on-site monitoring is an essential tool for HUD (through CPD) to assess program performance and identify and address potential program problems. Such monitoring is also useful in motivating grantees to exercise sound judgment in carrying out their grant activities. GAO’s Standards for Internal Control in the Federal Government note that controls generally should be in place to ensure that ongoing monitoring occurs during normal operations. Monitoring should be performed continually, be ingrained in an entity’s operations, be used to assess the quality of performance over time, and support the prompt resolution of any identified problems. CPD goals require on-site monitoring of only a small percentage of grants. For fiscal year 2003, the plan called for the field offices to monitor 35 percent of formula grants; 20 percent of competitive homeless grants; and 7 percent of competitive nonhomeless grants, including Youthbuild. HUD has since changed its baseline monitoring goals (requiring monitoring of 20 percent of grantees with active, open grants established since 2004) to give its field offices more flexibility to meet monitoring priorities based on local grantee knowledge. As a result, goals are no longer set by program. Field offices decide on the number of formula versus competitive grantees to be monitored based on risk analyses that evaluate each grantee on factors such as the size of the grant, perceived project management capacity, grantee responsiveness, and the extent of citizen complaints. HUD officials cited a lack of resources as the primary reason for not requiring the monitoring of a larger percentage of grantees. In 2006, according to HUD officials, field offices typically had one person working part time responsible for overseeing the individual Youthbuild grantees in the state, visiting no more than one or two grantees per year. As a result, field staff have not been able to comprehensively monitor grantees and verify the accuracy of the output data submitted by the grantees. In general, we found that the monitoring reports that we reviewed (which HUD field offices produced) on grantees primarily addressed various compliance issues, rather than reporting on the overall performance of a particular grant. For example, several reports identified grantees’ failure to receive prior approval from HUD for changing proposed job training construction sites. Other reports identified inadequate record keeping, insufficient documentation, and lack of sufficient financial internal controls on the part of grantees. However, although a few reports did comment on some individual performance outputs, such as job placements or GEDs attained, most did not. The lack of analysis of performance information of grantees also has implications for assessing the Youthbuild program overall, particularly because HUD has devoted few staff to overall program management and oversight. Since 2000, in headquarters, Youthbuild had a program director with one or two staff managing the program each year. During fiscal year 2006, with the expected program transfer to Labor, the HUD program manager was assigned to other duties, and a part-time program manager was assigned to oversee the 2006 grant process, in which HUD received 308 applications and awarded 74 grants. Although they are aware of the limited oversight of Youthbuild, CPD division officials said it has provided appropriate staff resources for program oversight of Youthbuild grantees, commensurate with the program’s size—the annual appropriation for which represents less than 1 percent of CPD’s usual annual budget of about $8 billion. However, without sufficient oversight HUD was unable to tell how the individual Youthbuild grantee programs performed. HUD has not performed the programwide analysis needed to determine overall program success, and weaknesses in other assessments of the programs and data preclude an overall assessment of Youthbuild success. While limited in scope, three studies suggest Youthbuild helped youths achieve economic self-sufficiency. And, although YouthBuild USA tracks performance data, grantees do not have the follow-up information needed to measure performance outcomes. To augment limited existing data, we analyzed information in 245 closeout reports, but the results cannot be generalized to the entire program. We found a wide range of results in outputs such as job placements; however, because grantees generally did not follow up on participants, we were unable to determine long-term outcomes such as percentages of participants retaining employment. Moreover, while closeout reports include impediments to success and “best practices,” HUD did not systematically review this information or share it with YouthBuild USA. As a result, the lack of follow-up data and programwide evaluations make it very difficult to determine which programs and strategies have worked best and assess the performance of Youthbuild over time. Labor officials said they would consider that the closeout reports include outcomes such as jobs obtained and retained and said that they believe impediments and best practices should be evaluated and disseminated to grantees. A few studies have provided some evidence of the success of individual Youthbuild programs. Although subject to many limitations, the studies suggest that identified programs have achieved certain Youthbuild objectives. However, without comparable information for the entire population of Youthbuild grantees, it is not possible to determine the extent to which these outcomes and reported successes are reflective of what was achieved by the grantees not included in the studies. More specifically: In June 2004, researchers from Brandeis and Temple Universities published a study entitled, “Life after YouthBuild - 900 YouthBuild Graduates Reflect on Their Lives, Dreams, and Experiences,” in collaboration with YouthBuild USA. The study was based on a survey of graduates from 11 Youthbuild grant sites and included in-depth interviews with 57 graduates from eight of these sites. The researchers determined that, for those 882 participants (for a 23 percent response rate) who responded to the survey, many are doing well and were helped considerably by the Youthbuild program. Many participants found jobs or furthered their education and have volunteered in community activities. In addition, a number of participants surveyed indicated they also obtained intangible benefits from the program, such as increased self-esteem and had developed positive attitudes about themselves and their community. A limited nonresponse analysis was conducted by YouthBuild USA to compare the 882 survey responses and the 57 interviews with one site that had a 98 percent response rate. However, using one site that had a high response rate is not representative and cannot be generalized to the whole sample. As such, it is not known if the 77 percent who did not respond were doing more or less well than those who responded to the survey. In August 2003, HUD issued a study entitled, “Evaluation of the Youthbuild Program,” in which a HUD contractor compared program results and costs per participant from the Youthbuild Program and four other federal employment and training programs—Job Corps, JOBSTART, both designed to serve disadvantage youth, and the youth components of the Job Training Partnership Act and Supported Work Demonstration programs. The researchers conducted their work at 20 Youthbuild sites, selected in part because they had received funding for at least two grants, obtained a variety of organizational sponsorships, built new or rehabilitated housing, and covered a variety of funding category sizes. The study found that 36 percent of the Youthbuild participants at these sites obtained jobs after enrolling and 29 percent obtained either a GED or high- school diploma. In addition, 12 percent of the Youthbuild graduates in the 20 sites reportedly went onto higher education. However, results at the five federal programs were not directly comparable because researchers obtained data from Youthbuild program participants at the time they exited the program while data from the other programs’ were obtained from tracking participants up to 3 years after leaving the program. In addition, the limited scope of this study precludes an overall assessment of the program’s success. In February 2003, the state of Minnesota issued a study entitled, “Minnesota Youthbuild Program: A Measurement of Costs and Benefits to the State of Minnesota.” This study analyzed the costs and benefits of the state-funded Youthbuild program in Minnesota. The researchers measured post-program participant performance outcomes by tracking program year participants beyond graduation. They found that Youthbuild graduates earned more than double the minimum wage, whereas youth with similar characteristics who had not been through the program typically earned only the minimum wage. In addition, the graduates who had been adjudicated had a considerably lower rate of recidivism (rearrest, reconviction, or return to prison) than other youth involved with the correctional system. Using state administrative data to estimate the amount of revenues and savings generated through increased tax revenues and reduced prison costs, the study estimated first-year benefits to the state of about $1.5 million dollars versus costs of about $877,000. Over a 4- year period, the study estimated the total net benefit to the state at about $7.3 million (by 2006). The study was limited to costs and benefits directly related to state programs and did not include potential benefits such as reductions to welfare rolls, state-sponsored medical care, or other reductions in human services costs. Since 2002, YouthBuild USA has been using a Web-based system— WebSTA—to collect participant characteristics and performance data from its affiliates. According to YouthBuild USA officials, as of December 2006, about 90 percent of its affiliates were entering data into WebSTA to some extent. However, the value of YouthBuild USA’s WebSTA data is limited, largely because grantees self-report the data, not all grantees are meeting the requirement to send in information, and the information is not reported at the grant level. That is, if affiliates have more than one Youthbuild grant, the data for each grant are not reported separately. As a result, the data are not verified, comprehensive, or comparable. Also, because the grantees submit the information quarterly, the data provide only a point-in-time snapshot of the program’s performance and cannot be summed to provide annual data. Recognizing these limitations, according to YouthBuild USA’s President, upgrades are planned to be implemented in early 2007 that will allow grantees to enter data in WebSTA by individual grant, which in turn will allow YouthBuild USA to analyze grant- level performance. We also found that the limited depth of the information collected restricts the value of WebSTA information for performance assessments. For example, WebSTA collects information on participant attendance, retention and graduation rates, and initial job and college placements and participant characteristics (such as welfare, public housing, and adjudication status) when participants enter Youthbuild programs. However, many grantees do not follow up on participants once they leave the programs. As a result, they often do not know if students placed in jobs were still working at those jobs weeks or months later. Also, several program directors we visited said that most of their program graduates who go on to higher education sign up for free remedial-level courses at nearby colleges. Although they have not had the funding to systematically follow the students’ progress, some said they generally have found that the students have had varying success in advancing to college-level credit courses. Without grantee-level follow-up systems, WebSTA cannot track program outcomes that would reflect whether the graduates are achieving economic self-sufficiency—such as the percentage of program graduates who remove themselves from the welfare rolls, move out of public housing, or stay out of the court system. The system also does not collect follow-up information on the type of jobs attained (including construction), pay raises, benefits received, and college or trade degrees or certifications received. Analyzing such performance outcomes could provide, HUD, Labor, and other interested parties with the measures needed to evaluate overall program performance and success. Because HUD had not aggregated or analyzed data for Youthbuild, we obtained and analyzed 245 closeout reports that grantees submitted to HUD. Figure 6 provides selected performance information that we summarized from the closeout reports. However, because HUD has not established objective performance goals for the program, which would serve as baseline criteria against which to judge performance, the information related to the experience of the 12,863 participants who entered the program under the 245 grants gave us limited perspectives about how individual programs were working. In addition, because we had information on only 245 (or 46 percent) of the grants, the results cannot be generalized to the entire program. As shown in figure 6 the percentages for participants graduating, receiving a GED, or being placed in employment varied widely. As previously discussed, HUD has not set benchmarks, and critical data elements (baseline data) are missing in the closeout reports. For instance, it is not possible to obtain an accurate number of diplomas and GEDs attained from the closeout reports because the reports do not contain data on the number of participants that enter the program with a high-school diploma or GED. As result, we could not determine how well the programs (except for those with the very highest percentages) performed individually or in comparison with each other. The closeout reports also do not provide consistent and reliable data on the number of units rehabilitated or built by Youthbuild participants. A basic purpose for which Youthbuild was authorized was to expand the supply of affordable housing. According to the closeout reports, 158 grantees reported that their participants built a total of 1,483 new units, while 139 grantees reported that their participants rehabilitated a total of 2,238 units. Some of the Youthbuild program directors with whom we met said that during a typical reporting period they would complete from one to four new or gut-rehabilitated housing units. Other directors said that when a program reports about 200 units rehabilitated, it generally means the students are performing minor repetitive tasks such as changing locks or painting a limited number of interior walls. As a result, the number of units rehabilitated likely is overstated in the closeout reports. Although construction training is a major part of the Youthbuild program, HUD’s closeout reports also do not track the number of graduates obtaining construction-related jobs or specify the types of jobs obtained (construction or otherwise). In addition, HUD officials told us that grantees are not required to follow up on participants after they leave the program. While some grantee officials with whom we met recently had attempted to establish follow-up systems, most grantees cited funding constraints as the reason for not following up on graduates. Several officials further noted that it was difficult to locate many participants after they had left the program. However, as a result, it is not possible to obtain comprehensive post- program results. Finally, some program directors with whom we spoke cautioned that any follow-up system should not be strictly focused on students obtaining higher education degrees or obtaining high-paying jobs. They emphasized that such goals were beyond the abilities of some of their participants, but that moving from a fifth-grade to a ninth-grade reading level or obtaining a service sector job sometimes was a real victory and should be counted as a success. The information we obtained from our visits also demonstrates varied results for continued employment and academic success, and little detail on long-term success. As with our closeout report analysis, the information cannot be generalized to the universe of Youthbuild grantees—although YouthBuild USA officials told us that they believe we visited some of the more innovative grantees. For example, although not required, some of the nine grantees we visited used other funding sources, such as United Way or AmeriCorps funds, to establish a participant follow- up system. As a result, some of the grantees were able to provide us with varying amounts of information on the status of program graduates. For example: One grantee, which was able to track individuals who completed the program since 2001, provided us with data that showed 70 of the 82 program participants were either employed or pursuing higher education. Seven of the 70 participants were working and going to school. The hourly wages of those employed ranged from $7 to $13.75. However, the grantee did not have information on the types of employment. Another grantee that recently established a follow-up system showed that 11 of the 26 program graduates who started in 2004 had obtained employment. The positions ranged from pizza delivery person to union carpenter. However, only the union carpenter and a graduate hired by the program as a construction trainer were working in the construction field. The hourly wages of the graduates ranged from $5.50 to more than $16 per hour for a graduate hired by the grantee. Another grantee used WEBSTA to track continuing education and work history, including each job held. The program director told us that such a follow-up system allows the program to spot trends, which in turn can be used to fine-tune the program. Of 60 graduates from 2002 to 2005, the program continually has tracked 53 and reported that 8 are receiving higher education, 24 are working in nonconstruction jobs, and 16 are working in construction jobs. The pay for the graduates ranged from $6.50 to $15 per hour. The grantee continues to keep in touch with the graduates by helping them with housing, legal aid, school advice, tutoring, and help toward achieving a GED. Grantees are not required to collect such post-program follow-up information. Yet, both grantees and program participants emphasized that the Youthbuild program created a very supportive atmosphere that many participants had never experienced prior to joining a program. During our visits, we met with students who credited the program with improving their lives by either helping get them off drugs, get out of the gang lifestyle, or disengage from other activities that likely could have resulted in incarceration or worse. The studies we mentioned previously had similar findings. However, it is difficult to gain insight into how many program participants remain drug free, crime free, in advanced degree programs, or working in construction or other trades without post-program performance data. It is also difficult to gain insight into which program strategies are most effective for serving these youth. Citing resource constraints, HUD did not systematically review the impediments and best practices identified in closeout reports or share the information in them with YouthBuild USA. In particular, identifying best practices (or the converse, impediments) can provide a model for improvement for other organizations with similar missions. The closeout reports contain a section addressing what the grantees considered to be best practices. For example: Several grantees set-up educational opportunities, such as GED preparation, at local colleges for participants. Two grantees noted that being on a college campus provided a positive experience for the participants. Two grantees noted that they made an arrangement with a local technical college to offer free enrollment to all participants that successfully completed the Youthbuild program. Another grantee noted that working through community college GED programs allowed them to lower their per-student cost and serve more students. One grantee established an alumni council consisting of elected representatives from each of its seven graduating classes. All graduates receive quarterly mailings that include an alumni newsletter, new job and educational opportunities, and a quarterly calendar of events. Another grantee has maintained a program serving graduates for up to 12 months to provide on-going employment support, including assistance in securing a second job in the event that the initial placement did not work out. One grantee started a “drug free” club and found that students really wanted to participate and were anxious to become drug free and would publicly announce their success. Another grantee worked extensively recruiting area college students to volunteer to help with tutoring and program community service activities. Closeout reports also contain information on impediments that grantees encountered in implementing and operating the programs. Impediments to program success varied in scope and severity. Some of the more significant impediments mentioned by numerous grantees included the following. Turnover of key staff, especially on-site construction managers; Negative and apathetic attitudes among participants; Alcohol and drug abuse issues among participants; Difficulties in dealing with municipal organizations to obtain building permits and contractual difficulties, which delayed construction training activities; and Acceptance of students with very low educational levels, which made obtaining high GED levels very difficult. HUD’s contract with YouthBuild USA specifically calls for the contractor to assist HUD in the management, supervision, and coordination of Youthbuild programs by strengthening Youthbuild program design and disseminating information on best program practices. Although analyzing the impediment and best practices falls within the scope of HUD’s contract with YouthBuild USA, two CPD program officials said that HUD never considered sharing the reports with its technical services provider. YouthBuild USA’s chief operating officer said that the organization would welcome access to the closeout reports. The officer said his staff already spent many hours each month trying to identify best practices from Youthbuild grantees and would be anxious to analyze the closeout reports for both the problems and successes identified and forward the information to interested grantees. YouthBuild USA’s President told us that she not only agreed that reviewing the closeout reports for problems and “best practices” would be beneficial, but that she believes the closeout reports needed to “be analyzed to get to the bottom line because the total impact (outcomes) of a grant could not be determined from data provided on a rolling quarterly basis.” As a result of not sharing the closeout reports with YouthBuild USA, HUD may have missed opportunities to improve the program as a whole and help grantees improve performance. According to Labor officials, they will consider analyzing information from the closeout reports to assess and improve the performance of the YouthBuild program. Until 2006, Labor assessed past performance of its youth employment and training grantees through measures required under WIA. For example, under the WIA Youth and Job Corps programs, Labor tracked and analyzed 6-month retention and earnings wage change information. Labor officials told us that they would use OMB’s common measures to track and analyze the performance of YouthBuild grantees but said that they have not finalized the information they would require YouthBuild grantees to collect. The officials indicated to us that they would consider developing post-program performance outcomes such as the types of employment graduates attained and retained (including construction), wage rates, and college or trade degrees or certifications received. Although Labor may incur some additional costs in developing such information, the ability to measure program success would improve. Labor officials also noted that the information currently contained in the closeout reports would be considered with other factors they deem as pertinent to assessing grantees’ performance. However officials said they would also likely consider modifying the closeout reports to include other program participant data, such as degrees obtained prior to program entry and details on the types of construction jobs obtained upon program completion. Labor officials also acknowledged that information on program impediments and best practices should be evaluated and passed to grantees and that performance data needed to be aggregated, verified, and analyzed to determine which programs and strategies worked best. As of October 2006, Labor had not determined whether its Employment and Training Administration or an outside contractor would have primary responsibility for collecting, aggregating, and disseminating the information. Our analysis of available closeout reports showed that the grantees have had varying success in obtaining additional funding sources. In assessing grant applications, HUD gave consideration to program applicants that were able to secure outside funding. Applicants received points for leveraging nonhousing resources compared with the amount of Youthbuild funds requested in the application. Overall, the median amount spent by a HUD Youthbuild grantee was $400,000 in HUD funds; the HUD grant represented about 48 percent of the average total spending per grantee, which included additional funding sources of about $430,000. However, success in obtaining additional funds varied widely, from 21 grants reporting no additional funding sources to 40 reporting more than $1 million (see fig. 7). According to information in the closeout reports and the officials from the grantees that we visited, the additional funding they obtained largely came from federal, state, and local agencies, businesses, and charitable organizations. According to a YouthBuild USA official, states have provided funding to local Youthbuild grantees over the past several years. For instance, the Massachusetts State Department of Education has provided funding in its budget for the state’s Youthbuild program. The Massachusetts funds are provided to existing Youthbuild programs, based on a formula the state developed in conjunction with a state coalition of Youthbuild grantees. In Minnesota, 10 Youthbuild programs in 2005 shared $754,000 in state Youthbuild program funding, which the state supplemented with more than $3 million in matching funds from local partners. In Minnesota as elsewhere, urban grantees have had greater opportunities to obtain funding or in-kind support from local businesses and charitable organizations than rural grantees that typically have had access to fewer businesses and might not be a focus of charitable activity. Regardless of their success in obtaining outside funds, several grantees we visited stated that their Youthbuild program could not be sustained without the HUD grant because the HUD funding allowed them to attract the leveraged funds. Also, several grant officials said that many existing and potential contributors would not be willing to continue funding if they perceived that the program would not be able to continue without the HUD grant. One exception (which we did not visit) was in Minnesota where the state Youthbuild program director said that only 4 of the state’s 10 programs have had HUD funds in the past, including 2 programs which received HUD funding in 2004 through a HUD grant administered by the state. The program director added that the structure of the Minnesota state Youthbuild program is similar to that of HUD’s, although the programs are typically smaller, having from 10 to 25 students. Information from YouthBuild USA generally agrees with grantees’ contention about the need for continuous HUD funding. Overall, YouthBuild USA found that 60 percent of programs that HUD did not fund for 2 consecutive years ceased operations, and 90 percent of programs not funded for 3 consecutive years ceased operations. According to YouthBuild USA, 173 of 462 grantees funded since 1994 currently are operating with active HUD grants. YouthBuild USA, also found that grantees with continuous HUD funding achieved higher outputs, such as GED attainments and job placements, than the ones that did not receive one or more follow-on grants. According to some grantee officials, that success is partly due to continuous funding that allows grantees to develop infrastructure and maintain experienced staff to establish a better program. In its fiscal year 2005 Performance and Accountability Report, HUD noted the benefits of making grants to previous awardees: “Having established programs and experience running a Youthbuild program, these grantees are more efficient in enrolling students, resulting in a greater number of youth trained.” Furthermore, Youthbuild program directors with whom we met emphasized the intangible benefit that such established programs provide such as a family atmosphere that allows graduates to return for advice and support as needed—a benefit that goes away when programs close. HUD has not kept statistics to find out why some grantees did not reapply for additional grants or why grantees did not qualify for follow-up grants. Through discussions with a nonprobability selection of 23 of the 100 grantees that closed programs, we found that some did not reapply because they were no longer interested in dealing with at-risk youth and others closed due to poor management. But most of the closed grantees with whom we spoke said they closed because they lost HUD funding for one or more years and were unable to obtain sufficient private funds to make up for the lost funding. Of the sites we contacted, two were still in operation after ceasing to receive HUD funds—but they appeared to be the exception. Both were already operating youth technical training programs prior to their first HUD Youthbuild grant. In addition, officials from several grantees that also received funding from AmeriCorps stated that they preferred the AmeriCorps concept of providing dedicated funds for 3 years. These officials stated that knowing that funding levels were longer-term provided more continuity to their program, enabled better planning, and allowed them to build a cushion through leveraged funding in the event that they did not receive a HUD grant for a year or two. Finally, when the question of multiyear funding was raised at a Web-based listening session in December 2006, designed to help Labor identify Youthbuild program administration issues and concerns, most participating grantees spoke out in favor of multiyear funding. HUD has not taken advantage of several opportunities to use existing information for purposes of program assessment and oversight. Such opportunities should not be ignored, particularly because HUD has limited resources with which to assess and oversee current grantees. Specifically, HUD has not verified, aggregated or analyzed closeout reports, which grantees are required to submit. HUD also has conducted limited oversight of grantees, citing resource constraints; the impending transfer of oversight to Labor bodes no change to this specific situation. However, given these conditions, analysis of existing closeout reports would help provide crucial information on the performance of the Youthbuild programs, particularly in the absence of a centralized HUD database that could be used to track program performance. At a minimum, the closeout reports form a logical basis for providing useful information that HUD, Labor, and other interested parties can use to judge the performance of Youthbuild. HUD still will maintain an active involvement for several more years, so coordination between Labor and HUD will be critical to producing reliable assessments of how successful the program has been and will be. HUD also does not share reported constraints and best practices with the technical services contractor it pays for performing such work and disseminating best practices. By not utilizing performance data and sharing information, HUD has missed opportunities to determine whether the overall Youthbuild program has achieved its intended results, among them enabling disadvantaged young adults to gain economic self- sufficiency. Therefore, Congress and the public also lack the information needed to make such determinations. Labor has experience in managing youth training and education programs and collecting performance information, and Congress transferred Youthbuild to Labor in part to better align the program with existing federal workforce development and youth training programs. In offering perspectives for Labor to consider, we stress the value that closeout reports have in the absence of more comprehensive and programwide data, although the existing reports lack certain elements that could help program managers determine and report on outcomes. The reports do contain valuable information on impediments and best practices, which could provide both program managers and grantees with much broader perspectives on how successful the program has been and suggestions for improvements. Labor has indicated that it would consider developing post- program performance outcomes such as the types of jobs graduates attained and retained (including construction), wage rates, and college or trade degrees or certifications received. As a result, while there may be some additional costs involved, the ability to measure program success would improve. And, because alternatives to the HUD data are limited, the grant-level assessment discussed above could act as the building blocks of an overall program assessment. Labor also has agreed that information on impediments and best practices would be valuable and ought to be passed on to grantees, but has not yet determined how this might be done. Finally, data on grantee success in attracting other funding, although limited, offer more perspectives for Labor to consider because outside funding helps leverage limited federal dollars. While many grantees have obtained extensive outside funding and support, YouthBuild USA has found that very few operated for more than a few years without continued HUD funding. Tellingly, their data show that 90 percent of programs not funded by HUD for 3 consecutive years ceased operations. According to YouthBuild USA officials, their data indicate that grantees with repeat awards also produced better outcomes such as a higher level of job placements. Further, when HUD funding stopped, potential contributors became concerned that grantees would no longer stay in business and were reluctant to jeopardize their own funds. These data, while not definitive, do suggest that multiyear funding has the potential to produce dividends for the program. Many grantees expressed similar belief in the benefits of longer term funding at a Department of Labor YouthBuild program listening session. To improve the reporting and assessment of performance for Youthbuild grantee programs and develop the bases for an overall assessment of the program, we are making the following three recommendations: that the Secretary of HUD analyze closeout reports by grant and share information on identified problems and “best practices” with its technical services contractor and Labor; that the Secretary of Labor develop and monitor post-program performance outcome measures for the YouthBuild program, such as the types of employment graduates attained and retained, wage rates, and degrees or certifications received, and share the data with the grantees; and that the Secretary of Labor consider whether multiyear funding could be useful in helping YouthBuild grantees attract additional outside funding. We provided HUD and Labor with a draft of this report for review and comment. HUD’s comments are summarized below. Labor’s Assistant Secretary for Employment and Training provided written comments that are presented in appendix I. Officials from HUD’s Office of Community and Planning and Development provided comments. They stated that they did not disagree with GAO’s overall findings, but added that HUD’s oversight responsibility was limited by resource constraints. They cited the fact that the Youthbuild program represents 0.63 percent of the Community Planning and Development Division’s entire portfolio. Nevertheless, because HUD will have monitoring responsibilities for existing grants for 3 years or more, we believe it is important that HUD analyze the closeout reports in order to provide Labor with information about how current grantees are performing. Labor’s Assistant Secretary for Employment and Training wrote that she believes that the report will be very useful to Labor as it assumes responsibility for administering the YouthBuild program. She noted that Labor agreed with our recommendation to develop and monitor post program performance outcome measures for the YouthBuild program and share these data with grantees. She added that Labor was building a Web- based Management Information System to collect and report on participant information. Finally, she wrote that Labor agreed that there could be value on multiyear funding and that the Department was considering such an approach for existing grantees. We are sending copies of this report to other interested congressional committees and the Secretaries of Housing and Urban Development and Labor. We will also make copies available to others upon request. The report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have questions regarding this report, please contact me at (202) 512-4325 or [email protected]. Contact points for our Offices of Public and Congressional 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, Andy Finkel, Assistant Director; Rich LaMore, John McGrail, Marc Molino, Luann Moy, Barbara Roesmann, and Tom Taydus made key contributions to this report. | Since 1993, the Department of Housing and Urban Development (HUD) has provided funding for Youthbuild, a competitive grant program that trains and educates disadvantaged youth and helps build low-income housing. In 2006, Youthbuild was transferred to the Department of Labor (Labor) to better align the Youthbuild program with existing youth workforce and training programs. In response to concerns about the overall quality of Youthbuild, a Senate report directed GAO to assess the program. GAO's objectives included (1) evaluating how HUD assessed and oversaw the program, (2) determining what results the program achieved, and (3) assessing how successful grantees were in obtaining outside funding. GAO analyzed Youthbuild performance data, visited Youthbuild sites, and interviewed agency officials. While HUD requires grantees to report basic performance data, such as the number of program participants and graduates and job placements, HUD has not aggregated or analyzed the data and conducted limited oversight of grantees. According to HUD officials, they did not have staff available to analyze the closeout reports that grantees must submit, and a lack of resources also limited oversight of grantees. The monitoring HUD did primarily focused on compliance with program requirements such as documentation rather than on performance. As a result, HUD largely was unable to tell how the individual Youthbuild grantee programs performed. Limited outcome data preclude any overall assessment of the performance of the Youthbuild program; further, the few other analyses available such as the one GAO did in this study to augment limited existing data cannot be generalized programwide. GAO analyzed 245 closeout reports, representing 46 percent of the grantees or 12,863 participants. While GAO could determine percentages of participants who received high school diplomas or were placed in jobs, GAO could not determine outcomes over time, partly because the reports lacked baseline information and grantees were not required to and generally did not follow participants after graduation. Further, while closeout reports include information about impediments to program success and "best practices," HUD did not systematically review this information or share it with its primary technical assistance contractor. Consequently, the lack of programwide evaluations, follow-up data, and dissemination of best practices make it very difficult to assess the performance of Youthbuild over time and determine which programs and strategies have worked best. Reporting on post-program performance outcomes, such as the number of participants placed and retained in construction-related employment, could increase the value of the closeout reports and better measure program results. Labor officials indicated that they would consider including such measures for program reporting. Grantees had varying success in obtaining funds from outside sources, but YouthBuild USA data suggest that continued (multiyear) HUD funding was critical to sustaining grantee operations and attracting leveraged funds. Grantees' success in obtaining additional funds varied widely, from 21 grants reporting no additional funding sources to 40 reporting more than $1 million. While most grantees have generated outside funding, YouthBuild USA reported that most grantees have had difficulty continuing operations without continued HUD funding. Their data show that 90 percent of grantees ceased operations if not funded for 3 consecutive years by HUD. Further, YouthBuild USA also noted that grantees with follow-on HUD funding achieved better performance outcomes, such as higher rates of job placements, than grantees that did not receive subsequent HUD funding. |
Federal facilities have been contaminated with a wide range of substances, including highly radioactive waste and toxic chemicals. As of April 1995, federal agencies had placed 2,070 facilities on the federal facility docket, EPA’s listing of the facilities awaiting evaluation for possible cleanup. EPA had placed 154 federal facilities on the National Priorities List (NPL) (see table 1) and, as of February 1996, had proposed another five facilities for listing. (For the status of the 2,070 facilities on the docket, see app. I.) EPA uses the NPL as an aid in determining which sites warrant further investigation to assess public health and environmental risks and which sites merit cleanup. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, created the Superfund program to govern cleanups of both private and federal hazardous waste sites. Cleanups of federal facilities are also subject to the Resource Conservation and Recovery Act (RCRA) of 1976, as amended, which governs, among other things, the treatment, storage, and disposal of hazardous wastes. This review focuses on the requirements that CERCLA imposes upon federal facilities. The Superfund process for cleaning up federal facilities consists of many steps involving both the responsible federal agencies and EPA. First, a responsible federal agency identifies a potentially contaminated facility and reports it to EPA for listing on the federal facilities docket. The responsible agency then conducts a preliminary assessment to gather data on the facility and performs a site inspection, which may involve taking and analyzing samples, to learn more about potential contamination. An EPA region oversees the agency’s activities at each stage, and if the evidence indicates that the facility is contaminated, EPA then decides when to evaluate the facility to determine whether it qualifies for inclusion on the NPL. The evaluation scores the severity of the facility’s contamination using EPA’s hazard ranking system. Figure 1 depicts the stages in the Superfund process leading to a facility’s placement on the NPL. After EPA has placed a facility on the NPL, the responsible federal agency is required, within 6 months, to begin a remedial investigation to characterize the waste and a feasibility study to evaluate the alternatives for cleaning up the facility. With EPA’s oversight, the agency examines all the information gathered during this process, selects a cleanup remedy, and prepares a record of decision to document the analysis that led to the selection. The responsible agency must also enter into an interagency agreement with EPA on a plan for cleaning up the facility. Finally, the responsible agency develops a detailed design and implements the cleanup plan while EPA oversees the agency’s implementation. Figure 2 depicts the cleanup stages in the Superfund process. Although several federal agencies have significant numbers of facilities on the federal facility docket (see table 1), the departments of Defense and Energy have the largest budgets for environmental restoration. In comparison, Interior’s cleanup program is currently small, but it is expected to grow as the Department’s agencies—including the Bureau of Land Management, the Fish and Wildlife Service, and the National Park Service—develop more complete inventories of contaminated facilities, particularly abandoned mines. For fiscal year 1996, the appropriations for hazardous waste cleanups at Defense, Energy, and Interior totaled almost $4 billion. (See table 2.) The Federal Facilities Policy Group estimates that the total cost of cleaning up federal facilities could reach almost $400 billion (see app. II). From the formal inception of federal environmental cleanup programs through fiscal year 1996, the group reported that federal agencies have budgeted nearly $54 billion for cleanups. According to the group, about two-thirds of the total budget has been targeted for Energy facilities and includes amounts for ongoing waste management. For the purposes of this report, we have defined a “site” as a specific area of contamination and a “facility” as a geographically contiguous area under an agency’s ownership or control within which a contaminated site or sites are located. EPA generally includes all contaminated sites at a federal facility—such as a military installation—on the NPL. Thus, a federal facility on the NPL may contain from a few to hundreds of sites that require assessment and possibly cleanup. It is generally agreed that the magnitude of the risks to human health posed by contamination at a federal facility should be a primary factor in setting priorities for cleanups. However, according to the Federal Facilities Environmental Restoration Dialogue Committee (a group composed of representatives from federal, state, local, and tribal governments, as well as citizens’ groups and labor organizations), additional factors also warrant consideration. These include legal requirements; cost-effectiveness; the potential future uses of decontaminated land; and other cultural, social, and economic factors. The Superfund process does not fully and consistently identify for possible cleanup the federal facilities presenting the greatest risks to public health and the environment. An incomplete inventory of contaminated federal facilities and a backlog of unevaluated facilities have limited the scope of priority-setting efforts. Furthermore, no national guidance ensures that EPA’s regions use a consistent approach in choosing which facilities to evaluate for inclusion on the NPL from the backlog of facilities awaiting this step. Some facilities that qualify for inclusion are not being listed, making listing an uncertain indicator of a facility’s relative risk. In addition, EPA’s evaluation process does not produce enough information to rank sites on the basis of relative risk. Agencies cannot fully set priorities without a complete inventory of contaminated sites and adequate data on the risks at these sites. As we have reported in the past, federal agencies have not yet completed a comprehensive inventory of their potentially contaminated sites. Some agencies, such as Defense and Energy, have made substantial progress toward completing their inventories, while others, such as Interior, are still in the early stages of developing theirs. As of April 1995, Interior had 432 sites on the federal facility docket, but a recent report by the Federal Facilities Policy Group estimates that Interior has 26,000 sites that may require some cleanup. The dimensions of Interior’s future cleanup responsibilities are uncertain. Interior officials estimate that only 1 or 2 percent of these sites may require major cleanup work. According to officials, the Department’s legal liability for cleaning up many sites has not been fully resolved. Interior officials told us that they are not planning to conduct a comprehensive inventory of their potentially contaminated hazardous waste sites, in part because they lack sufficient funding. Instead, they intend to rely on existing information, as well as on discoveries made during the Department’s regular activities, to identify sites requiring cleanup. In 1994, we reported on the importance of a comprehensive federal site inventory and recommended, among other things, that the Congress amend CERCLA to (1) require the agencies to submit plans for completing their inventories of hazardous waste sites for EPA’s review and approval and (2) require EPA to report annually to the Congress on the agencies’ progress toward completing the inventories. No action has yet been taken on these recommendations. For many of the facilities and sites in their inventories, federal agencies have not gathered sufficient data to set priorities for further activities. Information is incomplete for 1,040 of the 2,070 facilities listed on the federal facility docket. For some, the agency has not completed the preliminary assessment or site inspection; for others, the EPA region has not reviewed the responsible federal agency’s inspection or the site’s status is unknown. As table 3 shows, 157 facilities have completed the early assessment phases and are awaiting the final evaluation for inclusion on the NPL. At the current evaluation rate, this backlog could take many years to clear. According to EPA officials, the agency’s budget permits the agency to perform final evaluations for only five facilities per year. Despite the need for setting priorities to determine which sites in the backlog to evaluate first for possible inclusion on the NPL, EPA headquarters has not developed policy guidance to ensure that the regions employ a consistent approach. EPA has developed such guidance for evaluating nonfederal NPL candidate sites but has not extended its application to federal facilities. Only 4 of EPA’s 10 regions reported using such nonfederal guidance to help them determine which federal facilities to evaluate first for possible inclusion on the NPL. In July 1993, we reported that EPA was not evaluating federal facilities in a timely manner, in part because (1) it did not devote adequate resources to the task and (2) some agencies were providing EPA with late or incomplete data. Delays in EPA’s evaluation may postpone cleanups while responsible federal agencies await EPA’s decision on a facility’s NPL status or may cause rework after a facility has been listed. These delays could increase dangers to human health and the environment and raise costs. Our report recommended that EPA, in consultation with the regulated agencies, develop a plan to address the backlog of unevaluated federal facilities on the docket. Such a plan, which could be used to specify criteria for selecting the order in which facilities should be evaluated for cleanup, has not been developed. EPA officials are concerned that the agency would not have the resources to implement such a plan. EPA regional officials cited EPA’s limited resources and poor data from the responsible agencies as the main barriers to improving EPA’s ability to determine which sites to evaluate first. Many regions believed they did not have the staff resources or the funding needed to adequately oversee the agencies’ preliminary assessments and site inspections. In addition, 9 of EPA’s 10 regional offices cited inadequate data from other agencies on sites’ risks as a significant barrier to improving their own priority setting. EPA officials said that some federal agencies were slow to submit the results of their investigations, the data were sometimes incomplete when submitted, and EPA’s guidance on data gathering was not being followed. As a result, some seriously contaminated facilities are not yet ready for EPA’s evaluation. To improve the quality and timeliness of the data it receives from the regulated agencies, one EPA region reported making two significant changes. First, it dedicated a full-time position to work exclusively with the agencies on assessment issues and answer their questions. Second, it trained the agencies’ staff and contractors to conduct preliminary assessments and site inspections. While the region believes these efforts have been very successful, budget cuts may prevent it from continuing them. The Congress and EPA have allowed the exclusion of certain federal facilities from the NPL for various policy reasons. Because of these exclusions, some of the nation’s most contaminated facilities do not appear on the NPL. Nine of EPA’s 10 regional federal facility cleanup coordinators told us that some facilities in their regions scored higher than the hazard ranking system’s threshold but were not placed on the NPL. Reasons for these exclusions included a state’s not concurring with a listing or a facility’s being cleaned up under another authority. Until June 1995, EPA had the authority to include any qualifying facility on the NPL. In July 1995, legislation was enacted requiring EPA, during fiscal year 1995, to seek a state’s concurrence before including a site on the NPL. This provision, which effectively gave governors the authority to veto EPA’s listing decisions, may significantly affect the consistency and comprehensiveness of the NPL. As of February 1996, EPA had sought state governors’ concurrence to list 14 federal facilities. The governors refused to concur with seven listings, approved four, and reached no decision on three. Furthermore, according to EPA officials, the impact of requiring a state’s concurrence is greater than these numbers would indicate because EPA’s regions will not move a facility forward in the Superfund process if a governor’s veto is expected. EPA’s 1996 appropriations language continues the requirement that EPA obtain a state’s concurrence for the remainder of the fiscal year or until CERCLA is reauthorized. EPA’s current policy is to include on the NPL federal facilities that may be involved in hazardous waste cleanups regulated under RCRA. In establishing this policy, EPA argued that if the listing of such facilities were deferred, very few facilities would be included on the NPL. According to EPA, most eligible facilities contain hazardous waste units that are regulated under RCRA and therefore are subject to its corrective action authorities. Despite EPA’s policy, a regional official told us that if a RCRA corrective action is under way at a federal facility, then the region may not pursue a listing for that facility. An EPA headquarters official acknowledged that a site being cleaned up under RCRA will receive a low priority for inclusion on the NPL. Hence, in practice, the site may receive an informal RCRA deferral. Similarly, according to an EPA regional official, a facility that is already being cleaned up under Defense’s Base Realignment and Closure program will receive a low priority for inclusion on the NPL. Defense is closing or realigning over 400 installations. EPA’s processes for scoring and listing do not produce enough information to rank facilities or sites on the basis of risk. When EPA uses the hazard ranking system to determine whether a federal facility should be included on the NPL, it typically evaluates only a few major areas of contamination and does not score all contaminants and pathways. Because the system’s evaluations are not comprehensive, EPA cannot use its scores to compare the relative severity of the contamination at NPL facilities. Generally, EPA places all contaminated portions of a federal facility on the NPL. While some of these facilities may contain hundreds of individual sites whose contamination may vary widely in severity, the sites are still designated as high priorities. In our 1994 report on setting priorities for cleanups at Defense, we discussed the problem of treating all sites at NPL facilities as high priorities without considering how seriously they are contaminated, and we recommended that the system for designating high-priority sites be revised to reduce the number of such sites in Defense’s high-priority program. As discussed below, Defense has established a system to classify its sites into various risk categories. Both Defense and Energy have developed new approaches for setting cleanup priorities, but neither agency has fully established agencywide, risk-based funding priorities. Defense has classified most of its sites in one risk category without further refinement as to rank. Energy has used its new system primarily to rank sites at individual facilities, rather than across many facilities or the agency as a whole. Interior has developed a centralized process for setting priorities for NPL sites, but its bureaus set priorities independently during the assessment stages that precede listing. The three departments have developed different risk-ranking and priority-setting systems, making cross-agency comparisons of risks and priorities difficult. To improve its priority-setting processes, Defense introduced evaluations of sites’ relative risks in 1994 as a key element in decisions about which of its contaminated sites should be cleaned up first. Defense’s Relative Risk Site Evaluation Framework allows the agency to place a potentially contaminated site within the Defense Environmental Restoration Program into one of three relative risk categories—high, medium, or low—on the basis of relative risks that the site poses to human health and the environment. The relative risk framework evaluates the nature and concentration of the site’s contaminants, the possible pathways for the contaminants to move from the site, and the opportunities for humans and ecological elements (designated as “receptors”) to come into contact with the contaminants. For example, at a highly contaminated site that poses a hazard to groundwater, has an identifiable migration pathway, and is located near a human receptor that uses the groundwater as a source of drinking water, the risk ranking would be high. Conversely, at a site with minimal contamination, no migration pathways, and no receptors, the risk ranking would be low. The relative risk ranking is a primary tool for setting cleanup priorities and making funding decisions. As of February 1996, Defense had completed relative risk evaluations for approximately 75 percent of its 10,000 sites. Not having such evaluations for the remaining sites limits Defense’s ability to set cleanup priorities effectively. Of the sites assigned categories, approximately 54 percent were rated as high relative risk, while the remaining 46 percent were rated as medium or low relative risk. The sites ranked as high risk were to receive 83 percent of Defense’s projected fiscal year 1996 funding for cleanups. Generally, Defense does not rank order sites within each relative risk category. By not identifying the worst sites among the large number in the high relative risk category, Defense cannot ensure that its limited funds are being used to clean up the worst sites first. In determining which sites to fund first, Defense assesses relative risk information along with other considerations, such as the status of legally enforceable cleanup agreements and the availability of cleanup technologies. According to Defense officials, individual Defense facilities are responsible for performing these assessments, the results of which are forwarded to higher organizational levels for consideration in priority setting. Defense officials at facilities we visited generally said that the relative risk evaluations had helped improve priority setting, even though most of the contaminated sites at the facilities had been categorized as high risk. Nonetheless, the officials said they could usually identify the worst sites among those with high risk ratings. However, Defense does not generally compare the relative severity of contamination at high-risk sites across installations. According to the officials, the relative risk categorization process requires some subjective judgments that make it difficult to compare sites at different facilities on the basis of their risk category alone. However, they said that if representatives from various facilities met to determine which sites should receive funds first for cleanups, the relative risk information would be useful in helping set priorities across facilities. Although nearly all of its largest facilities are on the NPL, Energy must set priorities for the thousands of individual sites within these facilities. The congressional conference committee’s report on Energy’s fiscal year 1994 appropriations bill directed the Department to report on the risks at its contaminated sites and indicate how it was ranking competing cleanup requirements. Because Energy did not have the data needed to answer these questions, it qualitatively evaluated its environmental management activities, asking its field office managers to (1) classify the risks addressed by its environmental management activities (high, medium, or low) and (2) assess the significance of legal compliance requirements (high, medium, or low). High risks presented immediate and very serious threats, medium risks included significant hazards that should be addressed expeditiously, and low risks encompassed conditions that were not likely to cause serious problems in the near future. Compliance requirements were ranked as high if responses to laws or agreements were needed within relatively short periods of time to avoid penalties; rankings of medium and low indicated successively longer periods for achieving compliance. Energy officials then used this information to evaluate the risk and compliance levels of activities in the fiscal year 1996 budget request. In its draft 1995 report to the Congress, Energy concluded that 49 percent of its fiscal year 1996 funding for the environmental management activities that it reviewed (about $2.5 billion out of $5.1 billion) addressed high risks to the public, workers, or the environment and 88 percent addressed both high and medium risks. The report also stated that 84 percent of the funding addressed high compliance activities. However, Energy noted that its qualitative approach was limited because individual facilities used different assumptions about risk, compliance, and future land use in preparing their evaluations. For example, some facilities assumed that the current compliance agreements would remain largely unchanged, whereas others assumed that certain agreements could be renegotiated. Gaps in the data also made comparisons across sites difficult, according to the report. According to Energy, its qualitative evaluation is a first step in understanding the link among risk, legal and regulatory compliance, and budget. Energy recognizes the need for a more integrated risk assessment process that can become central to its priority setting. Such a process would go well beyond the current qualitative, facility-based approach. Among other things, it would identify and quantify hazards, exposure, risk, and cost in the context of reasonably anticipated future land use on a consistent basis for all sites needing cleanup. Energy officials emphasized that their priority setting for cleanups should be evaluated in the context of their other environmental management responsibilities. For example, Energy is responsible for stabilizing, treating, and disposing of large quantities of hazardous and radioactive wastes. Officials at two of Energy’s largest facilities—Hanford, Washington, and Rocky Flats, Colorado—told us that information on relative risks was considered in setting priorities. In addition, information on other factors, such as legally enforceable cleanup requirements, the need for site maintenance activities, cleanup costs, and worker safety, was considered. However, each facility had independently determined what information to evaluate and how to weight that information in setting priorities. Several agency officials expressed concerns about how priorities are set, noting that funding is allocated to sites on the basis more of historical funding levels than of relative risk. The officials added that the Department’s practice of dedicating funds to certain categories of activities within the Environmental Management program, such as “waste management” and “environmental remediation,” instead of allowing the funds to move between categories, limited the agency’s ability to ensure that funds were being directed to reduce the greatest risks. Energy officials told us that the agency was beginning to address this concern. They said, for example, that Rocky Flats was moving funds from environmental remediation into waste management to respond to greater risks. In 1995, we reported that Energy set cleanup priorities at individual facilities largely on the basis of site-specific legal agreements. We recommended that it set national priorities for cleaning up its contaminated sites and attempt to renegotiate cleanup agreements that no longer reflect such priorities. Energy is now renegotiating some of its agreements and attempting to balance concerns about risks at its sites, compliance issues, and costs. Additionally, the agency is making an effort to impose a national set of criteria for allocating budgeted funds to facilities. We continue to believe that national priorities should be set because the future progress that the agency makes in cleaning up its facilities depends greatly on how effectively it sets national priorities under increasingly restrictive budgets. The current practice of setting priorities at individual facilities does not ensure that limited resources will be allocated to reducing the greatest risks nationwide. In 1993, Interior’s Office of Inspector General reported problems in the Department’s management of hazardous materials cleanups. The report found, among other things, that sites were not always ranked to ensure that the most severe contamination was addressed first. The report recommended that Interior develop and implement a Department-wide ranking system to ensure the allocation of its resources to the highest priorities. Subsequently, Interior established a centralized priority-setting mechanism. In 1995, the Congress established a Central Hazardous Materials Fund for Interior to support activities in the later stages of the Superfund process—remedial investigations, feasibility studies, actual cleanups of hazardous substances, and other associated activities. To set priorities for funding projects, Interior classifies sites on the basis of their legal and regulatory requirements, ranks their risks, and considers other factors affecting their needs for funding. The Department has developed five codes for categorizing contaminated sites according to the importance and urgency of the laws and regulations affecting them. Interior has also developed multiple criteria for ranking sites’ risks, including the types of contaminants, their potential for movement, and the relative threats they pose to human health and the environment. Finally, Interior established a Technical Review Committee, which reviews requests for funding submitted by Interior’s bureaus. This committee uses the information on legal requirements and relative risk, along with information on the status of a site’s remediation, the involvement of other responsible parties, and any unusual conditions, to determine which sites will receive funding first. For fiscal year 1996, the committee recommended funding cleanup activities at seven sites. Five of these seven sites were classified as higher priorities because they needed to meet significant legal requirements. Ninety percent of the recommended funding, or about $9 million, is targeted to these five sites. At several other seriously contaminated sites, requests for funding remedial investigations and feasibility studies were not recommended. One Interior bureau, the Fish and Wildlife Service, has expressed concern that the Central Fund’s appropriation is not adequate to meet its cleanup needs. The Service reported needing $13.4 million from the fund in fiscal year 1996, more than the total amount available for the entire Department. For fiscal year 1997, the Service reported needing $24.2 million. Although Interior’s approach to setting priorities is more comprehensive now than it once was, it is still incomplete and may not always direct funds to the greatest risks. According to an Interior official, the Department has not developed a centralized system for setting cleanup priorities for sites in the earlier stages of the Superfund process. In addition, the official stated that legal and regulatory agreements are an important factor in determining which projects should receive funds first from the Central Fund. An Interior official told us that the sites with legally binding cleanup agreements are also the sites with the greatest risks, but the Department cannot document this correspondence because it has not scored the risks for many projects considered for funding from the Central Fund. Furthermore, given that EPA is not including all qualifying sites on the NPL, it may not be appropriate to set priorities for funding largely on the basis of a facility’s legal status. Some of Interior’s sites, such as Pine Creek Mills in Idaho, have scored high enough to qualify for inclusion on the NPL but had not been listed as of February 1996. As discussed above, individual federal agencies use their own approaches to classifying the risks at sites and setting priorities for funding cleanups. In addition, the agencies do not adequately evaluate the relative risks of their sites agencywide. Consequently, there may not be a consistent relationship nationwide between the level of danger posed by the contamination at a site and the priority for funding its cleanup. This fragmented approach may not be the most cost-effective way to clean up contamination at federal facilities nationwide. According to 9 of EPA’s 10 regional federal facility cleanup coordinators, it is important for federal agencies to use a consistent approach in establishing cleanup priorities. The coordinators said a consistent approach is needed to ensure that (1) important decision-making criteria are being addressed at all sites and (2) limited funds are going to the highest-priority sites. One coordinator, noting that EPA’s procedures call for a national approach when prioritizing nonfederal Superfund sites for the cleanup phase of the Superfund process, would like to see a similar approach applied to federal facilities. To rank private sites that are ready to begin the costly remedial action phase of the Superfund process, EPA relies on a panel of 10 representatives from EPA’s regions and 5 from headquarters, who are given specific priority-setting criteria to apply. All 10 of EPA’s regional coordinators told us that the optimal level for priority setting is broader than the individual facility. While acknowledging the importance of the local facility’s input, the EPA officials recognized that only a broader process—whether regional, agencywide, or national—can efficiently distribute the nation’s cleanup resources. In 1995, we reported on the need for a national process to set priorities for funding federal facility cleanups. In addition, the National Research Council recommended that the government consider developing a unified national process to set priorities for hazardous waste cleanups to replace the multiple approaches now in use. We believe that a consistent approach for relative risk evaluations is an essential element in the process for setting cleanup priorities nationally. The Naval Facilities Engineering Command, Southwest Division, in San Diego, California, has taken steps to expand the scope of its priority setting to identify the Navy’s highest-priority sites on the West Coast. According to an EPA official, starting in fiscal year 1992, the Southwest Division invited staff from the California Environmental Protection Agency and EPA Region 9 to participate in discussions on funding priorities for Navy facilities in California. This group began to meet when the Navy and the state recognized that NPL-caliber installations had not been placed on the NPL and needed funding for cleanup. In fiscal year 1995, the California group invited representatives from (1) the states of Alaska, Arizona, and Washington; (2) EPA Region 10; and (3) each of the Navy’s West Coast cleanup operations and Navy headquarters to participate in discussions on budget reductions. According to an EPA official, during these discussions, the group agreed on the highest priorities for funding cleanup projects and transferred some funds across organizational boundaries. Navy officials at the installations we visited supported this process. They were generally satisfied with the extent of their input into the ranking and said that their sites had been assigned appropriate priorities for cleanup. An EPA regional official said that using the Navy’s West Coast approach has improved the priority-setting process by ensuring better communication, expanding the geographical scope of the priority setting, and ensuring that limited cleanup funds are allocated to the highest-priority sites. According to the EPA official, the West Coast team works well at the current size because participants are knowledgeable about local sites and trust can be developed; however, in their view, the team might not function as well if it were larger. The EPA official believes the next step for the West Coast team would be to involve community advisory boards in the priority-setting process. We believe that regional priority-setting approaches involving important stakeholders—such as EPA, the states, regulated agencies, and affected local communities—hold promise for improving priority setting. To illustrate the importance of this participation, officials from seven regions told us that EPA is additionally part of a decision team that meets periodically with at least one regulated federal agency in the region to establish priorities for funding cleanups. Ultimately, priority setting is a matter of determining where available appropriated resources—currently about $4 billion annually—should be spent to clean up contaminated federal facilities. The Superfund process does not fully and consistently establish national priorities for funding such cleanups, yet it is the only nationwide priority-setting process. To improve its effectiveness, EPA and the regulated federal agencies need to work cooperatively to identify and assess the most severely contaminated federal facilities as an important step in establishing priorities for funding cleanups. Toward this end, we have previously recommended that (1) regulated federal agencies finish inventorying their sites and (2) EPA and the agencies develop a plan to reduce the backlog of unevaluated federal facilities. This plan should specify criteria for selecting the order in which facilities should be evaluated for cleanup. We continue to believe that these recommendations should be implemented. If agencies are to direct their resources to their most contaminated facilities, they will need to develop information allowing them to compare health and environmental risks across all the sites under their jurisdiction. While the major cleanup agencies have made progress in incorporating risk considerations into priority setting, they have not fully compared risks nationwide. In addition, consistency in measuring risks across agencies would increase the value of risk as a factor in determining the relative priority each agency’s cleanup program should receive. Because Defense, Energy, and Interior have each developed their own risk-ranking approaches, there is currently no assurance of consistency among their rankings and no basis for assessing the relative severity of their cleanup needs. The Congress is currently considering bills to change and reauthorize the Superfund program. Although current law allows the agencies to set their priorities on the basis of risk, the reauthorization of Superfund offers an opportunity for the Congress to strengthen the role of health and environmental risk in priority setting. To facilitate the setting of risk-based priorities for cleaning up hazardous waste sites, the Congress may wish to consider amending CERCLA to require EPA, in consultation with the responsible federal agencies and other stakeholders, to develop a consistent process for assessing and ranking the relative risks of hazardous waste sites and require agencies to employ this process as a factor in setting priorities for federal hazardous waste cleanups nationwide. We provided copies of a draft of this report to the departments of Defense, Energy, and the Interior and to EPA for their review and comment. We met with officials of these agencies, including a representative of the Office of the Under Secretary of Defense-Environmental Security; the Director, Office of Strategic Planning and Analysis, Department of Energy; the Team Leader for Solid and Hazardous Waste Materials Management, Office of Environmental Policy and Compliance, Department of the Interior; and the Associate Director, Federal Facilities Restoration and Reuse Office, EPA. Overall, the agencies believed that our report was factually accurate, but, as discussed below, they had some concerns about the interpretation of some information and wanted us to include some additional points. Their principal comments are discussed below. In addition, the agencies provided technical and editorial comments that we incorporated into the report as appropriate. Defense said that its Relative Risk Site Evaluation Framework measured only the relative risks of sites and did not produce risk data comparable to the data that would come from the risk assessments performed for NPL sites. We have indicated throughout our discussion of Defense’s system that it measures relative risk. Defense also said that its relative risk model was a national system whose results were taken into account when priorities were set for funding. We have added this information to our report. Energy emphasized that in comparison with other federal agencies, it has responsibility for addressing a greater variety of environmental problems, including radioactive waste, and that the risks posed by some of these problems are not easily comparable. We have expanded our description of Energy’s environmental responsibilities and agree that risk-based priorities can be set only for cleanup functions whose relative risks can be compared. Energy also said that setting priorities requires considering factors other than risk. Our report indicates that issues other than risk, such as cost and other program management considerations, can be considered in setting priorities. Energy further said that setting priorities for cleanups is made more difficult because funding for Energy and other agencies comes from different appropriations and congressional committees. We agree but think that consistency among federal agencies’ evaluations of relative risk would facilitate a broader view of priorities. Interior said that its cleanup program is much smaller than Defense’s or Energy’s and that although there may be 26,000 potentially contaminated sites on Interior’s lands, the majority, in the Department’s view, do not pose significant human health or safety concerns. We have revised our report to indicate that Interior officials believe that only a small portion of these sites will require major cleanups. Interior also said that the large number of its “sites” should not be compared with the smaller number of other agencies’ “facilities,” which can include many sites. We have tried to make the distinction between sites and facilities clear in our report. While agreeing that a complete inventory of sites is required for the federal government to know whether its funds are being spent on the highest-priority projects, Interior said that it would need additional funding to complete its inventory of hazardous waste sites and prioritize them for cleanup. EPA, like Energy, said that factors other than risk, such as cost and concern for the equitable treatment of low-income or disadvantaged individuals, should be considered in priority setting. Our report indicates that it is appropriate to set priorities on the basis of risk and other considerations. EPA also said that our report placed too much emphasis on the role of risk in setting priorities. We believe that the cost-effective reduction of health and environmental risks should be the predominant consideration in priority setting. The agencies also had some comments about our matter for congressional consideration. Interior and EPA officials expressed some concern that agencies are forced to strike a balance between evaluating and cleaning up sites and that they would need additional resources to both fully evaluate relative risks and maintain their current levels of cleanup. Defense was concerned that the agencies’ individual needs be considered in the development of a consistent national process for evaluating relative risks. We have recognized this concern by indicating that EPA should work with the agencies in developing such a process. EPA said that the states should be involved in selecting a consistent process for evaluating relative risks for federal priority setting. We have revised our matter for congressional consideration to indicate that EPA should consult with stakeholders—including the states—in developing this process. To respond to this report’s objectives, we met with headquarters officials from EPA, Defense, Energy, and Interior. We reviewed pertinent laws and regulations and examined EPA’s policy guidance on priority setting. In addition, we visited several Defense and Energy field installations and reviewed documentation on the priority-setting approaches being used at Defense, Energy, and Interior. We also conducted telephone interviews with federal facility cleanup coordinators in each of EPA’s 10 regional offices. Appendix III contains additional information on our scope and methodology. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 21 days after the date of this letter. At that time, we will send copies to the Administrator of EPA and the Secretaries of Defense, Energy, and the Interior. We will also make copies available to others on request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix IV. 7.4% Currently on NPL (154)0.1% Removed From NPL (3) Evaluation in Process (1,040) Inclusion on NPL Not Warranted (873) We were asked to assess (1) whether Superfund is identifying the highest-priority federal sites for cleanup and (2) what progress is being made by the departments of Defense, Energy, and the Interior in establishing approaches for ranking risks and setting priorities for cleanups. To address our first objective, we gathered information on the extent to which federal agencies had inventoried and assessed their potentially contaminated facilities. To determine the number of facilities for which preliminary assessments and site inspections have not yet been completed, we analyzed data from EPA’s Superfund database, the Comprehensive Environmental Response, Compensation, and Liability Information System. We met with EPA headquarters officials to discuss the role of the hazard ranking system and the National Priorities List in setting priorities, and we examined the policy guidance from EPA headquarters on setting priorities and implementing the Superfund program. We also conducted telephone interviews with federal facility cleanup coordinators in each of EPA’s 10 regional offices to obtain their views on the effectiveness of the Superfund program in setting priorities. To address our second objective, we gathered policy guidance and other documentation on the risk-ranking and priority-setting approaches being used at each agency. We also met with officials at Defense, Energy, and Interior to obtain their views on the progress they have made in establishing such approaches. To assess how priority setting was being implemented, we visited Defense’s Picatinny Arsenal in New Jersey and Portsmouth Naval Shipyard in Maine and Energy’s Hanford facility in Washington and Rocky Flats facility in Colorado. We conducted our review from July 1995 through May 1996 in accordance with generally accepted government auditing standards. James F. Donaghy, Assistant Director Uldis Adamsons, Assistant Director Stephen D. Secrist, Evaluator-in-Charge R. Tim Baden, Senior Evaluator Richard P. Johnson, Attorney Steve Pruitt, Senior Evaluator Virgil N. Schroeder, Senior Evaluator John D. Yakaitis, Senior Evaluator Leo G. Acosta, Evaluator Raymond G. Hendren, Evaluator 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 how priorities are being set for hazardous waste cleanups, focusing on: (1) whether the Superfund program is identifying the highest-priority cleanup sites; and (2) the Department of Defense (DOD), Department of Energy (DOE), and the Department of the Interior approaches for ranking risks and prioritizing sites for cleanup. GAO found that: (1) the Superfund program does not completely and consistently identify the federal facilities presenting the greatest risks to public health and the environment; (2) without a complete inventory of contaminated sites, adequate data on the risks at these sites, and consistent policy guidance, agencies cannot fully prioritize cleanup activities; (3) the National Priorities List (NPL) does not include all eligible contaminated sites and the Hazard Ranking System does not provide sufficient information to rank contaminated facilities on the basis of risk; (4) federal agencies responsible for cleanups do not use a consistent approach to assess relative risk; (5) to help set cleanup priorities and make funding decisions, DOD developed a risk-ranking tool to categorize contaminated sites; (6) DOE uses a qualitative, facility-based approach to evaluate contaminated sites and prioritize cleanups; (7) Interior uses a centralized priority-setting mechanism in the later stages of the Superfund process to rank its contaminated facilities; and (8) while individual agencies use their own risk-assessment processes, it would be more cost-effective for agencies to use a consistent, national approach to rank risks and identify high-priority sites. |
The term “ombudsman” originated in Sweden and has generally come to mean an impartial official who receives complaints and questions, collects relevant information through an investigation or inquiry, and works toward the resolution of the particular issues brought to his attention. Ombudsmen may make recommendations for the resolution of an individual complaint or improvements related to more systemic problems. Depending on their jurisdiction, ombudsmen may protect those who work within an organization or those who are affected by the organization’s actions. An ombudsman who handles concerns and inquiries from the public, such as EPA’s national hazardous waste ombudsman, is often referred to as an “external” ombudsman. In contrast, internal or “workplace” ombudsmen provide an alternative to more formal processes to deal with conflicts and other issues that arise in the workplace. While there are no federal requirements or standards specific to the operation of ombudsman offices, the Administrative Conference of the United States recommended in 1990 that the President and the Congress support federal agency initiatives to create and fund an external ombudsman in agencies with significant interaction with the public. In addition, several professional organizations have published or drafted relevant standards of practice for ombudsmen. Among these organizations are the Ombudsman Committee of the ABA, The Ombudsman Association, and the U.S. Ombudsman Association. In July 2000, ABA’s Ombudsman Committee released a draft of its recommended Standards for the Establishment and Operation of Ombudsman Offices, which are intended to expand on a 1969 ABA resolution that identified essential characteristics of ombudsmen. An article published by the U.S. Ombudsman Association, “Essential Characteristics of a Classical Ombudsman,” elaborates on these factors and explains why they are necessary. Similarly, The Ombudsman Association has published a generic position description for ombudsmen, including critical skills and characteristics, and the U.S. Ombudsman Association has drafted a model ombudsman act appropriate for state governments. Both the recommendations of the Administrative Conference of the United States and the standards of practice adopted by ombudsman associations incorporate the core principles of independence, impartiality, and confidentiality. The ABA’s recommended standards define these characteristics as follows: Independence—An ombudsman must be and appear to be free from interference in the legitimate performance of duties and independent from control, limitation, or penalty by an officer of the appointing entity or a person who may be the subject of a complaint or inquiry. Impartiality—An ombudsman must conduct inquiries and investigations in an impartial manner, free from initial bias and conflicts of interest. Confidentiality—An ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. Records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. In addition to the core principles, some associations also stress the need for accountability and a credible review process. Accountability is generally defined in terms of the publication of periodic reports that summarize the ombudsman’s findings and activities. Having a credible review process generally entails having the authority and the means, such as access to agency officials and records, to conduct an effective investigation. The role of EPA’s national ombudsman has evolved since it was first established in the 1984 amendments to the Resource Conservation and Recovery Act. In 1991, EPA expanded the ombudsman’s jurisdiction to encompass all of the hazardous waste programs managed by OSWER, with the most significant addition being the Superfund program. EPA appointed Superfund ombudsmen in each of its 10 regional offices in 1996, when the agency adopted a number of administrative reforms in the Superfund program. The nature of the national ombudsman’s work has also changed; although the emphasis was initially on responding to informational inquiries, he has taken on more detailed investigations in recent years. In January 2001, the ombudsman temporarily suspended his ongoing investigations over disagreements with OSWER management about staffing in the ombudsman’s office. However, we did not address the issue in this report because investigation of internal personnel disputes was beyond the scope of our work. Important characteristics of EPA’s national hazardous waste ombudsman differ from the professional standards of practice adopted by various ombudsman associations. While EPA is not required to comply with such standards—and, in some instances, faces legal or practical constraints to doing so—the standards can serve as a guideline for implementing the core principles of an effective ombudsman: independence, impartiality, and confidentiality. Contrary to these standards, EPA’s national ombudsman is not independent of the organizational unit whose decisions he is responsible for investigating. Moreover, this lack of independence raises questions about the ombudsman’s impartiality and hence his ability to conduct a credible investigation. EPA’s national ombudsman also falls short of existing standards in other areas, such as accountability. When we examined the operations of ombudsmen at other federal agencies, we found that these agencies have found ways to increase their ombudsmen’s ability to adhere to professional standards of practice. EPA is considering several changes to the operations of the national ombudsman, but these changes do not address existing limitations on the ombudsman’s independence and, in some instances, they impose additional constraints. Existing professional standards contain a variety of criteria by which an ombudsman’s independence can be assessed, but in most instances, the underlying theme is that an ombudsman should have both actual and apparent independence from persons who may be the subject of a complaint or inquiry. According to ABA guidelines, for example, a key indicator of independence is whether anyone subject to the ombudsman’s jurisdiction can (1) control or limit the ombudsman’s performance of assigned duties, (2) eliminate the office, (3) remove the ombudsman for other than cause, or (4) reduce the office’s budget or resources for retaliatory purposes. Other factors identified in the ABA guidelines on independence include a budget funded at a level sufficient to carry out the ombudsman’s responsibilities; the ability to spend funds independent of any approving authority; and the power to appoint, supervise, and remove staff. The Ombudsman Association’s standards of practice define independence as functioning independent of line management and advocate that the ombudsman report to the highest authority in the organization. As currently constituted, some aspects of EPA’s national hazardous waste ombudsman are not consistent with existing criteria for independence. In terms of organizational structure, the national ombudsman is located within OSWER, the organizational unit whose decisions the ombudsman is responsible for investigating. In addition, the ombudsman reports to and receives performance evaluations from one of OSWER’s managers. Thus, OSWER management is in a position to control or limit the ombudsman’s performance of assigned duties. OSWER managers told us that the organizational structure was established as a matter of convenience and simply reflects the fact that the ombudsman’s jurisdiction encompasses the hazardous waste programs within the office’s purview. The officials also said that at the time the structure was established, the ombudsman’s workload consisted primarily of responding to informational inquiries rather than conducting investigations. Although OSWER managers acknowledge concerns about the appearance of constraints on the ombudsman’s independence, they point out that most decisions about specific hazardous waste sites or facilities are made at the regional office level. The officials believe that OSWER’s top management is sufficiently removed from site-specific decisions to mitigate such concerns. According to the ombudsman, however, decisions on the most significant or costly sites are the most likely to be elevated to OSWER’s management level at EPA headquarters. He also believes that locating the ombudsman’s office outside of OSWER would increase his independence and lessen the likelihood that he would be reporting to someone who was once responsible for making decisions on specific hazardous waste sites or facilities. On a functional basis, OSWER’s control over the ombudsman’s budget and staff resources also affects the ombudsman’s independence. For example, until recently, the ombudsman did not have a separate budget and was on a “pay-as-you-go” system in which prior approval was required for every expenditure. In November 2000, OSWER created a separate line item within the OSWER budget for ombudsman-related expenditures. According to OSWER managers, having a separate line item made sense in light of the ombudsman’s increased workload. In addition, they decided that it is better to give the ombudsman a budget up front and tell him that he has to set priorities and work within the amount provided than to approve funding on a case-by-case basis. They recognized that the latter approach could create the impression that OSWER is hampering the ombudsman’s independence any time a funding request is disapproved because such a decision would limit his involvement in particular cases. From the ombudsman’s perspective, knowing the amount of available funding at the beginning of a fiscal year allows him to better prioritize and manage his activities. However, without supervisory authority, he does not have the same discretion as other OSWER managers over how the budget resources are used. OSWER exercises similar control over the ombudsman’s staff resources. Since the ombudsman is a nonsupervisory position, he does not have authority to hire, fire, or supervise staff. OSWER managers approve all staff detailed or assigned to the ombudsman function and prepare their performance appraisals. Until recently, the ombudsman function was carried out with only one full-time, permanent staff member—the ombudsman himself. To aid the ombudsman as his workload has increased, OSWER has supplied a variety of temporary help including, at various times, a part-time assistant, an individual on a short-term detail, technical consultants, and student interns and retired persons funded through special grant programs. In April 2001, an individual who had been assigned to work with the ombudsman under a 6-month detail was granted permanent status in that position. In addition, according to OSWER officials, a total of 3 full-time-equivalent staff-years have now been budgeted for the ombudsman function, and OSWER management secured an exemption for the ombudsman function from an agency-wide hiring freeze. However, because the ombudsman continues to be a nonsupervisory position, OSWER managers still prepare the performance appraisals for any of the staff assigned to the ombudsman. Another issue relating to independence is the adequacy of the resources available to the ombudsman. Some evidence suggests that the ombudsman’s resources have not kept pace with his increased workload. Information compiled by the ombudsman at our request shows a significant increase in the number of investigations over the past 2 years. On the basis of information extracted from his case files, the ombudsman told us that he initiated 34 investigations since he took office in October 1992, more than half of which were initiated since 1999. OSWER managers point out that the ombudsman was allocated a total of $900,000 for fiscal year 2001, a significant increase over the estimated $500,000 spent on ombudsman-related activities during the previous year.However, when the ombudsman was asked to provide an estimate of his fiscal year 2001 resource needs, he requested a budget of $2 million and seven full-time equivalent staff. Without more information, it is difficult to determine whether the ombudsman’s estimate was realistic or what the appropriate level of resources should be. The ombudsman does not maintain sufficient statistical records on his investigations and other activities to serve as a basis for a reasonable estimate of resource needs. He also does not have written procedures for selecting, prioritizing, and tracking inquiries and cases. He told us that during his first few years as ombudsman, he had an assistant who maintained case logs on inquiries received, and thus could produce summary statistics on his workload. According to the ombudsman, once his assistant retired, he no longer had sufficient staff resources to maintain logs on inquiries received and their resolution, summary information on the results of investigations, or records on the status of ongoing cases, although he does maintain case files on his investigations. While independence is perhaps the most essential characteristic of an effective ombudsman, other aspects are also important. When we compared these aspects of EPA’s national ombudsman with relevant professional standards, we found several differences. One significant difference concerns the ombudsman’s impartiality, which is called into question by the impairments to the ombudsman’s independence. According to the ABA’s recommended standards, “the ombudsman’s structural independence is the foundation upon which the ombudsman’s impartiality is built,” and independence from line management is a key indicator of the ombudsman’s ability to be impartial. However, in the case of EPA’s national ombudsman, line management not only has direct supervisory authority over the ombudsman but also controls his budget and staff resources. Other criteria for evaluating an ombudsman’s impartiality relate to the concept of fairness. For example, according to the article published by the U.S. Ombudsman Association about the essential characteristics of an ombudsman, an ombudsman should provide any agency or person being criticized an opportunity to (1) know the nature of the criticism before it is made public and (2) provide a written response that will be published in whole or in summary in the ombudsman’s final report. However, we found that EPA’s national ombudsman does not have a consistent policy for preparing written reports on his investigations, consulting with agency officials to obtain their comments before his findings are made public, or including written agency comments when reports are published. According to the national ombudsman, inconsistencies in the degree of consultation with the agency are linked to differences in the extent of OSWER management’s interest in reviewing his reports. However, he acknowledged that these differences do not preclude him from soliciting comments. Another difference concerns confidentiality since legal constraints prevent EPA’s national ombudsman from adhering to relevant professional standards in this area. Under ABA’s recommended standards, an ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. The standards say that records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. However, as an EPA employee, the national ombudsman is subject to the disclosure requirements of the Freedom of Information Act. The act generally provides that any person has a right of access to federal agency records, except to the extent that such records are protected from disclosure by statutory exemption.Exempted information includes agency internal deliberative process or attorney-client information. According to the ombudsman, the confidentiality issue has not posed a significant problem thus far because he has not been asked to disclose information provided by complainants. However, he believes that his inability to offer confidentiality could be troublesome in the future. Accountability is another area in which EPA’s national ombudsman differs from relevant standards of practice for ombudsmen. The ABA recommends that an ombudsman issue and publish periodic reports summarizing his findings and activities to ensure the office’s accountability to the public. Similarly, recommendations by the Administrative Conference of the United States regarding the establishment of ombudsmen in federal agencies state that ombudsmen should be required to submit periodic reports summarizing their activities, recommendations, and the relevant agency’s responses. EPA’s national ombudsman does not prepare such reports; he told us that EPA has never required an annual report at the national level. The regional ombudsmen are expected to submit annual reports on their activities, but the reports are for internal use only. He also indicated that he does not have the resources to maintain the records necessary to produce such a report. Other federal agencies have provided their ombudsmen with more independence than that available to EPA’s national ombudsman—both structurally and functionally. At least four other federal agencies have an ombudsman function somewhat similar to EPA’s: the Agency for Toxic Substances and Disease Registry, the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service. Of these agencies, three have an independent office of the ombudsman that reports to the highest level in the agency. For example, the ombudsmen from the Food and Drug Administration and the Internal Revenue Service each report to the Office of the Commissioner in their respective agencies. The exception is the ombudsman at the Agency for Toxic Substances and Disease Registry. Although the agency does not have a separate office of the ombudsman—a single individual fulfills its ombudsman function—the ombudsman reports to the Assistant Administrator of the agency. In contrast, EPA’s national ombudsman is located in a program office (OSWER) and reports to the Office’s Deputy Assistant Administrator. OSWER officials pointed out that the ombudsmen in other federal agencies generally have an agency-wide jurisdiction, while EPA’s ombudsman is responsible only for inquiries and investigations relating to the hazardous waste programs managed by OSWER. They believed that it was logical to place the national ombudsman within OSWER because that office would directly benefit from the ombudsman’s activities. However, as noted earlier, the ombudsman believes that locating his function outside of OSWER would offer him greater independence. In addition, structural issues take on greater prominence when the unit to which the ombudsman must report also controls his budget and staff resources. The ombudsmen in three of the agencies we examined—the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service—also have more functional independence than the EPA ombudsman has. For example, they have the authority to hire, supervise, discipline, and terminate staff, consistent with the authority granted to other offices within their agencies. These ombudsmen are able to hire permanent full-time staff and do not have to rely on part- time or detailed employees. In addition, the ombudsmen in these three agencies have control over their budget resources. For example, the ombudsmen have authority to draft and submit budgets to cover their anticipated workloads in the upcoming fiscal year. While they are subject to the same budget constraints as other offices within the agencies, they have the ability to prioritize their workloads and make decisions about where their funds will be spent. In January 2001, OSWER proposed new guidance to explain the roles and responsibilities of the national and regional ombudsmen. The primary objective in issuing the guidance was to improve the effectiveness of the ombudsman program by providing a clear and consistent set of operating policies and expectations. On the subject of the ombudsman’s independence, the guidance is relatively brief. It states: “The Ombudsman will be free from actual or apparent interference in the legitimate performance of his/her duties. The Ombudsman has the autonomy to look into any issue or matter consistent with this guidance.” However, the guidance leaves the current organizational structure in place and, in some respects, imposes additional constraints on the ombudsman’s independence. Maintaining the existing structure raises questions about whether the ombudsman will be subject to interference in the performance of his duties. Many of the comments EPA received on its proposed guidance expressed concerns about structural constraints on the ombudsman’s independence. The general theme of the comments was that the ombudsman must be located outside of the organization that is being investigated to be truly independent. Some commenters suggested that the ombudsman report to the EPA Administrator, and others believed that the function should be entirely independent of the agency. In addition to maintaining the status quo with regard to the organizational structure, EPA’s proposed guidance places some new restrictions on the ombudsman’s independence. Regarding case selection, for example, the guidance states that the regional ombudsmen will generally handle matters that fall within the territorial boundaries of their respective regions. (See appendix II for a map showing the EPA regions and the distribution of national ombudsman investigations.) For cases that concern a “nationally significant” issue, the guidance states that regional ombudsmen will consult with the national ombudsman regarding who is best suited to take the lead, considering time, resources, location, and familiarity with the subject and parties involved. If the national and regional ombudsmen cannot reach agreement on a particular case, the guidance provides that the Assistant Administrator or Deputy Assistant Administrator of OSWER will resolve the dispute. Giving the regional ombudsmen such a prominent role in case selection is problematic considering their part-time involvement in the ombudsman function and, more significantly, the nature of their other responsibilities. EPA’s proposed guidance acknowledges that the national ombudsman is best suited to handle matters that pose potential conflicts of interest for the regional ombudsmen, but it does not recognize the inherent problems created by their dual roles. (Concerns about impairments to the independence of the regional ombudsmen are discussed in more detail later in this report.) Regarding another aspect of case selection, EPA’s proposed guidance includes a general prohibition on investigating matters in litigation, on the ground that such investigations could be construed as creating an alternative forum for arguing the issues. The guidance cites the risks of confusion, inefficiency, and potentially conflicting statements about the agency’s position as reasons that the ombudsman should avoid investigating matters in litigation. According to OSWER officials, their primary concern with the ombudsman’s involvement is the potential for undermining the legal process and building a separate record as a result of his investigation. They acknowledged that most Superfund cases are in litigation at some point, but they said that the matter being litigated usually concerns who should pay for a cleanup, not how the cleanup should be done. The officials believe that the latter issue is more likely to be the subject of an ombudsman investigation. EPA’s national ombudsman told us that he should have the authority to select cases for investigation regardless of whether the matter is in litigation. Most of the comments on EPA’s proposed guidance also stated that the ombudsman should have the discretion to choose which cases to investigate without interference from agency management. For example, the Coalition of Federal Ombudsmen commented that although coordination between top management and the ombudsman is a necessity when matters are in litigation, requiring the concurrence of agency management is “not a workable solution.” Comments from two entities within the ABA agree that the involvement of agency management would be inconsistent with the ombudsman’s independence. However, they also said that the national ombudsman should be able to accept jurisdiction over an issue that is pending in a legal forum only if all parties to the action explicitly consent. In addition to drafting new guidance for the ombudsman program, EPA officials, including those in OSWER, have been considering a variety of organizational options for the ombudsman function. In March 2001, OSWER developed, as one possible option, a proposal for creating a separate office of the ombudsman within OSWER. They indicated that the proposed organizational change stems from a recognition that the role and workload of the national ombudsman have evolved and that some current management practices are cumbersome and inefficient. Under the reorganization, the incumbent ombudsman would serve as director of the office and have more control over his budget and staff resources. Specifically, the ombudsman would have the authority to hire, supervise, and remove staff, consistent with other offices within OSWER. In addition, the director would be responsible for drafting and submitting a budget to cover the ombudsman’s activities. Although this proposal would enhance the functional independence of the ombudsman, the office of the ombudsman would still be located within OSWER. Final decisions about the appropriate staffing levels and resource allocations would still be under the purview of OSWER management. EPA has decided to table its decision on the appropriate placement of the ombudsman function within the agency until agency management has time to consider the results of our report and comments from other stakeholders, including the ombudsman. Within EPA’s 10 regional offices, the ombudsman function is perceived as a collateral duty and is assigned to individuals whose primary role often poses a potential conflict of interest. Most of the regional ombudsmen devote less than 25 percent of their time to the ombudsman role. They spend the majority of their time performing duties that could be the subject of an ombudsman investigation. The regional ombudsmen primarily respond to informational requests, including some referred by the national ombudsman. While the national and regional ombudsmen disagree on the extent to which they coordinate their activities, the regional ombudsmen clearly have little involvement in substantive matters, such as helping to select which cases will be investigated by the national ombudsman or to conduct such investigations. ABA’s recommended standards for ombudsmen call for independence in structure, function, and appearance and, among other criteria, stipulate no assignment of duties other than that of the ombudsman function. Similarly, guidance developed by The Ombudsman Association states that an ombudsman should serve “no additional role within an organization” because holding another position would compromise the ombudsman’s neutrality. However, by virtue of their dual roles, EPA’s regional ombudsmen appear to have less independence than the national ombudsman has. Moreover, they are more likely to encounter a potential conflict of interest, since most decisions on hazardous waste sites and facilities are made at the regional level. The ombudsman function is generally seen as a collateral duty at the regional level, and the manner in which the function is implemented is left to the discretion of the agency’s regional administrators. As a result, the nature of the primary role served by the regional ombudsmen varies from region to region, although 7 of the 10 regional ombudsmen are located within the regional unit that manages the Superfund program. (See table 1.) The amount of time spent on ombudsman duties also varies widely from region to region. During fiscal year 2000, for example, estimates of the percentage of time devoted to ombudsman-related work ranged from about 2 percent to 90 percent. Figure 1 summarizes the estimated time spent on regional ombudsman duties during calendar years 1999 and 2000. When asked how they are able to ensure their independence in light of their dual roles, 7 of the 10 regional ombudsmen either did not perceive their multiple responsibilities as hampering their independence or cited direct access to regional management as a way of dealing with potential conflicts. However, we also asked about the extent to which their supervisors have been involved or have the potential to be involved in decisions or cases subject to investigation by the ombudsmen. Five of the ombudsmen acknowledged that their immediate supervisors could have significant involvement in matters subject to an ombudsman investigation. While the remaining five ombudsmen did not agree, they also reported that their immediate supervisors held positions in which the potential for involvement appears high. OSWER officials recognize that the regional ombudsmen are more constrained than the national ombudsman as a result of their dual responsibilities. However, the officials believe that these individuals provide a valuable service in responding to informational inquiries, a function in which independence is less likely to be an issue. If the regional ombudsmen are to be truly independent, EPA’s national ombudsman believes that they should report to him and should not have other responsibilities that pose a potential conflict. He attributed their relatively light workload and part-time role to public perceptions that the regional ombudsmen are not independent. OSWER officials agreed that such perceptions might be at least partly responsible for the situation. When we looked at how other federal agencies dealt with regional ombudsmen, we found that two of the four agencies we examined—the Federal Deposit Insurance Corporation and the Internal Revenue Service—have ombudsmen in regional offices. The Federal Deposit Insurance Corporation currently has ombudsmen in each of its seven service centers located across the country. Within the Internal Revenue Service, the National Taxpayer Advocate is required to appoint local taxpayer advocates, including at least one in each state. In both agencies, the staff that perform the regional ombudsman function devote 100 percent of their time to that responsibility. The regional staffs are considered part of the national ombudsman’s office and report directly to the national ombudsman. In each case, the national ombudsman has responsibility for the hiring, supervision, and removal of all staff within his office, including regional staff, and the regional operations are included in his office’s budget request. Since the ombudsman function was first created within OSWER, EPA has issued and proposed guidance that calls for coordination between the national and regional ombudsmen. EPA’s Hazardous Waste Ombudsman Handbook, which was published in 1987 and remains in effect, states that close cooperation between the national and regional ombudsmen is important. In February 1998, after some misunderstandings developed between the national and regional ombudsmen regarding their respective roles and responsibilities, OSWER’s Acting Assistant Administrator issued a memo that attempted to clarify the situation. Most significantly, the memo stated that the regional ombudsmen would take the lead on all Superfund-related matters and would refer to the national ombudsman only those cases that the regional ombudsmen believe are “nationally significant”—and only with the concurrence of the Assistant Administrator of OSWER. Although EPA officials generally agree that this policy was never implemented, the regional ombudsmen believed, until at least 1999, that the policy was in effect and that the coordination called for in the policy was supposed to be occurring. The new guidance recently proposed by OSWER is, in part, another effort to delineate the roles and responsibilities of the national and regional ombudsmen, particularly with regard to the selection and referral of cases for investigation. Notwithstanding the guidance, the extent to which the national and regional ombudsmen actually coordinate is unclear and is the subject of disagreement among the parties. According to the national ombudsman, he notifies his regional counterparts of all inquiries he receives and refers many of them to the regions for follow-up. However, he said that he rarely receives any information on how the inquiries were resolved. According to an OSWER official who helps coordinate monthly conference calls among the regional ombudsmen, the reason for the lack of response is that almost all of the referrals involve minor problems that are not worth any additional reporting or time spent on paperwork. Other OSWER officials suggested that these referrals are often passed on to other EPA or state employees and are not handled directly by the ombudsmen. The national ombudsman generally does not consult with the regional ombudsmen on substantive matters, such as deciding which complaints are significant enough to warrant investigations, or request their assistance in conducting investigations. He told us that he notifies the applicable regional ombudsman and regional management when he initiates an investigation and asks for their views on the issues raised in the complaints. In addition, he said that he occasionally requests administrative and/or logistical assistance when visiting one of the regions in the course of conducting an investigation. For example, the regional ombudsmen may obtain copies of documents for the national ombudsman, arrange meetings with regional staff, and help set up public hearings. From the perspective of the regional ombudsmen, the extent of the communication from and coordination by the national ombudsman is not sufficient. According to the minutes of their monthly conference calls and the information we collected, the regional ombudsmen have had limited contact with the national ombudsman and generally are not consulted when investigations are initiated nor are they updated as the investigations proceed. According to an OSWER official who helps coordinate the conference calls, the regional ombudsmen complain that the national ombudsman almost never calls them for any reason and sometimes does not notify them when he is visiting the region. Another area of disagreement is the extent to which the national ombudsman has authority to oversee the activities of the regional ombudsmen. The national ombudsman told us that he does not have supervisory authority and thus, is not responsible for overseeing the regional ombudsman program as envisioned in EPA’s 1987 handbook. He said that under current operating procedures, the regional ombudsmen are under no obligation to refer cases to him and have made no referrals in the last 4 or 5 years. However, OSWER officials suggested that he could provide more direct oversight. They pointed out that many senior-level employees at headquarters have functional responsibility for various activities performed by regional employees even if they do not supervise the employees. To some extent, an ombudsman’s effectiveness is within the ombudsman’s control. For example, the ombudsman strengthens his credibility when all parties perceive his investigations as fair and objective. Yet effectiveness is also a function of an ombudsman’s actual and apparent independence, and this is an area where the ombudsman’s home agency can make a big difference. In the case of the national hazardous waste ombudsman, EPA could help ensure that the ombudsman is perceived as independent by locating the function outside the unit he is responsible for investigating and by giving him control over his budget and staff resources. Although the current organizational structure may have made sense originally, the function has evolved, and the organization should reflect the shift in the ombudsman’s workload from responding to informational inquiries to investigating complaints. Under the current framework, the national ombudsman must compete with other offices within OSWER for scarce budget resources. With senior OSWER officials making the budget allocations, this arrangement may create a perception that EPA is not allocating an adequate share of OSWER’s resources to the ombudsman. Similarly, OSWER management’s authority to hire and fire the ombudsman’s staff clearly poses an institutional barrier to the ombudsman’s independence. A related issue involves the nature of the staff allocated to the ombudsman. Reliance on temporary assistance from interns and employees on short-term details does not provide the necessary experience or continuity to support the ombudsman. OSWER has taken a step in the right direction by allocating 3 full-time-equivalent staff-years to the ombudsman function, but to be truly independent, the ombudsman should have direct control over the staff. For his part, if the national ombudsman is to be given responsibility for managing his resources, he needs to maintain adequate records on his operations to serve as the basis for a reasonable budget request. The ombudsman must also establish the criteria and operating procedures necessary for managing his workload within his budget constraints and select and prioritize his workload so that he can work within those constraints. Having a consistent policy for preparing written reports on investigations and soliciting comments from affected parties would help ensure that the ombudsman is perceived as fair and impartial. In addition, the ombudsman should be accountable for his activities through a publicly available annual report. Regional ombudsmen may provide a valuable service to the public in responding to informational inquiries, but their current lack of independence should preclude their involvement in more significant investigations. Despite their dual roles, in recent years, OSWER has attempted to give the regional ombudsmen a greater say in selecting cases for investigation and deciding which ones should be referred to the national ombudsman. Instead, EPA should reexamine the position of regional ombudsman and, if a regional presence is warranted, ensure that whoever provides such a presence is truly independent. To improve the effectiveness of EPA’s ombudsmen and secure the public trust, we recommend that the Administrator, EPA, take steps to strengthen the independence of the national hazardous waste ombudsman. Specifically, EPA should (1) modify its organizational structure so that the ombudsman is located outside of OSWER and (2) provide the ombudsman with a separate budget and, subject to applicable Civil Service requirements, the authority to hire, fire, and supervise his own staff. To ensure that the ombudsman has adequate resources to fulfill his responsibilities within the context of EPA’s overall mission, EPA should require the ombudsman to (1) develop written criteria for selecting and prioritizing cases for investigation and (2) maintain records on his investigations and other activities sufficient to serve as the basis for a reasonable estimate of resource needs. In the interests of fairness, EPA should require the ombudsman to establish a consistent policy for preparing written reports on his investigations, consulting with agency officials and other affected parties to obtain their comments before his findings are made public, and including written agency comments when reports are published. To ensure that the ombudsman is accountable, EPA should require the ombudsman to file an annual report summarizing his activities and make it available to the public. Finally, we recommend that EPA officials, including the national ombudsman, (1) assess the demand for ombudsman services nationwide to determine where these resources are needed and, (2) in those locations where regional ombudsmen are warranted, ensure that their operations are consistent with the relevant professional standards for independence. EPA provided comments on a draft of this report. Specifically, we received a letter from the Acting Assistant Administrator of OSWER, an enclosure with additional technical comments from OSWER, and an enclosure from the national ombudsman containing general and technical comments. EPA’s comments and our responses are contained in appendix III. Both OSWER and the national ombudsman generally agreed with our conclusions and recommendations. According to OSWER, the agency supports “a strong, independent, and appropriately funded Ombudsman function and committed to full and serious consideration of the audit recommendations.” OSWER plans to assess our recommendations over the next few months, along with input from stakeholders, as the agency determines the most appropriate organizational placement of the ombudsman function. OSWER also noted that our recommendations relating to increased accountability by the national ombudsman were helpful. Similarly, the national ombudsman indicated that he was taking steps to implement several of our recommendations, including developing criteria for selecting and prioritizing cases for investigation, maintaining records to serve as a basis for a reasonable estimate of resource needs, developing a consistent policy for preparing written reports on his investigations, and publishing an annual report on his activities. He also indicated his intent to assess the operations of the regional ombudsmen. We incorporated technical comments from OSWER and the national ombudsman as appropriate. To determine how the national ombudsman’s operations compare with relevant professional standards, we identified four organizations—the Administrative Conference of the United States, the Ombudsman Committee of the ABA, The Ombudsman Association and the U. S. Ombudsman Association—that have published or drafted such standards. Based on our review of the standards and on discussions with EPA’s national ombudsman, OSWER officials, and representatives of professional associations, we evaluated characteristics of EPA’s national ombudsman using the standards as criteria. To learn more about the development and application of ombudsman standards, we contacted representatives from the Coalition of Federal Ombudsmen, the Interagency Alternative Dispute Resolution Working Group, The Ombudsman Association, the University and College Ombuds Association, and the U. S. Ombudsman Association, as well as the current and former chairmen of the ABA’s Ombudsman Committee. Besides conducting interviews with EPA’s national ombudsman and OSWER officials, we reviewed various documents that they provided regarding the implementation of the ombudsman function and proposed changes, including the ombudsman handbook, the proposed new guidance, the proposed change in OSWER’s organizational structure, and budget documents. In addition, we reviewed information that the ombudsman compiled at our request on the investigations that he initiated between October 1992 and December 2000. Recognizing that there are no federal requirements or standards specific to the operation of ombudsman offices at federal agencies, we also looked at how other federal agencies are implementing the ombudsman function. We compiled a list of federal agencies with ombudsmen that handle external inquiries or complaints. None of these ombudsmen was totally comparable to his counterpart at EPA in terms of longevity, jurisdiction or the nature of the investigations conducted. However, we selected four ombudsmen with enough similarity in longevity and workload to provide a reasonable basis for comparison. These ombudsmen were located in the Agency for Toxic Substances and Disease Registry, the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service. We met with the ombudsman at these agencies to obtain information on their operations and on the extent to which they are consistent with relevant professional standards. To obtain information on the relative roles and responsibilities of EPA’s national and regional ombudsmen, we developed a data collection instrument to question the regional ombudsmen on their functions in each of EPA’s 10 regions for calendar years 1999 and 2000. Among other things, we obtained information on their ombudsman-related activities, other roles and responsibilities, and supervisors; the amount of time spent on ombudsman duties; and the extent of interaction and coordination with the national ombudsman. We discussed the operations of the regional ombudsmen with OSWER officials and with the national ombudsman and compared those operations with those of the national ombudsman and the relevant professional standards for independence. We also reviewed minutes of periodic conference calls held by the regional ombudsmen during 1999 and 2000, as well as various documents that they provided on their operations and activities. We conducted our review from November 2000 through July 2001 in accordance with generally accepted government auditing standards. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to the Administrator, EPA, and make copies available to others who request them. If you or your staff have questions about this report, please call me on (202) 512-3841. Key contributors to this assignment were Ellen Crocker, Richard Johnson, Les Mahagan, Cynthia Norris, and Robert Sayers. Yes (Interim) Yes (interim) Yes (interim) The following are GAO’s comments on the letter signed by EPA’s national ombudsman dated July 11, 2001. 1. According to a February 1991 Decision Memorandum from EPA’s Office of Administration and Resources Management, the Office of the Ombudsman was abolished as part of a reorganization of the Immediate Office of the Office of the Assistant Administrator of OSWER. 2. Our report does not suggest that the ombudsman does not obtain agency comments on his findings before they are made public. Rather, we say that the ombudsman does not have a consistent policy for soliciting agency comments and that his decision to seek them is contingent on management’s interest in seeing the report prior to publication and providing comments. We are recommending that the ombudsman adopt a consistent policy to solicit agency comments whenever reports are published; agency officials can choose to provide comments at their discretion. 3. Our recommendation was that EPA officials, including the national ombudsman, assess the demand for ombudsman services nationwide to determine where these resources are needed. | Through the impartial and independent investigation of citizens' complaints, federal ombudsmen provide the public with an informal and accessible avenue of redress. Ombudsmen help federal agencies be more responsive to persons who believe that their concerns have not been dealt with fully or fairly through normal problem-solving channels. A national hazardous waste ombudsman was established at the Environmental Protection Agency (EPA) in 1984. In recent years, that ombudsman has increasingly investigated citizen complaints referred by Members of Congress. As the number and significance of the ombudsman's investigations have increased, so have questions about the adequacy of available resources and whether other impediments exist to fulfilling the ombudsman's responsibilities. This report (1) compares the national ombudsman's operations with professional standards for independence and other factors and (2) determines the relative roles and responsibilities of EPA's national and regional ombudsmen. GAO found that key aspects of EPA's national hazardous waste ombudsman differ from professional standards for ombudsmen who deal with inquiries from the public. For example, an effective ombudsman must have independence from any person who may be the subject of a complaint or inquiry. However, EPA's national ombudsman is in the Office of Solid Waste and Emergency Response (OSWER), the organizational unit whose decisions the ombudsman is responsible for investigating, and his budget and staff resources are controlled by unit managers within OSWER. GAO also found that, compared with EPA's national hazardous waste ombudsman, the regional ombudsmen are less independent and play a reduced role, primarily responding to informational inquiries on a part-time basis. Most of the ombudsmen in EPA's 10 regional offices hold positions within the regional organization that appear to compromise their independence. The regional ombudsmen split their time between performing duties related to the ombudsman function and duties related to the implementation of the hazardous waste programs that they are responsible for investigating. Communication between the national and regional ombudsmen is limited, despite operating guidelines that call for close communication. The national ombudsman periodically refers informational inquiries to the regional ombudsmen but rarely requests their assistance in investigations. |
The nation’s transportation infrastructure consists of over 4 million miles of public highways and roads; over 140,000 miles of national, regional, and local railroad networks; and 25,000 miles of commercially navigable waterways over which trillions of dollars worth of freight move annually. Public roads account for the majority of our nation’s transportation infrastructure mileage, reaching nearly every corner of the United States, and as a result, enable trucks to move the greatest amount of freight on a tonnage basis. However, tonnage as a measure does not capture important aspects of freight mobility across the modes, such as the distances over which freight moves. For making comparisons across the modes throughout this report, we use ton-miles as a unit of measurement. Ton- miles measure the amount of freight moved, as well as the distance over which it moves. Table 1 shows the estimates and sources for ton-miles of freight moved on each mode for 2007, the most recent year that data are available. Appendix I provides more detail on our methodology for determining ton-miles used for the estimates in this report. Freight shipments can also move by more than one mode before reaching their final destination. In particular, freight moved by rail or waterways may also be moved by truck at some point to reach its final destination, as rail and waterways may not reach locations that can be reached by truck. On the other hand, trains and waterborne vessels typically have far greater capacity than does a single freight truck, so rail and waterways generally move large volumes of commodities (e.g., coal and grain) long distances that would not be feasible by truck alone. Modes often work as complements to complete a shipment. For example, a ton of grain may move from a grain elevator by rail, be transported to a port on an inland waterway, move by barge to another port on an inland waterway, and then be distributed by truck to its final destinations. A particular type of shipment known as “intermodal” is designed to move on multiple modes, using a container that can be moved from a truck to a train to a ship without handling any of the freight itself when changing modes. Such freight movements are growing and FHWA forecasts that intermodal freight will continue to increase in the future. In some cases, the modes may be substitutable for certain types of trips and will compete directly for shipments or for segments of shipments based on price and performance. For example, long-haul trucking and rail shipments may be substitutable, or short sea shipping legs can be a substitute for rail or truck shipments along coastal routes. The extent to which mode-shifting is possible in the United States is difficult to estimate and will largely be determined by the types of parameters discussed above, such as whether shipping is feasible by another mode (e.g., rail lines or waterways may not be available for some routes), or practical (e.g., sending heavy coal shipments by truck or time-sensitive shipments by rail or waterways are not practical), and by the relative prices and other service characteristics of shipping by different modes. Figure 1 geographically depicts the national freight transportation infrastructure and tonnage of freight activity by mode, which provides a sense of the physical reach of each modal network. Federal, state, and local governments each play a crucial role in planning, designing, constructing, and maintaining the highways and waterways infrastructure, as well as raising revenues for the highway and waterway portions of the surface transportation system. Governments also play a role in regulating the freight industry, which we address in the next section. FHWA, state departments of transportation, and local transportation organizations plan and fund new highway infrastructure and maintain existing highways. The Corps has the responsibility for construction, operation, and maintenance of the nation’s waterway system. There is limited public sector funding for rail infrastructure. All Class I railroads, which comprise about 91 percent of all railroad revenues, are privately owned and, as one of the most capital-intensive industries in the United States, make considerable investments in their own transportation networks. Highway infrastructure. The federal government authorized over $190 billion for the federal-aid highway program for fiscal years 2005 through 2009. A small portion of this funding was specifically identified for surface freight transportation projects, including $25 million for the freight Truck Parking Facilities program and $30 million for the Freight Intermodal Distribution Pilot Grant program. For the most part, however, funding is provided for construction, reconstruction, restoration, and rehabilitation of roads that serve both freight and nonfreight users. Because the federal government’s expenditures for highways are based, in part, on the user pay principle, the government collects taxes and fees, which flow into the Highway Trust Fund—historically, the principal mechanism for funding federal highway programs. The fund’s highway account reported revenues of about $34 billion in fiscal year 2007—mainly from fuel (diesel and gasoline) tax that constitutes the majority of revenues from both freight and nonfreight users, as well as a variety of taxes imposed on trucks used in freight movement, including a truck and trailer sales tax, a heavy vehicle use tax, and a tire tax. In the following year, 2008, the Highway Trust Fund held insufficient amounts to sustain the authorized level of funding, and partly as a result, we placed it o To cover the shortfall, from fiscal years 200 list of high-risk programs. through 2010 Congress transferred a total of $34.5 billion in additional general revenues into the Highway Trust Fund, including $29.7 billion the highway account. Consequently, highway funding shifted aw the contributions of highway users, breaking the link between highway taxes paid and benefits received by users. The American Recovery and Reinvestment Act of 2009 (Recovery Act) further augmented transportation spending using general fund revenues of about $48 billion, of which about 57 percent was identified for federal highway projects. State and local governments also invest in public highways and roads. Within the federal-aid highway program, the federal government is responsible for funding 80 to 100 percent of highway project costs, and state and local governments are responsible for the remainder of the costs. State governments spent about $36 billion on capital outlays and about $21 billion more on maintenance of state-administered highways in 2007, while local governments spent approximately $69 billion on public roads. According to FHWA, state governments collected about $61 billion in user revenue, and local governments collected about $4 billion from a combination of fuel taxes, vehicle taxes and fees, and tolls. State and local governments supplement user revenue with general fund appropriations to support highway and road activities. Railroad infrastructure. The federal government has helped improve public safety on freight railroad infrastructure by providing limited funds to states for railroad-highway grade crossings and grants for relocating railroad tracks away from urban centers. Since January 1, 2007, freight railroads no longer pay federal fuel taxes, and there is no federal user fee specific to freight railroads. However, the federal government pays freight rail companies for intercity passenger train usage of the companies’ railroad tracks to the extent that these costs are not recovered through passenger fares. Recently, the Recovery Act funded two discretionary grant programs, the Transportation Investment Generating Economic Recovery (TIGER) grant program at $1.5 billion and the High-Speed Intercity Passenger Rail program at $8 billion, both of which can provide capital investment in railroad infrastructure. Additional funding for these programs were made available through the 2010 appropriations for DOT, nearly $600 million for TIGER grants and $2.5 billion for the high speed rail program. Because these programs are new, they are not included in the scope of our analysis of government spending on freight transportation. Little systematic information is available about state programs and financial assistance for the freight railroad industry. A 1997 survey of state departments of transportation found 10 states with dedicated freight railroad budgets exceeding $1 million annually. A few states (e.g., Alabama, North Dakota, and Tennessee) tax fuel for locomotives, but this revenue is not always used for rail projects. Railroads also pay state and local property taxes on their infrastructure; the nation’s major railroads paid $625 million in property taxes in 2008, according to the Association of American Railroads. Waterway infrastructure. The Corps, under its civil works program, is responsible for planning, constructing, operating, and maintaining the nation’s waterways used primarily by commercial vessels, as well as recreational and commercial passenger boats along some sections of the waterways. For fiscal year 2007, the Corps spent about $1.2 billion to operate and maintain the inland waterways, as well as the nation’s coastal harbors and channels (deep and shallow draft), and $686 million more for a variety of construction projects along inland waterways and coastal harbors and channels. For the same year, the Saint Lawrence Seaway Development Corporation budgeted about $33 million for operations and maintenance activities and $1 million for construction activities. Much of these funds are from the Harbor Maintenance Trust Fund. The general fund pays for all of the Corps’ operations and maintenance activities and one-half of the inland waterway construction costs for rehabilitating, modernizing, or replacing locks and dams. The other half comes from commercial waterway users that pay fuel taxes which flow into the Inland Waterways Trust Fund. The Inland Waterways Users Board and the National Academy of Public Administration have both reported on inefficiencies in the delivery of construction projects which have led to delays and cost escalation that have strained the trust fund and resulted in fewer and less-beneficial projects being funded. Some waterborne vessels are exempt from the fuel tax, including oceangoing ships, passenger boats, recreational craft, or government vessels. Receipts totaled about $101 million, including excise taxes and interest on investments, in fiscal year 2007. In contrast, revenue for the Harbor Maintenance Trust Fund comes largely from an excise tax on imports imposed on commercial users of certain ports. The tax applies a second time to cargo that has already arrived at a U.S. port, but is transferred by barge or short-sea route to another U.S. port. Importers or shippers pay an amount equal to 0.125 percent of the value of the commercial cargo involved at the time of unloading. Exporters are exempted from the excise tax. In fiscal year 2007, this trust fund received about $1.4 billion from tax collections—including $68 million from domestic shippers, which is relevant to the scope of this study—and $154 million from interest on investments in U.S. treasury bonds. Harbor Maintenance Trust Fund revenues exceed expenditures, and in 2007 the Fund was carrying a balance of nearly $4 billion, which has continued to grow. The federal government levies other fees, such as customs and agricultural quarantine inspection fees, on waterborne vessel operators and shippers to cover the costs of the inspection programs. State and local governments also provide funding to publicly owned and dock facilities on waterways for the purposes of construction, operation, and maintenance of commercial port facilities, including warehouses, cranes, and terminals; canals; harbors; and other public waterways, in addition to dredging of those waterways. State and local governments also impose a variety of fees, such as canal tolls, rents from leases, concession rents, and other charges for use of commercial or industrial water transport and port terminal facilities and related services. In addition to constructing, operating, and maintaining the infrastructure, governments regulate various aspects of the surface freight transportation sector. Federal regulations across all modes are focused on safety and the environment rather than economic regulation. For example, truck safety regulations include truck size and weight limits and restrictions governing interstate freight operations. For rail, Congress has recently dire cted the Secretary of Transportation to require that Class I railroads, and commuter or regularly scheduled intercity transportation providers, instal positive train control systems to help reduce the risk of crashes. Fre ight railroads continue to be subject to pricing regulation in areas where shippers do not have an alternative mode for shipping goods. Waterways freight carriers and their employees must comply with federal regulation Indeed, all three modes—trucks, railroads, and waterway vess expected to comply with federal drug testing, security, and environmental regulations, including measures imposing new pollution standards to reduce sulfur in diesel fuel. Except as preempted by federal s. els—are law, state and local governments may also establish regulations that affect freight transportation. Compliance with these regulations can impose costs on the freight industries. For example, new emissions regulations may result in costlier investments in new vehicles than would otherwise have occurred. At the same time, government regulations are often intended to help reduce the costs of freight movements on society by reducing emissions and improving safety. In a market economy, resources are allocated to their most efficient uses (meaning they produce the greatest net benefits to society) when the prices of goods and services reflect all of the costs entailed in producing those goods and services. More specifically, economic efficiency requires that the price of a good or service equals the marginal social cost (the cost to society of consuming one additional unit of the good or service). Governments can best promote economic efficiency in the freight transportation sector by minimizing subsidies that produce gaps between prices and marginal social costs and by correcting price gaps that can occur naturally in the market. However, policies that promote efficiency can conflict with other objectives of policymakers, such as covering the costs of government services and satisfying certain concepts of equity. The total social costs of providing freight transportation services can be divided into three categories on the basis of who bears them. First, there are private costs, such as labor, equipment, and fuel that are typically paid directly by freight service providers. Freight rail infrastructure falls into this category, as it is mainly funded privately by the rail companies. Second, there are the costs of public investments and services, such as the construction, maintenance, and operations of highways and waterways. These public costs are paid out of government budgets and can be funded through a variety of general or targeted taxes and fees. Finally, there are “external” costs, such as congestion, accidents, and health and environmental damage caused by pollution that are generated while transporting freight, that are not paid for directly by either the service providers or by government. These external costs are imposed on other members of society who are directly affected by these externalities. Each of these cost categories can be divided further between marginal costs and fixed costs. As noted earlier, marginal costs are those associated with the production of additional units of service. In contrast, fixed costs, such as those associated with the initial construction of infrastructure, are incurred before any service can be provided; however, the production of additional units of service does not add to these costs. In order to remain in business, private companies need to set prices that not only will cover their private marginal costs, but that will also include a margin that provides a sufficient rate of return to be able to obtain needed investment funds from capital markets. In a competitive market economy, only private costs will be passed on in prices to the final consumers of freight services, unless government policies are designed to pass the public and external costs on to those consumers as well. Governments can recover the public costs that support freight transportation by imposing taxes or fees on freight service providers. Competitive market forces should lead service providers to pass the cost of these payments on to their customers in the same manner that private costs are passed on. If competitive pricing prevents a particular business from passing such costs on to its customers, it may not earn a sufficient rate of return to remain in business. To the extent that public costs are not covered by taxes or fees levied on freight providers or consumers, governments would be providing a subsidy to the industry, which is paid by other taxpayers. Governments can also attempt to make freight service consumers bear the external costs generated by service providers by imposing taxes or fees on those providers in proportion to the external costs that they generate. Again, these costs should be passed on to the customers or noncompetitive businesses will drop out of the market. Government regulation of pollution and other factors that generate external costs can be used in conjunction with taxes and fees to address those costs. The hypothetical scenarios in figure 2 illustrate how discrepancies between marginal social costs (plus a competitive return on investment) and prices, whether caused by government subsidies or by external costs, can distort competition and cause inefficient allocations of resources in the freight transportation sector. In the scenarios, a shipper has to choose between two transportation modes to ship a package. Except for price, the services provided by the two modes are equal in all respects, such as timeliness and reliability. In the first scenario, Mode B uses $125 in resources to ship the package; Mode A uses $100 in resources. Price accurately reflects costs incurred to provide the freight service for both modes. Looking to minimize expenses, the shipper makes the logical decision and chooses the less expensive option (Mode A). The freight service provider represented by Mode A is rewarded for providing service more efficiently than the competitor, and the $25 of resources that otherwise would have been used if the product were shipped by Mode B can be used more efficiently in other ways to produce benefits for society. The second scenario in figure 2 shows the detrimental effects of a subsidy. In this scenario, the government provides a subsidy to Mode B, enabling it to charge a price that is $50 below its marginal costs. As in the first scenario, the shipper selects the lower-priced option; however, in this case the subsidy results in the service being provided by the higher-cost producer. As a result, $25 of resources that otherwise could have been used to provide other societal benefits are not used efficiently. The third scenario in figure 2 shows how external costs can distort competition and reduce economic efficiency in a manner similar to government subsidies. In this scenario, Mode B generates $50 in external costs that are not reflected in the price charged to the shipper. The fact that these costs are not passed on to the shipper makes Mode B more competitive than it would be if it had to include those costs in the price. Consequently, the shipper chooses Mode B, despite the fact that society bears $25 more in costs than if the other mode had provided the service. When prices do not reflect marginal social costs, investment decisions are also distorted, potentially resulting in a misallocation of resources. Much like a freight service shipper whose primary concern is price, an investor that is primarily concerned with profit potential is not concerned with the social costs that a freight service provider generates if they do not affect the provider’s net profit. Therefore, an investor looking to maximize his or her return will invest resources in the more profitable provider regardless of social costs. From an economywide perspective, this is a misallocation of resources because those investment resources could be used more efficiently if applied to another area in the economy that is more efficient. Certain freight transportation costs, such as the construction of new infrastructure, are considered to be “fixed” (rather than marginal) in the sense that they do not increase as use of the infrastructure increases. As an example, the construction cost of a bridge is a fixed cost, but pavement wear is a marginal cost. In freight transportation, fixed costs to build infrastructure are generally large relative to the marginal costs of an additional vehicle trip on an uncongested highway. Consequently, if governments were to charge users only for the marginal costs of their use, they usually would not be able to recover the full costs of building much of the infrastructure. As private companies that own and invest in their own infrastructure, freight railroads must pass on fixed costs to customers in order to remain in business. However, once the infrastructure is in place, charging users a portion of the fixed costs each time they use the infrastructure (on top of a charge for any marginal costs they impose) can result in underutilization of the infrastructure. Appendix V outlines a number of different ways that governments can address this tradeoff between efficiency and cost recovery. The choice among these alternatives involves a political, rather than a strictly economic judgment. Table 2 categorizes how the various types of costs in the freight transportation sector can be passed on to freight service consumers. Government policies aimed at reducing gaps between prices and social costs in the freight transportation sector also support the benefit principle of equity—a widely accepted economic principle—but they can conflict with the “ability-to-pay” principle of equity (which holds that people should contribute to the cost of government in line with their financial resources) and other objectives important to policymakers. The benefit principle holds that government services should be financed by those who benefit from those services. In the case of transportation funding, motor fuel taxes adhere more closely to the benefit principle than does the income tax because fuel consumption is correlated with road use. However, motor fuel taxes are regressive, meaning that lower income individuals pay a greater share of their income toward these taxes than do higher income individuals. This regressivity can conflict with the ability-to- pay principle, unless compensating relief to lower income individuals is provided in other parts of the tax system. Other objectives may be important to policymakers, such as whether or not a policy can be administered cost effectively. For example, attempts to achieve a high level of precision in marginal cost pricing through taxes and fees carry with them an administrative burden, as we discuss later in this report. The administrative costs of implementing finely calibrated versions of a tax may outweigh any efficiency gains achieved through increased precision. Efficiency in the freight transportation sector depends on prices fully reflecting marginal costs on a shipment-by-shipment basis; however, subsidies and external costs can vary considerably from one shipment to another based on the geographic origin and destination, time of day, and other factors. Moreover, as we discuss below, considerable uncertainty exists in the valuation of many types of costs. The combination of tax, spending, and regulatory policies in the United States does not result in consumers of all three surface freight transportation modes bearing the full costs they impose on society, particularly truck freight. Available data indicate that each of the modes, in the aggregate, generates marginal costs in excess of their marginal revenue. Specifically, we estimate that freight trucking costs that were not passed on to customers were at least 6 times greater than rail costs and at least 9 times greater than waterways costs per million ton miles of freight transport. Most of these costs were external costs imposed on society. In particular, the modes generate external costs related to accidents and pollution that are not reflected in prices. Furthermore, available data also indicate that at the national level, the infrastructure costs (both marginal and fixed) attributable to commercial freight transported by trucks and over waterways exceed the revenue that these freight transportation providers pay governments to fund that infrastructure. The available data for the freight transportation networks and vehicles we examined show that both the marginal and fixed social costs that are not passed on to freight service consumers are greatest (per million ton miles of freight carried) for freight trucks and lowest for railroads. Although certain data limitations and difficulties in valuing important categories of costs prevent us from making definitive quantitative estimates of the nonprivate (i.e., public and external) marginal costs generated by an additional million ton-miles of freight service provided by each of the three transportation modes, we are able to present at least lower bound estimates of those costs and to compare the magnitudes of these costs across the three modes. In a competitive economy, private costs such as payments for labor and fuel are generally passed on in prices to the final consumers of freight services; therefore, those costs did not need to be included in our estimation of costs that are not passed on. We are also able to estimate the amount of revenue that governments collect from highway taxes and fees, such as those on motor fuels and tires that are associated with marginal activity. (We use the payment of such taxes and fees as a measure of the extent to which governments have passed some of the nonprivate costs on to final consumers). The extent to which the nonprivate marginal costs exceed tax and fee payments indicates the extent to which some nonprivate marginal costs are not reflected in prices charged to freight consumers. We refer to this difference as “unpriced costs.” The available evidence suggests that, on average, an additional million ton-miles of freight service provided by trucking generates significantly more unpriced costs than an additional million ton-miles of either freight rail or waterways service generates. We estimate that over $55,000 per million ton-miles of service in unpriced freight trucking costs were not passed on to consumers. In contrast, freight rail and waterways services imposed over $9,000 and over $7,000 in unpriced costs per million ton–miles, respectively. Table 3 summarizes the estimates of marginal social costs attributable to each freight mode not passed on to consumers, per million ton miles. The estimates we present for pollution and other external costs are based on conservative volume estimates and valuation approaches from the available literature. Moreover, we do not include cost estimates for carbon dioxide (CO2) emissions because of the considerable uncertainty surrounding such estimates. For these reasons, our bottom-line estimates for marginal social costs not passed on to consumers are likely to represent minimum values for those costs. Marginal public infrastructure costs—the second cost item in table 3— relate to public highway spending attributable to miles driven by freight trucks (i.e., pavement preservation costs per million ton-miles). We estimate from recent FHWA data that trucks imposed an average marginal cost to pavement of $7,000 per million ton-miles. We also estimate from FHWA data that pavement preservation costs borne by all levels of government attributable to all single-unit and combination trucks (excluding pickup trucks) averaged about 6.1 cents per vehicle miles traveled (VMT). The cost per ton-mile would increase with truck weight and decrease with the number of axles. The costs also varied by location (urban or rural), type of road surface, temperature, and other factors. When we compared single-unit and combination trucks using DOT data, we found that marginal revenues exceeded the marginal infrastructure costs by 4.8 cents per VMT for single-unit trucks and by 3.5 cents per VMT for combination trucks, meaning that both types of trucks pay more than their share of pavement preservation costs. Although marginal costs are difficult to estimate from available data, CBO along with TRB and the Brookings Institution have undertaken this effort and reported their results. Their reports, although dated by at least 15 years, remain the most pertinent and relevant to our study. Because railroads generally pay for their own infrastructure, governments spend little on railroad infrastructure. For waterways freight, marginal public infrastructure costs, as estimated by TRB and CBO, are relatively low because the costs of dredging channels are predominantly fixed, rather than marginal, and vary little with the amount of tonnage that passes through. Because the Recovery Act (2009) was enacted after the time frame of our analysis and was a one-time funding source, our analysis does not consider these funds. Appendix II contains more details on the Recovery Act funds identified for freight transportation infrastructure by mode. Federal tax and financing programs subsidize the surface freight transportation infrastructure used by trucks, railroads, and waterborne vessels. Although we could not determine what portion of these benefits is associated with marginal activity, trucking and waterways freight received indirect, public subsidies through infrastructure improvements financed by certain state and local government bonds, which earned interest that was not subject to federal income tax. Trucking, railroads, and waterways also benefited from federal loan and loan guarantee financing programs for infrastructure improvements at attractive terms. However, we determined that the subsidies from federal financing programs for each of the three modes were negligible on a per-million-ton-mile basis. See appendix III for additional information on federal income tax subsidies and the federal financing programs. While each of the modes may benefit from certain provisions of the federal corporate income tax, the effects of these benefits on the three modes are not included in table 3 because they relate to fixed costs, rather than marginal costs. For example, eligible Class II and III railroads may take federal business tax credits for rail track maintenance, eligible shipping companies may make tax deferred deposits into a capital construction fund, and all of the modes can benefit from accelerated depreciation for tax purposes (as do many other industries). CBO’s estimates of federal corporate effective tax rates for 2002—the best available evidence of whether the overall corporate income tax system favors one mode relative to another, or relative to other industries—suggest that the federal corporate income tax may provide a slight advantage to waterways freight over the other two modes. CBO estimated that the effective tax rate on the category of assets that includes heavy trucks, truck trailers, and buses—the category closest to freight trucks investments—to be 18.2 percent. Further, CBO estimated the effective tax rate on investments in railroad infrastructure to be 20.1 percent and the rate on investments in railroad equipment to be 11.4 percent. When weighted by the amounts of assets in railroad infrastructure and railroad equipment, these two rates combine for an average effective tax rate on railroad investments of 18.1 percent. The closest asset category for waterways freight includes all investments in ships and boats. CBO estimated the effective tax rate on these investments to be 16.5 percent. These relative effects are on top of any benefits due to public infrastructure investments that trucking and waterways receive over railroads. The effective tax rates for all three modes are below the 26.3 percent average effective tax rate for all corporations, indicating that all three modes are receiving better than average tax rates. For all of the freight modes, external costs are large relative to public infrastructure costs. Our analysis of available data to quantify the levels of externalities in table 4 shows that freight trucking produces more air pollution, accidents, and congestion per million ton-miles than do the other modes. However, we recognized that there are many difficulties in estimating the monetary costs associated with these external effects. Consequently, the estimates we presented previously in table 3 should be considered a rough order of magnitude estimate for these external costs. EPA and DOT have not produced recent estimates of the economic costs of air pollution on a ton-mile basis for any of the freight modes. Therefore, we applied EPA’s estimates for the human health benefits of reducing one ton of fine particulate matter and one ton of nitrogen oxide to the emissions data. We estimated for freight trucking an emissions cost of $44,000 per million ton-miles, as shown in table 3. Given the even greater uncertainty surrounding the economic costs of CO2 emissions, we did not produce our own estimate. The omission of these costs, as well as the omission of other nonhealth costs associated with emissions of nitrogen oxide and particulate matter, means that the estimates in table 3 are likely to understate the extent to which some marginal costs are not passed on to final consumers. This understatement would be the greatest for trucking. According to our synthesis of EPA’s latest national emissions inventory data (2002), freight trucks produced over six times more fine particulate matter and over four times more nitrogen oxide on a ton-mile basis than freight locomotives, and over 10 and six times more of each type of emission, respectively, on a ton-mile basis than inland waterway vessels. And, according to our analysis of EPA data on greenhouse gases, trucks emitted the highest levels of greenhouse gas (CO2 equivalents) among the freight modes—about eight times more per unit of freight than freight rail, and thirteen times more than waterways freight, as shown in table 4. Recent EPA regulatory changes require that freight carriers for all the modes upgrade to technologies that reduce particulate matter and nitrogen oxide emissions. EPA expects these standards to reduce diesel engine emissions of particulate matter and nitrogen oxide by 80 and 90 percent, respectively, for locomotives and waterborne vessels and 90 and 95 percent, respectively for heavy duty trucks over the next 20 to 30 years as older engines are taken out of service. While these regulations are expected to reduce the overall level of air pollution external costs, overall emissions will not be reduced to the estimated levels until 2030 or later because older, more polluting diesel engines will still be in use for years to come as each mode’s fleet converts to the new technology. According to our analysis of DOT data shown in table 4, nationwide between 2003 and 2007, large trucks were involved in about six times more accidents with fatalities and 17 times more accidents with injuries, per billion ton-miles, than freight rail. Rates of fatalities and injuries involving a waterways vessel were much lower than those involving both trucks and freight rail. The economic costs of transportation accidents reflect the value assigned to the loss of a human life and the reduced productive life and pain and suffering related to serious injuries. The external portion of those costs excludes any amounts borne by the freight service providers (e.g., through insurance premiums or court settlements). Available cost estimates from the literature, shown in appendix IV, indicate that truck external accident costs could be as much as 2.15 cents per ton-mile, almost nine times higher than rail external accident costs. However, these estimates are dated and do not reflect the reduced rate of truck and rail accidents in recent years, or the much higher economic value now assigned to loss of human life. To obtain our conservative estimate of $8,000 per million ton-miles in table 3, we started with the number of fatalities in table 4, multiplied by the latest value for human life used by DOT in guidance for its own analysts, and then assumed that carriers are already compensated for 50 percent of these costs (see app. I for details on our scope and methodology). We identified four studies that attempted to determine the extent to which accident costs were compensated through insurance premiums, payments, and other compensation. These studies ranged from 50 to 62 percent in uncompensated or external costs. We chose to use 50 percent of the portion of costs that were not compensated as a reasonably conservative estimate since our calculations do not include estimates for uncompensated costs for injuries and property damage. Transportation Research Board, Paying Our Way, Estimating Marginal Social Costs of Freight Transportation, (1996); Forkenbrock, David J. (1999). “External Costs of Intercity Truck Freight Transportation,” Transport Research part A 33, 505-526; and David J. Forkenbrock, “Comparison of external costs of rail and truck freight transportation,” Transport Research, Part A, 35 (2001): 321-337. waterways users. There is no national policy to charge transportation infrastructure users for their contribution to congestion. Federal, state, and local governments levy certain taxes and user fees on road users that increase with the payers’ use. These levies include taxes on motor fuels and tires, as well as tolls. FHWA provided us with underlying data from its forthcoming highway cost allocation study that estimates how much of the various federal highway user taxes and fees are attributable to trucks. We combined this data with our own estimates for state and local fuel taxes and tolls in order to obtain our estimate of the total tax and fee payments that trucks make for their marginal use of highways, which amounts to about $11,000 per million ton-miles. In comparison, estimates by TRB and CBO suggest that marginal fees paid by waterways freight service providers are less than $500 per million ton- miles. Railroads do not pay taxes or fees for the marginal use of their own infrastructure. We examined the extent to which fixed costs are not passed on to final consumers separately from our table 3 comparison of marginal costs and marginal taxes and fees because unpriced fixed costs will not cause inefficient use of existing infrastructure as unpriced marginal costs do; however, unpriced fixed costs can lead to inefficient investment decisions (as discussed in the following section). Fixed public infrastructure costs are those, such as investments in new roads or the dredging of a waterway, which would exist regardless of whether an additional shipment is made on the route. Fixed taxes and fees, such as excise taxes on vehicle purchases and registration fees, do not vary with the number of VMT. Our estimates in table 5 indicate that the unpriced fixed social costs per ton-mile are largest for trucking—$7,000 per million ton-miles—and smallest for waterways freight—$2,000 per million ton-miles. Railroad infrastructure is, for the most part, privately owned and thus has negligible fixed public infrastructure costs. Within the freight trucking mode, we also compared single-unit and combination trucks. Our analysis suggests that fixed costs exceeded the share of fixed taxes and fees for both types of trucks, and that the amount of these unpriced fixed costs was higher for single-unit trucks than for combination trucks: 7.7 cents versus 5.2 cents per VMT. In contrast, the marginal revenues exceeded the marginal costs for each type of truck, with the difference larger for single-unit than for combination trucks: 4.8 cents versus 3.5 cents per VMT. In this report we have pointed out that the efficiency of our economy is decreased in several ways when marginal and fixed costs are not reflected in prices, and that the available evidence at a national level indicates that there are unpriced marginal and fixed social costs across the three surface freight transportation modes. Policy responses that attempt to more closely align prices with marginal social costs (including a competitive rate of return on capital) or attempt to reduce gaps between fixed costs and revenues will confront a number of complex issues that are important for policymakers to consider, particularly when considering national-level policies. We also noted that the extent to which modes are substitutable is difficult to estimate and will largely be determined by whether shipping is feasible or practical by another mode, and by the relative prices and other service characteristics of shipping by different modes. In addition to mode-shifting, price changes can prompt other economic responses in the short run, such as the use of lighter-weight materials; over the longer term there is greater potential for responses that will shape the overall distribution and use of freight services. Costs can vary widely based on the specific characteristics of an individual shipment, such as the geography and population density of the shipment’s route, and the fuel-efficiency of the specific vehicle carrying it. Ideally, policy that is able to align marginal prices with marginal costs on a shipment-by-shipment basis would provide the greatest economic benefit. However, achieving this in practice would typically result in high administrative costs. For example, freight carriers may have to purchase new technologies or be required to maintain more complex and detailed records. Similarly, government agencies would likely have to devote more resources to enforcement efforts. As a result, economic efficiency could be reduced because the costs to administer the policy may actually exceed the benefits achieved. Less targeted interventions (e.g., charging fees or taxes based on average costs, subsidizing more efficient alternatives, or broadly applying safety or emission regulations) can have impacts on users and potentially change the overall distribution of freight across modes or demand for freight overall, but provide fewer benefits. Further, more general policy interventions can push too much of the cost onto users who previously had below-average unpriced costs and too little of the cost onto users who previously had above-average unpriced costs. For example, a policy that charges freight providers on the amount of their emissions would result in an overcharge for those traveling in rural areas where few people live and an undercharge for those traveling in more densely populated urban areas. External costs from the same amount of emissions would be higher in more densely populated urban areas because more people are exposed to the pollutants. Other complexities arise when attempting to align fixed costs and revenues. In general, our current system is set up as a user pay system, wherein the costs of building and maintaining the system are to be borne by those who benefit. However, available data suggest that in the trucking and waterways modes, current government mechanisms to recover the fixed costs associated with public infrastructure do not achieve full recovery. Aligning fixed costs and revenues for public infrastructure— whose multiple users include passenger cars and recreational boats along with freight trucks and vessels—is a complex task requiring detailed cost allocation studies, which are expensive and time-consuming, and are not done regularly. Furthermore, policies designed to recover fixed costs can conflict with policies designed to address gaps between marginal social costs and revenues. As discussed previously, if governments were to charge users only for the marginal costs of their use, in many cases they would not be able to recover the costs of building the infrastructure to begin with. However, once the infrastructure is in place, charging users a portion of the fixed costs each time they use the infrastructure (on top of a charge for any marginal costs they impose) would likely result in underutilization of the infrastructure because some potential users would not be willing to bear the higher cost. Appendix V provides options that governments can take to address this tradeoff between efficiency and cost recovery. Finally, marginal social costs can vary widely across jurisdictions, and have varying levels of impact, which has implications for the level of government that is best suited to administer a policy response. For example, congestion costs are local in nature, thus cities, counties, or local authorities are in the best position to develop interventions that reduce those costs, or attempt to price those costs. On the other hand, some air pollution costs can be imposed on multiple states, the entire nation, or other countries. State or local governments may not be equipped or institutionally capable of implementing policies that are regional in nature and affect multiple states. National policy responses to pollution and emissions must also consider that air pollution reductions can be achieved across a number of different industries, potentially at lower cost than in the transportation sector. Furthermore, although considerable research has gone into estimating the effects of climate change, there is uncertainty around how increases in atmospheric concentrations of greenhouse gases and temperature within ecosystems and economic growth will vary across regions, countries, and economic sectors, and therefore, appropriate policy responses require international coordination. We provided copies of a draft of this report to DOT and the Corps for review and comment. DOT responded with suggestions to consider additional data sources and methods for calculating infrastructure and external costs. We accepted some of DOT’s suggestions and incorporated those changes into our report, but for others, we believe that our data sources and methods are appropriate. DOT also provided technical corrections, which we incorporated in the report. The Corps indicated that we had adequately incorporated or footnoted its comments made to a preliminary draft of this report and had no further comment. 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 Transportation, the Secretary of Defense, the Commanding General and Chief of Engineers of the U.S. Army Corps of Engineers, and interested congressional committees. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact our offices at (202) 512-2843 or (202) 512-9110 or at [email protected] 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. The objectives of this report are to (1) describe how public policies can affect competition and efficiency within the surface freight transportation sector; (2) determine what is known about the extent to which costs are borne by surface freight users; and (3) discuss how our findings could be used when making future surface freight transportation policy. To describe the effects of public policy on the freight sector, we conducted a review of the transportation and economic literature and interviewed transportation policy experts to identify how government, academic, and professional research organizations apply economic concepts to determine the efficiency of the surface freight transportation system in the United States. We identified the types of data that can be used to evaluate the costs imposed by users of the surface freight transportation system on the economy and the factors to consider when determining the effect of government intervention. To determine the extent to which costs are borne by users of freight trucking, freight rail, and waterways freight services, we obtained, reviewed, and analyzed several datasets. We used federal highway cost and revenue data provided by the Federal Highway Administration’s (FHWA) Office of Policy for allocating costs imposed by and estimating revenue received from the freight trucking industry—specifically, single- unit and combination trucks. For allocating similar costs and revenues to the same classes of trucks at the state and local government levels, we used several tables reported by FHWA’s Highway Statistics Series. To estimate domestic waterways costs at the federal level, we used construction costs reported by the U.S. Army Corps of Engineers (Corps), and used operations and maintenance costs obtained from the Corps’ Operations and Maintenance Business Information Link system. For estimating state and local governments’ financial assistance to waterways, we used the Census Bureau’s State and Local Government Finance data. In terms of revenue, inland waterways and the harbor maintenance trust fund revenue estimates were based on financial information reported by the Department of the Treasury’s Bureau of Public Debt. We used available cost and revenue information on railroads published by the Association of American Railroads. To assess the reliability of finance and technical data, largely gathered from federal statistical agencies’ databases, we reviewed relevant documentation about the agencies’ data collection and quality assurance processes, talked with knowledgeable officials from several agencies about these data, and compared these data against other sources of published information to determine data consistency and reasonableness. We determined that the data were sufficiently reliable for the purposes of this report. We reviewed marginal and fixed costs from the literature, including (1) the 1997 FHWA Highway Cost Allocation Study, its addendum published in 2000, and unpublished supporting documentation; (2) the Transportation Research Board’s 2008 National Cooperative Highway Research Program, Synthesis 378, on State Highway Cost Allocation Studies; (3) the 1996 Transportation Research Board (TRB) report entitled Paying Our Way, Estimating Marginal Social Costs of Freight Transportation; (4) the 1992 Congressional Budget Office (CBO) report entitled Paying for Highways, Airways, and Waterways: How Can Users Be Charged; (5) the American Association of State Highway and Transportation Officials publications; and (6) Road Work, A New Highway Pricing and Investment Policy, published by the Brookings Institution in 1989. To understand available financial and technical data on freight, we conducted interviews with and obtained data from officials in the following organizations: Department of Transportation’s Chief Economist, Federal Highway Administration’s Freight Management of Operations, and Transportation Infrastructure and Finance Innovation Act program office; Federal Railroad Administration’s Railroad Rehabilitation and Improvement Financing program office; Research and Innovation Technology Administration’s Bureau of Maritime Administration’s ship financing program office; Army Corps of Engineers’ Institute for Water Resources; and Environmental Protection Agency’s (EPA) Office of Air and Radiation. We also interviewed Department of Transportation (DOT), Corps, and EPA officials to obtain advice on economic concepts related to surface freight transportation, appropriate and available data sources, and methodological approaches. We obtained preliminary reviews about the scope, methodology, and analysis contained in this report from DOT, EPA, the Corps, as well as two members of the Comptroller General’s Advisory Board—comprised of individuals with broad expertise in public policy. We also spoke with industry representatives to discuss their views on government spending and regulatory policy. Specifically, we interviewed representatives from the American Trucking Association, the Association of American Railroads, the American Waterways Operators, and the American Association of Port Authorities. In addition to industry representatives, we also interviewed individuals who were involved in previous federal and state highway cost allocation studies or authored research papers on external costs. We estimated federal, state, and local government costs for the surface freight transportation infrastructure, including the publicly owned highways and domestic, commercial inland waterways by examining government-reported spending data. Freight railway infrastructure, on the other hand, is, for the most part, privately owned and operated. Private railroad investment costs and revenues are proprietary, and therefore, we did not attempt to produce estimates of private costs and limited our analysis to government expenditures associated with rail, where appropriate. Further, we did not consider in our study (1) pipeline freight because pipelines carry specific liquid commodities, such as natural gas and oil products or (2) air freight because air freight constitutes a fraction of commercial freight moved by value, ton, and ton-miles and is typically used to move high-value, time-sensitive freight which would generally not be moved by the other modes. Where possible, we adjusted all figures to constant 2010 dollars using the fiscal year gross domestic product price index. In compiling our results for freight trucking, we could only approximate the freight truck population by using available data for all single-unit and all combination trucks—any vehicle consisting of a power unit pulling at least one trailer that does not have a power unit—but excluded light trucks, which are generally passenger vehicles and delivery vans. In using this population to represent freight trucks, we include some trucks that are involved in nonfreight purposes, such as municipal waste disposal trucks and utility trucks, which account for a small percentage of the total vehicle miles traveled (VMT) of this population. Some of the nonfreight trucks are likely to have marginal costs and tax payments that are lower than those for the average freight truck, while other nonfreight trucks will have higher costs and tax payments. While the population of freight trucks could also have been defined based on the number of axles on a truck, FHWA’s 1997 Highway Cost Allocation Study—the basis for some of our spending and revenue projections—reported costs and revenues by various weights of single-unit and combination trucks. Our estimates of external costs—the costs imposed on society, such as the cost of lost time resulting from traffic congestion or the health consequences related to pollution—reflect activities that can be attributed to domestic freight activity for all single-unit and combination trucks, rail carriers, and waterborne vessels. In several instances, we made adjustments to national data in an effort to remove nondomestic or nonfreight activity from our calculations. For example, as shown in table 9 in this appendix, we adjusted EPA data to more accurately report emissions attributable to domestic freight activity for all three modes. Both our estimates of government costs and revenues and external costs are based on high-level data in order to compare the modes on a nationwide basis. Variations in costs and revenue across individual shipments within each mode may be obscured by this level of aggregation. Because these are comparisons between modes on an aggregate, national basis, and we are not able to compare specific shipments, the estimates associated with railroads and waterways do not consider the costs associated with the truck ton-miles necessary to complete a shipment on those modes (for an analysis that attempts to compare marginal costs across the modes on a shipment-by-shipment basis, see Transportation Research Board, Paying Our Way, Estimating Marginal Social Costs of Freight Transportation (1996)). The results should be viewed as representing averages across all of the marginal shipments that were made under a wide variety of different conditions in a wide variety of locations. FHWA has conducted highway cost allocation studies—the most recent being in 1997, which superseded its 1982 study—that attempted to determine whether all highway users are paying their fair share of federal highway costs and to ensure that it and Congress have up-to-date information when making future decisions affecting federal highway user fees. According to FHWA officials, sections of the 1997 report were peer- reviewed by TRB, and based on TRB’s comments, FHWA issued an addendum in 2000. According to FHWA officials, an update to this study is forthcoming. To the extent possible, we developed cost and revenue categories similar to those used in FHWA’s 1997 study. For this review, we obtained FHWA’s Office of Policy data on average spending from 2000 through 2006 on highways by improvement type and vehicle class—specifically single-unit and combination trucks. Improvement types included new construction, preservation, minor widening, bridge work, safety and traffic operations, and environmental, among others. We also obtained federal revenue data by vehicle class and revenue type—fuel, retail, heavy vehicle use, and tire taxes. We used this FHWA data to estimate total federal highway costs and revenues attributed to freight trucks. We separated the federal costs and revenues into two categories—the first included costs and revenues associated with marginal use of the highways by freight trucks. We considered highway system preservation costs to be the closest available approximation of the wear-and-tear costs associated with road use. However, we did not include (1) bridge-related costs because bridges are built to withstand a specific design load or (2) enhancement or new capacity costs because these costs do not directly vary with repeated truck usage. All other federal spending was considered to be fixed costs. Our use of spending data to represent marginal costs may result in an understatement of those costs if that spending was not sufficient to repair all of the damage caused by road use. We considered marginal revenue to be receipts from fuel and tire taxes—receipts directly related to the use of the highway infrastructure. We assumed the retail tax had little relationship to highway use, and therefore, did not include it in our marginal revenue category. Because FHWA efforts to update the 1997 study will not address state and local government costs, we produced our own estimates of state and local government costs and revenues allocated to freight trucks for the same time period as the federal-level data that FHWA had provided to us. For our state estimates, we summarized state expenditures on highways from fiscal years 2000 through 2006 using table SF-12A, State Highway Agency Capital Outlay, from FHWA’s Highway Statistics Series. With assistance from FHWA officials, we categorized these costs into four improvement types—new capacity, system preservation, enhancements, and other— consistent with cost categories identified in the 1997 Highway Cost Allocation Study and in federal costs reported in the Highway Statistics Series. Because state expenditures reported in table SF-12A included federal funds that states received, we adjusted the expenditures to reflect strictly state spending on highways. First, we converted federal obligations reported in highway statistics table FA-6A (Obligation of Federal Funds) to expenditures using factors provided by an official from FHWA. Second, for each of the four improvement types, we subtracted the estimated federal expenditures from state expenditures to obtain states’ spending of their own funds. Third, for each improvement type, we estimated the expenditure amounts attributable to freight trucks using proportions that we derived from supporting documentation related to the 1997 study. State and local governments are generally responsible for maintaining the nation’s highways, and therefore, we again used a proportion derived from data from the 1997 study and applied it to Highway Statistics Series table SF-2 (State Disbursements for Highways) containing maintenance and services figures to estimate operations and maintenance costs attributed to freight trucking at the state level. As with the federal spending data, we considered system preservation expenditures to be the best available approximation of costs associated with marginal highway use. We consider all other costs, such as new construction, system enhancements, and routine maintenance to be fixed costs. To estimate marginal state revenues attributable to freight trucks from fiscal years 2000 through 2006, we first determined the average, annual total receipts from motor fuels receipts (minus penalties and fines) reported in table MF-1 (State Motor Fuel Taxes and Related Receipts) and tolls from bridge, tunnel, and road crossings receipts reported in table SF- 3B (State Administered Toll Road and Crossing Facilities). We then determined what shares of these revenues were attributed to freight trucks as follows: except for tolls, the revenue shares from fuel for freight trucks were based on results from the 1997 Highway Cost Allocation Study. The revenue shares for each year after 2000 were adjusted for changes in VMT, motor fuels consumed, and vehicle registrations. Since the 1997 study did not allocate tolls, we assumed that for each freight truck category, the share of tolls was equal to its share of total VMT in a given year. For fixed revenues, we also included registration, drivers license, and weight- distance receipts, as reported in table MV-2 (State Motor-Vehicle and Motor-Carrier Tax Receipts), in our calculations. We also developed marginal and fixed cost estimates for local highway spending and revenues attributed to freight trucks. For local expenditures, we summarized local disbursements on highways, averaged from 2000 through 2006 using table LGF-2 from the Highway Statistics Series. The table grouped data by capital outlays, maintenance and traffic services, administration and miscellaneous, and law enforcement, among other categories. We grouped the data as closely as we could into categories approximating those that FHWA used in their 1997 study and then allocated these disbursements to single-unit and combination trucks based on those trucks’ shares of the 1997 categories. Given that capital construction and system preservation was reported as a single category, the only option we had for estimating the amount spent on pavement rehabilitation (which we used to benchmark marginal costs) was to assume that pavement rehabilitation accounted for the same share of total capital costs as it did in 2000. On the revenue side, we again used tables from the Highway Statistics Series: table LDF (Local Government Receipts from State and Local Highway User Revenue) and table LGF-3B (Receipts of Local Toll Facilities). Table LDF reported motor fuel and motor vehicle revenues combined as a single number. Using data from the 1997 cost study, we estimated that motor fuel accounted for 45 percent of combined motor fuel and motor vehicle revenue in 1994. We used the trucks’ shares of local motor fuel and motor vehicle taxes from the 1997 study to allocate our updated revenue amounts to trucks. For tolls, we used the same allocation assumption as we did for state toll revenues. Local revenues account for less than 3 percent of the marginal revenue and fixed revenue amounts that we report in tables 3 and 5 respectively. Table 6 summarizes expenditures and revenues by mode by government per million ton-miles. All Class I railroad infrastructure is privately owned, and most other classes of railroads are also privately owned. However, the federal government provides some limited assistance to privately owned railroads, but it was negligible for the purposes of our analysis. The federal government no longer levies any federal excise tax on railroads. There is little available evidence on the extent to which railroads receive financial assistance from states or local governments, but this evidence suggests that these amounts are negligible. Railroads are subject to state and local property taxes on their infrastructure and the nation’s major railroads paid at least $625 million in 2008. The nation’s waterways are used for many purposes, such as navigation, flood control, irrigation, and recreation. According to literature we reviewed, the marginal infrastructure costs associated with freight on the waterways are negligible. To estimate the overall fixed cost to the federal government for waterway infrastructure investments, as well as operations and maintenance in support of freight transportation, we obtained budgeting and expenditure data by waterway (deep and shallow draft coastal harbors and channels, Great Lakes, and inland waterways) from fiscal years 2000 through 2006 from the Corps and the Saint Lawrence Seaway Development Corporation. Coastal harbors and channels operations and maintenance, investments, and nonfuel taxed waterways investments. We allocated the Corps’ total operations and maintenance harbors and channels (deep and shallow draft) expenditures by year to each state based on the Harbor Maintenance Trust Fund expenditures by state. We also obtained waterway infrastructure investment costs by project by state from the Corps. We allocated the expenditures to domestic freight based on tonnage—specifically, the percent of total tonnage moved through each state that is domestic waterways freight—as reported by Corps data supporting table 4-1, Waterborne Commerce by States, Waterborne Commerce of the United States, National Summaries. Such allocation may overstate costs attributable to domestic freight operations for at least two reasons. First, CRS reports that a significant amount of harbor spending is directed toward harbors that handle little cargo, and therefore the primary beneficiaries of the spending will be nonfreight users of the harbors and channels. Second, dredging at U.S. ports may be done primarily to accommodate ever-larger container ships involved in oceanic trade, and therefore costs attributable to domestic trade may be negligible in those cases. However, without a waterways cost allocation study, little more is known about how costs may be distributed among the various users of harbors, channels, and other waterways, and thus tonnage appears to be the most reasonable method to allocate costs. Inland waterways operations, maintenance, and construction costs. After consultations with a Corps official, we allocated 50 percent of the Corps’ inland waterways operations, maintenance, and construction spending from fiscal years 2000 through 2006 to freight. We used 50 percent because federal law establishes a 50/50 federal/nonfederal cost- share arrangement for construction. We could not definitively determine the extent to which waterways freight activity accounted for all waterway activity. Two studies provide a wide range of possibilities. A 1980 Corps study indicated that for selected waterways (the Ohio, Allegheny, Monongahela, Lower and Upper Mississippi, among others) within the boundaries of three Corps districts—St. Paul, St. Louis, and Pittsburgh— the average waterways freight activity accounted for 75 percent. More recently, however, a 2010 preliminary report concluded that a wide range of consumers benefit from the pools of water created and operated to facilitate commercial navigation and other uses, but commercial navigation itself appears to be a relatively small beneficiary of this system. This finding was based on a limited scope of work, and without further research, allocating costs or revenues to commercial freight has limitations. State and local governments spend their own funds for investments in state-owned port facilities involved in domestic freight transportation. For our state and local government analysis, we used expenditure and revenue data on “sea and inland port facilities” from the U.S. Census Bureau’s, Government Finance Statistics, State and Local Government Finances by Level of Government. States and local governments provide funding to publicly owned ports and dock facilities on waterways for the purposes of construction, operation, and maintenance of commercial port facilities, canals, harbors, and other public waterways; dredging of those waterways; and maintenance of commercial docks, piers, wharves, warehouses, cranes, and associated terminal facilities, among other things. To determine the portion of this spending that may be allocated to domestic waterways freight transportation, we used factors based on tonnage— specifically, the percent of total tonnage moved through the port that is domestic waterways freight, as reported by Corps data supporting table 4- 1, Waterborne Commerce by States, Waterborne Commerce of the United States, National Summaries. We used ton-miles to normalize our data across modes. Multiple ton-mile estimates are available for domestic freight activity. To the extent possible, we attempted to use ton-mile data that most accurately reflects the total domestic freight activity within each mode. Freight trucks. We used truck ton-mile estimates based on DOT’s Freight Analysis Framework (FAF). According to DOT officials, the 2007 ton- mile estimate derived from the FAF are the most comprehensive representation of domestic truck freight activity available. DOT has another series of ton-mile estimates produced by the Bureau of Transportation Statistics (BTS); however, according to DOT officials the BTS series does not capture as much domestic truck freight activity as the FAF estimate. We determined that the FAF data were more appropriate for the purpose of presenting our cost and revenue data on a per-ton-mile basis because the cost and revenues data we used were for the broadest definition of truck freight traffic. One difficulty in using the FAF estimates is that 2007 is the only recent year for which DOT has applied the current FAF methodology. DOT in previous years applied a differentmethodology to estimate ton-miles based on 2002 data. However, given that the methodology for estimating these figures changed significantly between 2002 and 2007, DOT cautions that the estimates from the 2 years should not be combined in the same time series. mile estimates for all of the years that we needed, we multiplied the BTS figure for each year by the ratio of the FAF estimate to the BTS esti mate for 2007. Given the unavoidable imprecision of this approach, we report error bounds of plus and minus 5 percent for all of our per-ton-mile results. These ton-mile data are shown in table 7. The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided one-time funding to promote job preservation and creation and infrastructure investments, among other things. Since a portion of these funds were targeted for transportation infrastructure projects, generally, they may benefit both passenger and freight users. For example, where freight and passenger trains share tracks, the High-Speed Intercity Passenger Rail program may also enhance capacity for freight rail lines. In this appendix, we report funds identified for infrastructure projects and do not attempt to identify funding to freight or nonfreight users of the infrastructure. We also report Recovery Act funds identified for the EPA’s Clean Diesel Program which helps reduce emissions for freight vehicles across all modes and for Army Corps of Engineers waterway projects that we identified as pertaining to freight transportation. In addition, the Build America Bonds program, created by the Recovery Act, allowed state and local governments to obtain financing at lower borrowing costs for new capital projects such as the development and construction of transportation infrastructure by having the Department of the Treasury make a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the bonds. We summarize this information in table 12. Tax expenditures are revenue losses to the federal government resulting from tax provisions, such as federal tax (1) exemptions or deductions of the interest earned from certain state and local government bonds or (2) credits provided by the Department of the Treasury for infrastructure projects. We obtained estimates of fiscal years 2003 through 2007 tax expenditures from the yearly Analytical Perspectives, Budget of the United States Government. The Office of Management and Budget aggregates tax expenditures for state and local government bonds used to finance government operations, facilities, and services, and also identifies the general purpose of the bonds. Thus, we could identify the specific transportation mode for which these bonds were used, but not necessarily whether the bonds were used for domestic freight or nonfreight use. We also used the Statistics of Income’s Tax-Exempt Bonds articles from the Internal Revenue Service to estimate the proportion of state and local government bonds used for transportation purposes. In addition, three federal financing programs administered by DOT provided some subsidies to the freight industry through either interest rates or terms that were more favorable than might be available in the commercial credit markets. These three programs include FHWA’s Transportation Infrastructure Finance and Innovation Act program, the Federal Railroad Administration’s Railroad Rehabilitation and Improvement Financing program, and the Maritime Administration’s ship financing program. We obtained cost estimates from these program offices for fiscal years 2003 through 2007 for 28 infrastructure projects that we identified as being available for use by freight trucks, freight rail, and waterways freight. Table 13 summarizes this information. Appendix IV: Freight External Cost Estimates from the Literature Cost per ton-mile (in 2010 cents) The following cost recovery options have been identified in the economics literature: General subsidy. Infrastructure users could be charged for the marginal public and external costs they impose, and any shortfall in the coverage of total costs could be paid out of general government funds. This policy would promote efficient use of existing infrastructure; however, it would require higher general fund taxes (which cause their own economic distortions) than would otherwise be necessary and taxpayers who make little use of infrastructure may consider this to be unfair. Ramsey pricing. If infrastructure users can be classified into different groups depending on the strength of their demand for infrastructure use, then those individuals who would not reduce their use significantly, even if they were charged an amount that exceeded the marginal costs they impose, could be charged a higher price to cover fixed costs. Users with weaker demands could be charged prices equal to their marginal costs. Under these conditions, infrastructure would be utilized up to an efficient level, even though some users are charged more than their marginal costs. The principal impediment to implementing this approach is the difficulty of estimating the strength of various users’ demand. In addition, users with high demands may consider it unfair to be charged higher fees than other users solely on that basis. Two-part tariffs. Infrastructure users could be charged two types of fees. One could be a flat-rate fee to cover fixed costs that everyone could pay to gain access to the infrastructure. The second fee could be a per-use charge designed to cover the marginal costs arising from each use. This policy option could lead to less-than-efficient levels of infrastructure use because some who would have used the infrastructure if only the per-use fee were charged may not use it if the additional access fee were charged. This approach might be made more attractive to and be perceived as more equitable by different types of users if they were given a choice between (1) a high access fee with a low per-use charge and (2) a lower access fee with a higher per-use charge. Average-cost pricing. Charging users for the average, rather than marginal, costs that they impose would raise sufficient revenue to cover all costs; however, this policy would reduce efficiency because some users who would use the infrastructure if they were charged only for their marginal costs may not be willing to use it if they were charged the higher amounts needed to cover average costs. In addition to the contacts named above, Andrew Von Ah (Assistant Director), James A. Wozny (Assistant Director), Max B. Sawicky (Assistant Director), Peace Bransberger, Bertha Dong, Brian James, Bert Japikse, Delwen A. Jones, Steve Martinez, Ed Nannenhorn, and Donna Miller made key contributions to this report. | Road, rail, and waterway freight transportation is vital to the nation's economy. Government tax, regulatory, and infrastructure investment policies can affect the costs that shippers pass on to their customers. If government policy gives one mode a cost advantage over another, by, for example, not recouping all the costs of that mode's use of infrastructure, then shipping prices and customers' use of freight modes can be distorted, reducing the overall efficiency of the nation's economy. As requested, this report (1) describes how government policies can affect competition and efficiency within the surface freight transportation sector, (2) determines what is known about the extent to which all costs are borne by surface freight customers, and (3) discusses the use of the findings when making future surface freight transportation policy. GAO reviewed the transportation literature and analyzed financial and technical data from the Department of Transportation (DOT), the Army Corps of Engineers (Corps), and the Environmental Protection Agency to make cross-modal comparisons at a national level. Data limitations and assumptions inherent in an aggregate national comparison are noted in the report. Public spending, tax, and regulatory policies can promote economic efficiency in the freight transportation sector when they result in prices that reflect all marginal costs (the cost to society of one additional unit of service). These costs include private costs; public costs, such as infrastructure maintenance; and external costs, such as congestion, pollution, and accidents. When prices do not reflect all these costs, one mode may have a cost advantage over the others that distorts competition. As a consequence, the nation could devote more resources than needed to higher cost freight modes, an inefficient outcome that lowers economic well-being. Inefficient public investment decisions can result when all construction and other fixed costs are not passed on to the beneficiaries of that investment. GAO's analysis shows that on average, additional freight service provided by trucks generated significantly more costs that are not passed on to consumers of that service than the same amount of freight service provided by either rail or water. GAO estimates that freight trucking costs that were not passed on to consumers were at least 6 times greater than rail costs and at least 9 times greater than waterways costs per million ton miles of freight transport. Most of these costs were external costs imposed on society. Marginal public infrastructure costs were significant only for trucking. Given limitations in the highway, rail, and waterway economic, financial, technical, and environmental data available for the analysis, GAO presents conservative estimates. While freight costs are not fully passed on to consumers across all modes, a number of issues are important for decision makers to consider when proposing policy changes to align prices with marginal costs or reduce the difference between government fixed costs and revenues. Costs can vary widely based on the specific characteristics of an individual shipment, such as the geography and population density of the shipment's route, and the fuel-efficiency of the specific vehicle carrying it. Policy changes that align prices with marginal costs on a shipment-by-shipment basis would provide the greatest economic benefit, but precisely targeted policy changes can result in high administrative costs. By contrast, less targeted changes--such as charging user fees based on average costs, subsidizing more efficient alternatives, or broadly applying safety or emissions regulations--can change the overall distribution of freight across modes, but may provide fewer benefits. Although the current configuration of transportation infrastructure can limit the shifting of freight among modes, price changes can prompt other economic responses. Over the longer term, there is greater potential for responses that will shape the overall distribution and use of freight services. GAO is not making recommendations in this report. GAO provided a draft of this report to DOT and the Corps. DOT provided technical suggestions and corrections, which were incorporated as appropriate. The Corps had no comments. |
The Forest Service manages about 193 million acres of land, encompassing 155 national forests and 20 national grasslands. Laws guiding the management of the forests require that the Forest Service manage its lands for various purposes—including recreation; rangeland; wilderness; and the protection of watersheds, fish, and wildlife—and to ensure that the agency’s management of the lands does not impair their long-term productivity. In managing its lands in accordance with these principles, the agency provides a variety of goods and services. Goods include timber, natural gas, oil, minerals, and range for livestock to graze. Watersheds on Forest Service lands provide drinking water to thousands of communities, and the national forests themselves offer recreational opportunities to the public, such as camping, hiking, and rafting. In recent years, appropriations for the Forest Service have totaled about $5 billion annually, with wildland fire management activities—such as reducing potentially flammable vegetation, preparing for and fighting fires, and rehabilitating burned lands—consuming a substantial portion of the agency’s budget. The Forest Service employs about 30,000 people and operates hundreds of regional, forest, and ranger district offices nationwide. Over the past decade, we and others have identified numerous management challenges facing the Forest Service and made many recommendations to improve the agency and its programs. While the agency has improved some areas, progress has been lacking in other key areas, and management challenges remain. Addressing these challenges is becoming more pressing in the face of certain emerging issues. Perhaps the most daunting challenge facing the Forest Service is the dramatic worsening of our nation’s wildland fire problem over the past decade. The average annual acreage burned by wildland fires has increased by about 70 percent since the 1990s, while the Forest Service’s wildland fire-related appropriations have more than doubled in that time, from about $1 billion in fiscal year 1999 to almost $2.2 billion in fiscal year 2007, representing over 40 percent of the agency’s total 2007 appropriations. As we have previously reported, a number of factors have contributed to worsening fire seasons and increased firefighting expenditures, including an accumulation of fuels due to past land management practices; drought and other stresses, in part related to climate change; and an increase in human development in or near wildlands. The Forest Service shares responsibility for wildland fire management with four agencies of the Department of the Interior (Interior)—the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service. Since 1999, we have issued numerous reports calling for various improvements in the Forest Service’s approach to wildland fire management. Most recently, we have focused on four primary steps we believe the agency, in conjunction with Interior, needs to take to better understand the extent of, and address, the nation’s wildland fire problems and to help contain rising federal expenditures for responding to wildland fires. Specifically, we have called on the Forest Service to: Develop a cohesive strategy that identifies options and associated funding to reduce potentially hazardous vegetation and address wildland fire problems. Despite our repeated calls for a cohesive wildland fire strategy, the Forest Service has yet to develop one. In 1999, to address the problem of excess fuels and their potential to increase the severity of wildland fires and cost of suppression efforts, we recommended that a cohesive strategy be developed to identify the available long-term options for reducing fuels and the associated funding requirements. By laying out various potential approaches for addressing wildland fire, the estimated costs associated with each approach, and the trade-offs involved, such a strategy would help Congress and the agencies make informed decisions about effective and affordable long-term approaches to addressing the nation’s wildland fire problems. Six years later, in 2005, we reiterated the need for a cohesive strategy and broadened our recommendation’s focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. The Forest Service, along with the other wildland fire agencies, has generally agreed that such a strategy is necessary but has yet to develop one. In January 2009, agency officials told us they were working to create such a cohesive strategy, although they had no estimate of when the strategy would be completed. Establish clear goals and a strategy to help contain wildland fire costs. In 2007 and 2008, we reported that the Forest Service was taking a number of steps intended to help contain wildland fire costs, including improving its decision-support tools for helping officials select strategies for fighting wildland fires, but that the agency had not clearly defined its cost-containment goals or developed a strategy for achieving those goals— steps that are fundamental to sound program management. Forest Service officials identified several documents they argue provide clearly defined goals and objectives that make up the agency’s strategy to contain costs. In our view, however, these documents lack the clarity and specificity needed by officials in the field to help manage and contain wildland fire costs, and we therefore continue to believe that our recommendations in this area, if effectively implemented, would help the Forest Service better manage its cost-containment efforts and improve its ability to contain wildland fire costs. Continue to improve its processes for allocating fuel reduction funds and selecting fuel reduction projects. Also in 2007 and 2008, we reported on several shortcomings in the Forest Service’s processes for allocating fuel reduction funds to field units and selecting fuel reduction projects, shortcomings that limited the agency’s ability to ensure that funds are directed where they will reduce risk most effectively. The Forest Service has taken steps to improve its processes for allocating fuel reduction funds, including the use of a newly developed computer model to assist in making allocation decisions, rather than relying primarily on historical funding patterns and professional judgment. The agency is also taking steps to improve the information it uses in allocating funds and selecting projects—including information on wildland fire risk and fuel treatment effectiveness—and to clarify the relative importance of the various factors it considers when making allocation decisions. We believe the Forest Service must continue these efforts so that it can more effectively use its limited fuel reduction dollars. Take steps to improve its use of a new interagency budgeting and planning tool. In 2008, we reported on the Forest Service’s and Interior’s development of a new planning tool known as fire program analysis, or FPA. FPA was intended, among other things, to allow the agencies to analyze potential combinations of firefighting assets, and potential strategies for reducing fuels and fighting fires, to determine the most cost- effective mix of assets and strategies. While recognizing that FPA represents a significant step forward and shows promise in achieving certain of its objectives, we believe the agencies’ approach to FPA’s development hampers the tool in meeting other key objectives. First, FPA has but limited ability to project the effects of different levels of fuel reduction treatments and firefighting strategies over time, depriving agency officials of information that could help them analyze the long-term impact of changes in their approach to wildland fire management. Second, FPA, as the agencies have developed it, cannot identify the most cost- effective mix and location of firefighting assets for a given budget. Rather, it analyzes a limited number of combinations of assets and strategies to identify the most cost-effective among them. The Forest Service is now beginning to use FPA to help develop its fiscal year 2011 budget request. We made a number of recommendations designed to enhance FPA and the agencies’ ability to use it, and the Forest Service—in conjunction with Interior—has identified several steps it is considering taking to do so. It is not yet clear how successful these steps will be, however—and, further, the steps the agencies have outlined do not address all the shortcomings we identified. We continue to believe that agency improvements are essential if the full potential of FPA is to be realized. In addition to these issues, we have also reported on the Forest Service’s difficulties funding fire suppression activities within its appropriated wildland fire budget; in many years, the agency has transferred money from other Forest Service programs to pay suppression costs. We reported in 2004 that such transfers between programs had caused projects to be delayed or canceled, strained relationships among land managers at different agencies, and created management disruptions within the Forest Service, and we recommended several measures to minimize the impacts of funding transfers and to improve the estimates on which the agencies base their wildland fire budgeting requests. Nevertheless, fire-related funding transfers continue, occurring in fiscal years 2006, 2007, and 2008— with the Forest Service transferring $400 million from other programs in fiscal year 2008 alone. Long-standing data problems have plagued the Forest Service, hampering its ability to manage its programs and account for its costs and reflecting deep-rooted and persistent shortcomings in the agency’s management of its activities. Without complete and accurate data, the agency has difficulty carrying out tasks that are intrinsic to its land management responsibilities—including recognizing and setting priorities for needed work, tracking activities, and understanding the true costs of its operations. Further, without an effective managerial cost-accounting system, the agency will have difficulty monitoring revenue and spending levels and making informed decisions about future funding needs. We have made numerous recommendations aimed at the Forest Service’s data shortcomings regarding both activities and costs. In recent years we have identified several land management programs for which the Forest Service lacks sufficient data, keeping the agency from effectively overseeing its activities and understanding whether it is using its appropriated dollars most efficiently. For example, in 2005, we reported on data problems in the Forest Service’s program for reforestation—the planting and natural regeneration of trees—and treatments to improve timber stands, such as thinning trees and removing competing vegetation. Reforestation and subsequent timber stand improvement are critical to restoring and improving the health of our national forests after timber harvests—yet the agency lacked sufficiently reliable data to accurately quantify its specific needs, establish priorities among treatments, or estimate a budget. A year later we reported on a similar shortfall in the agency’s program for rehabilitating and restoring lands unlikely to recover on their own after wildland fires, noting that the agency lacked nationwide data on the amount of needed rehabilitation and restoration work it had completed for recent wildland fires. And in 2008, we reported that the Forest Service did not maintain complete nationwide data on its use of stewardship contracting authority, under which the agency can trade goods (such as timber) for services (such as thinning forests or rangelands) that it would otherwise pay for with appropriated dollars, and can enter into stewardship contracts lasting up to 10 years. Although the Forest Service had recently updated its timber sale accounting system to include certain data on stewardship contracts, other data—such as the value of products sold and services procured through agreements rather than contracts—were not systematically collected or were incomplete. In addition to data on its activities, the Forest Service also lacks complete data on their costs. In 2006, we reported that the agency did not have a managerial cost-accounting system in place with which it could routinely analyze cost information. Managerial cost accounting, rather than measuring only the cost of “inputs” such as labor and materials, integrates financial and nonfinancial data, such as the number of hours worked or number of acres treated, to measure the cost of outputs and the activities that produce them. Such an approach allows managers to routinely analyze cost information and use it in making decisions about agency operations and permits a focus on managing costs rather than simply managing budgets. Such information is crucial for the Forest Service, as for all federal agencies, to make difficult funding decisions in this era of limited budgets and competing program priorities. In 2012, the Department of Agriculture is scheduled to replace its current Foundation Financial Information System with a new Financial Management Modernization Initiative system. The new system is expected to incorporate managerial cost-accounting capabilities, but the department has delegated responsibility for implementation of managerial cost accounting to its component agencies. The Forest Service’s Chief Financial Officer stated at the time of our 2006 review that implementation of a managerial cost- accounting system would not be a priority until outstanding financial reporting issues had been resolved and that reliable and timely financial information was necessary before pushing to develop managerial cost- accounting information. Without a managerial cost-accounting system, however, the Forest Service will continue to have difficulty developing realistic and useful budgets and related cost-benefit analyses of its activities—essential tools for present and future land management activities. In addition to its shortcomings in accounting for its overall costs, the Forest Service’s shortcomings in tracking of the costs associated with its timber sales program—such as obligations and expenditures for personnel and equipment—have been the subject of several of our previous reports. In 2001 we reported that serious accounting and financial reporting deficiencies precluded an accurate determination of the total costs associated with the timber sales program and, in fact, rendered the agency’s cost information unreliable. In 2003, we reported that it was unclear how accurately the agency would be able to report on the actual costs of individual work activities. And more recently, in 2007, we reported that the Forest Service tracks the funds it spends on timber sales in a way that does not provide the detail that many field managers, such as district rangers and national forest supervisors, said they need in order to make management decisions—for example, deciding how to allocate or redirect resources among sales. The agency does not track timber sales- related obligation or expenditure data by individual sale but rather aggregates these data by the programs that fund the sales. Neither does it track obligations and expenditures at the ranger district level, where timber sales are generally carried out, but tracks them instead at the national forest level—making it more difficult and resource intensive for field managers to oversee activities occurring in their units. Limited cost data also hampered the agency’s implementation of the competitive-sourcing program, as we reported in 2008. Competitive sourcing is aimed at promoting competition between federal entities and the private sector by comparing the public and private costs of performing certain activities (typically those performed in both government and the commercial marketplace, such as information technology, maintenance and property management, and logistics) and determining who should perform those activities. Although Congress had limited the funds the Forest Service could spend on competitive-sourcing activities, we found that for fiscal years 2004 through 2006, the Forest Service lacked sufficiently complete and reliable cost data to determine whether it had exceeded these congressional spending limitations. Additionally, the Forest Service did not consider certain costs in calculating competitive- sourcing savings and as a result could not provide Congress with an accurate measure of the savings produced by its competitive-sourcing program during this time. We recommended that the agency take several actions to improve its management of the program. The program’s future, however, now appears uncertain. Over the years, the Forest Service has struggled to provide adequate financial and performance accountability. Regarding financial accountability, the agency has had shortcomings in its internal controls and has had difficulty generating accurate financial information. Regarding its performance, the agency has not always been able to provide Congress and the public with a clear understanding of what its 30,000 employees accomplish with the approximately $5 billion the agency receives every year. Our long-standing concerns over the Forest Service’s financial accountability resulted in our including the agency in our High-Risk Series from 1999 through 2004, citing, among other issues, “a continuing pattern of unfavorable conclusions about the Forest Service’s financial statements.” We also had concerns about internal control weaknesses within the agency; in a 2003 report, we noted that internal control weaknesses in the Forest Service’s purchase card program—under which purchase cards are issued to federal employees to make official government purchases—left the agency vulnerable to, and in some cases resulted in, improper, wasteful, or questionable purchases. Subsequently, in a 2008 report, we noted that internal control weaknesses continued and that from 2000 through 2006 a Forest Service employee had embezzled over $642,000 from the Forest Service’s national fire suppression budget. Another area where we have raised concerns about the agency’s internal controls is in the Recreational Fee Demonstration Program, under which the Forest Service and other agencies can collect fees for using agency sites, including entrance fees for basic admission to an area and user fees for specific activities such as camping or boat launching. We reported in 2006 that the Forest Service not only lacked adequate controls and accounting procedures over collected recreation fees, but also lacked effective guidance even for establishing such controls. The agency has since updated its policies and procedures for handling collected recreation fees, although we have not evaluated their implementation. We removed the Forest Service from our high-risk list in 2005 in response to its efforts to resolve many of the financial management problems we identified. Nevertheless, the agency continues to struggle with financial accountability. In 2007, the Department of Agriculture’s Inspector General reported that significant deficiencies existed in the Forest Service’s ability to produce accurate financial information; in 2008, the Inspector General reported that certain deficiencies had been corrected but that others remained—including the agency’s failure to comply with the Federal Financial Management Improvement Act of 1996. As with financial accountability, our concerns about the Forest Service’s performance accountability shortcomings date back over a decade. In 2003 we reported that the agency had made little real progress in resolving its long-standing performance accountability problems—which included its inability to link planning, budgeting, and results reporting—and was years away from implementing a credible performance accountability system. We concluded that the agency was essentially in the same position it had been in more than a decade earlier—studying how it might achieve performance accountability. We recommended that the agency appoint a senior executive with decision-making authority and responsibility for developing a comprehensive plan to ensure the timely implementation of an effective performance accountability system and that the agency report annually to Congress on its progress in implementing such a system. While the agency responded that it would follow our recommendations, problems persisted; in our 2007 survey of federal managers’ use of performance information in management decision making, the Forest Service scored lowest of 29 federal agencies and components we surveyed in six of nine key management activities. Equally troubling are our survey findings related to leadership commitment to results-oriented management, which we have identified as perhaps the single most important element in successfully implementing organizational change. In our survey, we asked federal managers about their views on agency leadership’s commitment to using performance information to guide decision making. Only 21 percent of Forest Service managers we surveyed agreed that their agency’s leadership demonstrated such a commitment to a great or very great extent, compared with 50 percent of their counterparts in the rest of the federal government. More recent work by the Department of Agriculture’s Inspector General noted that the Forest Service continues to need improvements in its management controls to effectively manage resources, measure progress toward goals and objectives, and accurately report accomplishments. In fact, in 2008—only 7 months ago, and more than 5 years after our 2003 report on the problem—the Inspector General echoed our earlier findings, stating, “Some of these issues have been reported in multiple reports for over a decade, but their solutions are still in the study and evaluation process by .” Several emerging issues are likely to have profound implications for the agency, complicating its management responsibilities and underscoring the importance of addressing the management challenges we have highlighted so that the agency is well positioned to meet these new issues. Among the most significant: Climate change. In August 2007, we reported that according to experts, 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. These effects are also likely to lead to increased wildland fire activity. We noted that federal resource managers, including those at the Forest Service, had not yet made climate change a high priority and recommended that the Secretary of Agriculture (along with Interior and the Department of Commerce) 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. The Forest Service has since issued guidance on incorporating climate change information in land management planning activities. Increased human settlement in or near wildlands. Rapid development in the outlying fringe of metropolitan areas and in rural areas is increasing the size of the wildland-urban interface, defined as the area where structures and other human development meet or intermingle with undeveloped wildland. Experts estimate that almost 60 percent of all new housing units built in the 1990s were located in the wildland-urban interface and that this growth trend continues. They also estimate that more than 30 percent of housing units overall are located in the wildland- urban interface, including about 44 million homes in the lower 48 states, and that the interface covers about 9 percent of the nation’s land. This development has significant implications for wildland fire management because it places more structures at risk from wildland fire at the same time that it increases the complexity and cost of wildland fire suppression. Other land management challenges result as well; for example, as we reported in 2008, private subdivisions may seek access across public lands via roads that were not designed for public use, complicating agency management of those lands. And researchers have also noted that the wildland-urban interface is an area of widespread habitat fragmentation, introduction of invasive species, and biodiversity loss, further adding to the agency’s land management challenges. The aging of the federal workforce. Earlier this year we reported on the looming challenge facing federal agencies as retirements of federal workers threaten to leave critical gaps in leadership and institutional knowledge. In fact, we reported that about one-third of federal career employees on board at the end of fiscal year 2007 were eligible to retire by 2012, a trend especially pronounced among the agencies’ executives and supervisors—with nearly two-thirds of career executives projected to be eligible for retirement by 2012. Facing such a potential exodus of its most experienced employees, the Forest Service—like other federal agencies— will need to focus on strategic workforce planning to help forecast who might retire, when they might retire, and the impact of their retirement on the agency’s mission and, using this information, develop appropriate strategies to address workforce gaps. Our nation’s long-term fiscal condition. We have reported that our nation, facing large and growing structural deficits, is on an unsustainable long-term fiscal path. As a result, all federal agencies may be called upon to carry out their responsibilities with static or even shrinking budgets over the long term—making it especially important that the Forest Service address the challenges we have identified and ensure that it is spending its limited budget effectively and efficiently. Effective and efficient spending will also be critical in the short term, as the agency identifies projects to undertake with funds provided under the American Recovery and Reinvestment Act of 2009. Mr. Chairman, these issues are not new. In fact, not only are we repeating many of the same issues we have brought up over the years, but some of our concerns date back well over a decade. The Forest Service’s mission is, without question, a difficult one: managing millions of acres of diverse lands for often competing purposes while ensuring that current uses do not impair long-term productivity. This is an enormous and complex task, and we do not seek to minimize its difficulty. Nevertheless, the repetitive and persistent nature of the shortcomings we and others have surfaced over the years points to the Forest Service’s failure to fully resolve— perhaps even to fully grasp—its problems. Absent better data, better internal controls and accountability, and a more strategic approach to wildland fire, the agency cannot hope to improve upon its performance— and may ultimately be unable to respond effectively to the new challenges it faces. If, on the other hand, the Forest Service is to face these challenges head-on, it will require a sustained commitment by agency leadership to rooting out and resolving the agency’s long-standing problems. As a new administration takes office and begins to chart the agency’s course, it will be important for Congress and the Forest Service to remain vigilant in focusing on these issues. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Steve Gaty, Assistant Director; David P. Bixler; Arthur W. Brouk; Andrea Wamstad Brown; Ellen W. Chu; Laura Craig; Elizabeth Curda; Jonathan Dent; Charles T. Egan; Barry Grinnell; Richard P. Johnson; and Jack Warner. Wildland Fire Management: Interagency Budget Tool Needs Further Development to Fully Meet Key Objectives. GAO-09-68. Washington, D.C.: November 24, 2008. Wildland Fire Management: Federal Agencies Lack Key Long- and Short- Term Management Strategies for Using Program Funds Effectively. GAO-08-433T. Washington, D.C.: February 12, 2008. Wildland Fire Management: Better Information and a Systematic Process Could Improve Agencies’ Approach to Allocating Fuel Reduction Funds and Selecting Projects. GAO-07-1168. Washington, D.C.: September 28, 2007. Wildland Fire Management: Lack of Clear Goals or a Strategy Hinders Federal Agencies’ Efforts to Contain the Costs of Fighting Fires. GAO-07-655. Washington, D.C.: June 1, 2007. Wildland Fire Management: Update on Federal Agency Efforts to Develop a Cohesive Strategy to Address Wildland Fire Threats. GAO-06-671R. Washington, D.C.: May 1, 2006. Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy. GAO-05-147. Washington, D.C.: January 14, 2005. Wildland Fires: Forest Service and BLM Need Better Information and a Systematic Approach for Assessing the Risks of Environmental Effects. GAO-04-705. Washington, D.C.: June 24, 2004. Wildfire Suppression: Funding Transfers Cause Project Cancellations and Delays, Strained Relationships, and Management Disruptions. GAO-04-612. Washington, D.C.: June 2, 2004. Wildland Fire Management: Additional Actions Required to Better Identify and Prioritize Lands Needing Fuels Reduction. GAO-03-805. Washington, D.C.: August 15, 2003. Western National Forests: A Cohesive Strategy Is Needed to Address Catastrophic Wildfire Threats. GAO/RCED-99-65. Washington, D.C.: April 2, 1999. Federal Land Management: Use of Stewardship Contracting Is Increasing, but Agencies Could Benefit from Better Data and Contracting Strategies. GAO-09-23. Washington, D.C.: November 13, 2008. Forest Service: Better Planning, Guidance, and Data Are Needed to Improve Management of the Competitive Sourcing Program. GAO-08-195. Washington, D.C.: January 22, 2008. Federal Timber Sales: Forest Service Could Improve Efficiency of Field- Level Timber Sales Management by Maintaining More Detailed Data. GAO-07-764. Washington, D.C.: June 27, 2007. Managerial Cost Accounting Practices: Department of Agriculture and the Department of Housing and Urban Development. GAO-06-1002R. Washington, D.C.: September 21, 2006. Wildland Fire Rehabilitation and Restoration: Forest Service and BLM Could Benefit from Improved Information on Status of Needed Work. GAO-06-670. Washington, D.C.: June 30, 2006. Forest Service: Better Data Are Needed to Identify and Prioritize Reforestation and Timber Stand Improvement Needs. GAO-05-374. Washington, D.C.: April 15, 2005. Financial Management: Annual Costs of Forest Service’s Timber Sales Program Are Not Determinable. GAO-01-1101R. Washington, D.C.: September 21, 2001. Government Performance: Lessons Learned for the Next Administration on Using Performance Information to Improve Results. GAO-08-1026T. Washington, D.C.: July 24, 2008. Governmentwide Purchase Cards: Actions Needed to Strengthen Internal Controls to Reduce Fraudulent, Improper, and Abusive Purchases. GAO-08-333. Washington, D.C.: March 14, 2008. Recreation Fees: Agencies Can Better Implement the Federal Lands Recreation Enhancement Act and Account for Fee Revenues. GAO-06-1016. Washington, D.C.: September 22, 2006. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Department of Agriculture: Status of Efforts to Address Major Financial Management Challenges. GAO-03-871T. Washington, D.C.: June 10, 2003. Forest Service Purchase Cards: Internal Control Weaknesses Resulted in Instances of Improper, Wasteful, and Questionable Purchases. GAO-03-786. Washington, D.C.: August 11, 2003. Forest Service: Little Progress on Performance Accountability Likely Unless Management Addresses Key Challenges. GAO-03-503. Washington, D.C.: May 1, 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999. Older Workers: Enhanced Communication among Federal Agencies Could Improve Strategies for Hiring and Retaining Experienced Workers. GAO-09-206. Washington, D.C.: February 24, 2009. Proposed Easement Amendment Agreement between the Department of Agriculture and Plum Creek Timber Co. B-317292. Washington, D.C.: October 10, 2008. Long-Term Fiscal Outlook: Long-Term Federal Fiscal Challenge Driven Primarily by Health Care. GAO-08-912T. Washington, D.C.: June 17, 2008. Climate Change: Agencies Should Develop Guidance for Addressing the Effects on Federal Land and Water Resources. GAO-07-863. Washington, D.C.: August 7, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Forest Service, within the Department of Agriculture, manages over 190 million acres of forest and grassland. The agency is responsible for managing its lands for various purposes--including recreation, grazing, timber harvesting, and others--while ensuring that such activities do not impair the lands' long-term productivity. Carrying out these often competing responsibilities has been made more difficult by the increasing cost of wildland fires and the budgetary constraints necessitated by our nation's long-term fiscal outlook. This testimony highlights some of the major management challenges the Forest Service faces in carrying out its land management responsibilities. It is based on numerous reports GAO has issued on a wide variety of the agency's activities. While the Forest Service has made improvements in many areas GAO has reported on in recent years, certain management challenges persist--with the agency struggling to manage a worsening wildland fire problem and spiraling fire costs, collect data on its activities and their costs, and demonstrate financial and performance accountability to Congress and the public. Several emerging issues facing the agency underscore the urgency of addressing these challenges. The Forest Service continues to lack strategies for using its wildland fire management funds effectively. In numerous reports over the past decade, GAO has highlighted the challenges the Forest Service faces in protecting the nation against the threat of wildland fires. While the agency has taken important steps to improve its wildland fire management, other key steps remain. Specifically, the agency needs to (1) develop a cohesive strategy laying out various potential long-term approaches for addressing wildland fire, the estimated costs associated with each approach, and the trade-offs involved; (2) establish clear goals and a strategy to help contain increasing wildland fire costs; (3) continue improving its processes for allocating funds and selecting projects to reduce potentially hazardous vegetation; and (4) take steps to improve its use of a new interagency budgeting and planning tool. Program management suffers from lack of data on activities and costs. GAO's work over the years points to a persistent shortcoming in the Forest Service's management of its activities: the lack of adequate data on program activities and costs. This shortcoming spans multiple land management programs, including programs for selling timber and rehabilitating and reforesting lands that have been burned, as well as administrative functions such as the competitive sourcing program, which aims to increase competition between federal entities and private sector organizations. Inadequate data have hindered field managers in carrying out their duties and prevented the agency from understanding how much its activities are costing. Financial and performance accountability have been inadequate. The Forest Service has struggled to implement adequate internal controls over its funds, generate accurate financial information, and provide clear measures of what it accomplishes with the appropriations it receives every year. GAO's concerns about these issues date back to the 1990s but have yet to be fully addressed. Several emerging issues underscore the need for the Forest Service to improve its management. The evolving effects of climate change, increasing development in and near wildlands, the aging of the federal workforce, and our nation's long-term fiscal condition likely will have profound implications for the agency and magnify the urgency of addressing these challenges. |
Rare earths contain one or more of the following 17 elements in the periodic table: the lanthanides that begin with lanthanum (atomic number 57) through lutetium (atomic number 71) and two non-lanthanides that have similar properties, yttrium and scandium (see figure 1). These elements are referred to as rare because they appear in low concentrations in the ground—though relatively abundant overall—and are difficult and costly to mine and process. Rare earth elements are often classified as either heavy or light based, in part, on their chemical properties. According to the United States Geological Survey, heavy rare earth elements are generally less abundant and more expensive due to their scarcity, more unique characteristics, and strong demand relative to the light rare earth elements. DOD has a particular interest in two heavy rare earth elements, yttrium and dysprosium. Rare earth elements are generally found in mined ore, separated and converted into intermediary forms, such as oxides, and further processing depends on the application. For example, the intermediary form can be turned into a metal, and added to other materials to form an alloy for use in semi-finished metal components that are incorporated into end products. The United States was the leader in global production of rare earth oxides, metals, and alloys from the 1960s through the 1980s but currently has limited capability. According to a 2013 Congressional Research Service report, global production is prevalent outside the United States due, in part, to lower labor costs and more lenient environmental standards. At present, the United States generally relies on imports from global manufacturers of rare earths, such as metals, alloys, and magnets. See figure 2 for a representative rare earth metals supply chain that is generally outside the United States. The United States is a major consumer of defense and commercial end products containing rare earths, however, its demand for rare earths is approximately nine percent of the global demand, according to DOD estimates. Also, DOD demand is approximately only one percent of the United States demand. Recent studies have shown that rare earths are essential to the production, sustainment, and operation of U.S. military equipment. Reliable access to the necessary material, regardless of the overall level of defense demand, is a bedrock requirement for DOD. Some defense applications with rare earths are coatings for jet engines, missile guidance systems, antimissile defense systems, satellites, and communication systems. Examples of commercial products with rare earths are automotive catalytic converters, petroleum refining chemicals, flat panel displays, permanent magnets, and rechargeable batteries for hybrid vehicles. Since 2010, DOD has conducted studies and published reports on various rare earths issues in response to congressional mandates (see table 1 below). DOD also periodically issues two reports on the defense industrial base and on “critical” and “strategic and critical” materials. The Annual Industrial Capabilities Report to Congress provides analyses of sectors of the defense industrial base such as aircraft and ground vehicles and summarizes the department’s efforts to identify the availability of materials, such as rare earths. The biennial Strategic and Critical Materials Report on Stockpile Requirements summarizes DLA-Strategic Materials’ analyses of materials for the National Defense Stockpile. In addition, in July 2014 the DOD Inspector General issued a report assessing whether DOD effectively planned for life-cycle sustainment of rare earth elements for the defense industrial base. The DOD Inspector General found that DLA-Strategic Materials lacked procedures to validate supply and demand data for its stockpiling model. Further, the Inspector General identified internal control weaknesses related to the assessment of rare earth element supply and demand for defense applications. Specifically, the Inspector General found that DOD lacked a comprehensive and reliable approach to assess rare earth element supply and demand. The DOD Inspector General recommended that DLA-Strategic Materials have a plan for using verified and validated data to improve forecasts for the stockpile. DLA-Strategic Materials generally agreed, noting that its model is being reviewed and will be accredited. Three organizations in the department have related statutory requirements to manage risks from DOD’s use of “critical” and “strategic and critical” materials, such as rare earths. The three organizations are DLA-Strategic Materials and the Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy (MIBP), both in the Office of the Undersecretary of Defense for Acquisition, Technology and Logistics (OUSD(AT&L)), and the Strategic Materials Protection Board (SMPB). Their select responsibilities are shown in table 2 below. In addition to MIBP and DLA-Strategic Materials representation, the SMPB membership is department-wide and includes designees of the Assistant Secretary of the Army for Acquisition, Logistics and Technology and the Assistant Secretary of the Navy for Research, Development, and Acquisition. From 2011 to 2015, DOD identified certain materials, including rare earths, as critical to meet its individual statutory responsibilities, but has not taken a comprehensive approach to identify which of these materials are critical to national security. Based on GAO’s prior work, the Office of the Deputy Under Secretary of Defense for Industrial Policy, the predecessor of MIBP, stated that it was collaborating with the Defense Logistics Agency’s National Defense Stockpile Center to create department-wide criteria for the terms “critical” and “strategic,” and expected to report the results of this effort at the end of calendar year 2008. As of November 2015, there were no department-wide criteria for these terms, but DOD officials said that they were considering discussing the definitions and possibly proposing a group of materials that meet the SMPB’s definition of critical to national security. SMPB and OUSD(AT&L) and two of its offices—MIBP and DLA-Strategic Materials—have separate, existing statutory definitions for critical materials. See table 3 for the varying definitions of critical materials by organization. The DOD organizations, generally using their respective definitions and analyses for their individual responsibilities, identified between three and eight of the rare earths as having met the definitions at least once from 2011 to 2015. Overall, 15 of the 17 rare earths were identified as critical at some point in the last 5 years. None of the organizations identified cerium or promethium as having met the definitions during that time period. See table 4 for the rare earths that each DOD organization separately identified as critical in defense applications, critical to national security, or as strategic and critical in different reports. DOD’s identification of which rare earths, if any, are critical to national security is fragmented. Three DOD organizations separately identified five different lists of rare earths during this time frame using their respective definitions of critical to national security. According to GAO’s risk management framework, comprehensive management of risk is a necessary step for agencies, like DOD, to manage and assess risk to help make informed decisions and prioritize resource investments. The SMPB, with the duty of designating specific materials as critical to national security, has reported to Congress in 2007, 2008, and 2011 that its focus is to assess the criticality of materials and to identify which materials are critical to national security, but has not done so. The SMPB acknowledged that identifying the materials critical to national security is necessary to ensure consistency among the DOD offices. However, in a February 2014 letter from MIBP to DLA-Strategic Materials, the respective offices of the chair and vice-chair of the SMPB, that discusses cooperation concerning the SMPB, the designation of materials critical to national security was not one of the areas outlined for proposed coordination. DOD officials told us that they are generally working toward coordinating MIBP’s sector analyses of the defense industrial base—such as aircraft and ground vehicles—with DLA-Strategic Materials’ analyses that support recommendations for materials to stockpile in order to have a more comprehensive understanding of supply chains. DLA-Strategic Materials’ responsibility for determining materials to stockpile under certain scenarios has been considered by some within DOD as a means to ensure materials critical to national security are available. For example, MIBP officials told us that they rely on DLA- Strategic Materials’ analyses and expertise for other responsibilities such as MIBP’s Title 10 responsibilities of ensuring reliable sources of materials critical to national security. However, DLA-Strategic Materials officials caveat their analyses as being valid for a single point in time and for decisions related to their title 50 responsibilities for the National Defense Stockpile, and not for other statutory responsibilities such as identification of materials critical to national security in the Title 10 definitions. To demonstrate that its analyses are valid for a specific point in time, DLA-Strategic Materials officials indicated that the identification of rare earths that meet the definition for strategic and critical may differ over time, unlike OUSD(AT&L)’s and MIBP’s lists, which have not changed. In addition, the DOD-created emergency scenarios may change for each biennial analysis, which affects DLA-Strategic Materials identification of which materials meet the definition for strategic and critical. Moreover, DLA-Strategic Materials officials told us that they are not responsible for designating if a material is strategic and critical but are tasked with determining if a material is estimated to have a shortfall in a given year based upon DOD emergency scenarios. In addition to DOD’s differing lists of critical rare earths, weapon system officials at the military departments that we spoke with also have identified what they consider as critical rare earths in their systems, but this information is not reported consistently or department-wide. These officials do not have a definition for critical materials nor do they have an agreed upon department-wide list of critical rare earths, but they know which rare earths provide enabling functionality in the weapon systems. For example, a subject matter expert on lasers at Naval Surface Warfare– Crane told us that the rare earth component in certain defense lasers is what creates and focuses the light beam. In another example, officials at the Army Program Executive Office for Ammunition told us that rare earth magnets enable guided artillery ammunition to move in flight to the target. Further, Army Research Laboratory officials told us that they could better focus their work on specific rare earths if there was a department-wide list of rare earths critical to national security. Implementation of controls consistent with federal internal control standards provides management with some added confidence regarding the achievement of objectives, provides feedback on how effectively an entity is operating, and helps reduce risks affecting the achievement of the entity’s objectives. In particular, these standards state that management is to use data to create quality information that is appropriate, current, complete, accurate, accessible, and provided on a timely basis; and internally communicate the necessary quality information. Information and communication are necessary to create an effective internal control system that informs the allocation of resources in relation to the areas of greatest risk relevant to achieving the entity’s objectives, such as efficient operations. From an industry perspective, we spoke with five defense and petroleum corporations that took steps to assess risk to help make informed decisions and prioritize resource investments. Company officials we spoke with generally said that they determine what materials are critical by obtaining data and communicating across product lines. Officials from three corporations stated that they have a process to gather data throughout the company and decide what materials may be critical to the company as a whole. For example, an official from one company stated that it regularly collects data from manufacturing divisions across the company and differentiates critical materials by their ability to create a production line stoppage. For potential material shortages that can stop production, for example, company officials may have regular meetings with the suppliers, forecast supplies 6 months into the future, adjust contracting arrangements, and have mitigation actions in place. Given the differing interpretations of what rare earths are critical according to the individual responsibilities of each organization, DOD has not taken the next step to identify an appropriate, complete, timely list of department-wide rare earths critical to national security. Without taking a comprehensive department-wide approach to determine which rare earths, if any, are critical to national security, DOD is not in the best position to communicate and effectively focus resources across the department and align efforts to ensure the supply of rare earths critical to national security. Rare earths risk assessment is, in part, a function of the probability of a supply disruption and the vulnerability of a weapon system or supply chain to the disruption. Although DOD regularly identifies supply disruption risks, it has not taken a comprehensive approach to assess and mitigate those risks, including analyzing the effect of unavailability of rare earths designated as critical to national security which is statutorily required. Fortunately, these types of supply disruptions have not materialized over the last several years, but DOD’s current ability to respond may not be sufficient should they materialize in the future. Specifically, DLA-Strategic Materials estimates the risk of supply shortfalls through a biennial assessment process and makes recommendations for acquiring certain materials for the National Defense Stockpile. MIBP also has taken some action to identify supply disruption risks, but its mitigating strategy is reactive in nature. However, the SMPB, chaired and vice-chaired by officials of MIBP and DLA-Strategic Materials respectively, with the responsibility for analyzing the effect of unavailability of materials such as rare earths critical to national security may have on national defense, has not done so. Moreover, DOD has not established internal controls to measure risk and the effectiveness of its mitigating actions. Rather, DOD has taken actions without knowing the extent of the underlying risks that the unavailability of rare earths would have on its weapon systems specifically and national defense generally. DOD identifies potential supply disruption risks and takes some mitigating actions through DLA-Strategic Materials’ biennial process of assessing material shortfall risks and making recommendations to acquire certain materials for the National Defense Stockpile. The assessments are not designed to be comprehensive but are limited to a four-year time frame related to DOD defined national emergencies. The resulting shortfall risks are an estimated deficiency of materials for essential civilian and defense needs during a period of recovery after accounting for existing mitigating options, such as substitution of other materials to fill the deficiency. In each of its 2011, 2013, and 2015 assessments, DLA-Strategic Materials considered between three and seven specific rare earths at risk for a shortfall—15 in all. The assessment process is limited to DOD-created national emergency scenarios. These scenarios cover a four-year time frame in which the first year is assumed to be a period of conflict, and years two through four are assumed to be a period of recovery. The one year period of conflict takes into consideration the following conditions: (1) a catastrophic attack on a U.S. city by a foreign terrorist organization or rogue state, (2) two near simultaneous major combat operations, (3) conflict damage from a highly capable enemy, and (4) ongoing military operations such as a military presence in a foreign country. According to DOD officials, rare earths from the National Defense Stockpile have not been used. DLA-Strategic Materials’ process to assess material shortfalls, in order to meet select statutory requirements, is methodical and has many steps. Among the ongoing data collection and analysis efforts, first, DLA- Strategic Materials includes materials of concern on a “watch list” based on input from other DOD organizations. Second, it conducts initial research to determine which materials on the watch list to further analyze based on the potential for a supply disruption of the materials that may lead to a shortfall deficiency. This initial research is, in part, based on demand and supply data from industry and public sources. Third, DLA- Strategic Materials uses estimating models to assess shortfall risks. Fourth, to address mitigating actions, DLA-Strategic Materials uses its judgment to determine which materials with shortfall risks that it will recommend for stockpiling to the Congress. See figure 3 for materials that DLA-Strategic Materials assessed in 2015, including rare earths. DLA-Strategic Materials may conduct additional research, referred to as “deep dives,” on select materials or products to inform its decision on materials to recommend for stockpiling. See table 5 for a list of additional research conducted on rare earths from 2011 through 2015. To mitigate shortfall risks, DLA-Strategic Materials recommended stockpiling dysprosium and yttrium in 2013, and europium in 2015. See figure 4 below for the rare earths DLA-Strategic Materials identified with shortfall risks and recommended for stockpiling. DLA-Strategic Materials may identify a shortfall risk but not take mitigating actions for various reasons. For example, erbium and thulium had shortfall risks in 2013, but DLA-Strategic Materials did not recommend stockpiling them due to limited defense applications; limited data; and prioritization of more important materials, such as yttrium. In another instance, lanthanum had a shortfall risk in 2015, but DLA-Strategic Materials did not recommend it for stockpiling due to the availability of the material from companies in Australia, with which the United States has an agreement for priority delivery for defense needs. MIBP also took actions to address supply disruption risks by identifying the risk of unavailability of heavy rare earths—those that are generally less abundant and more expensive due to their scarcity—used in defense applications. Heavy rare earths are at risk for a supply disruption due to the concentration of production outside the United States, which MIBP described in OUSD(AT&L)’s 2013 Annual Industrial Capabilities Report to Congress, the last one completed at the time of our review. MIBP based its analysis, in part, on public and industry supply and demand forecasts for rare earths and interviews with federal officials, subject matter experts, military service officials, and industry representatives, among other sources, according to officials. To mitigate the risk, MIBP’s strategy relies on the market: (1) to find new sources of rare earths driven by increasing demand, (2) to discover substitutes for rare earths, and (3) to support initiatives for recycling rare earths from waste products. MIBP’s strategy is reactive, that is waiting for a supply disruption to occur and relying on the market to respond. Moreover, it may not be realistic. First, industry experts said that new mines and processing facilities are not economically viable as prices for rare earths have decreased and remain low. Second, Army officials, weapon systems subject matter experts, and industry representatives said that substitutes for some rare earths are not preferred or do not exist at this time. Third, while stating in 2012 that recycling initiatives could mitigate some supply risks, DOD determined that recycling is not economically feasible in 2014. In addition, MIBP does not have internal controls necessary to implement and monitor its strategy. Specifically, it has not established metrics to assess the extent to which its strategy could have mitigated the risk for a potential supply disruption of heavy rare earths. Nor has it defined the terms “reliable sources” and “secure supply” that are necessary to establish such metrics according to internal controls that call for identifying acceptable risk tolerances for what is reliable and secure. According to DOD officials, potential measures could be past performance history, including timeliness of delivery, or the financial health of companies in the rare earths supply chain. Further, MIBP has not defined the metrics for evaluating the extent of risk and the effectiveness of its strategy because, as indicated earlier it relies on the market to respond to a supply disruption. Without such metrics, it will be difficult for MIBP to monitor and adjust its mitigating actions. In addition to its stated strategy, MIBP officials said to identify potential supply disruption risks for materials, such as rare earths, they rely on the military departments and program offices to elevate issues so that MIBP can react to them as they “bubble up.” Similarly in our 2008 report on DOD’s industrial policy, we found that DOD used an informal approach to identify supplier-base concerns, often relying on the military services, program offices, or prime contractors to identify and report these concerns, including gaps or potential gaps. We further found that as there was no requirement for when to report such gaps to higher-level offices, knowledge of defense supplier-base gaps across DOD could be limited. Currently, MIBP partly relies on the Joint Industrial Base Working Group, which consists of department-wide representatives, to identify industrial base issues, such as rare earths unavailability or supply risk. We found that no guidance exists for when military departments and program offices are to report rare earth supply disruption risks, but MIBP officials reported that rare earths have never come up as an issue in the working group. The SMPB, chaired and vice-chaired by MIBP and DLA-Strategic Materials, has not taken a broader approach to comprehensively address the underlying risks of the unavailability of rare earths, including determining the effects and possible mitigating actions of the unavailability of rare earths, by leveraging the dispersed expertise that exists in the department. The current approach is thus fragmented. For example, although MIBP has offered a strategy to ensure a reliable supply, SMPB has not taken the additional step of assessing and building upon MIBP’s work to develop and recommend a department-wide strategy. Further, although DLA-Strategic Materials’ stockpiling efforts are proactive, according to DOD officials, the department has never used the rare earths from the National Defense Stockpile and does not know the time and cost to establish the capability to process the stockpiled material into a usable form, a necessary step to implement mitigating actions. Currently, there is a limited commercial capability in the United States for processing certain types of rare earths used in defense applications, according to government and industry officials. We previously reported in April 2010 that rebuilding a domestic rare earths supply chain may take significant time and money. Industry representatives we spoke with during this review agreed that while there is domestic expertise, with limited domestic capability, turning certain stockpiled rare earths into a useable form would most likely have to be conducted outside the United States, which may also introduce risks of a supply disruption. SMPB has also not built upon DLA-Strategic Materials work to understand what is necessary to use the stockpiled materials. According to defense officials, complete data on the use of rare earths in the defense industrial base are limited and challenging to collect, which can limit assessments of the defense supply chain needed to comprehensively address risks. For example, the Defense Contract Management Agency–Industrial Analysis Center, which conducts analyses of the industrial base for DOD, surveyed prime contractors and select subcontractors of acquisition category I programs—with a procurement cost of more than $2.79 billion—about their supply chains for rare earths. According to Industrial Analysis Center officials, only 10 percent of surveys sent to prime contractors for 79 acquisition category I programs in July 2014 were returned with meaningful information. The prime contractors reported that among the reasons for not responding were concerns about the release of sensitive information and non- disclosure agreements with suppliers. Although officials from MIBP and DLA-Strategic Materials also told us that their offices do not have the resources to track rare earths through defense supply chains from ore to weapon system, the SMPB has not leveraged the department’s dispersed expertise in order to analyze the impact of unavailability on national defense. We found DOD officials who understood the vulnerability and effect of unavailability of rare earths based on their knowledge of the supply chain for select weapon systems. For example, a DOD-wide subject matter expert in radars at Naval Surface Warfare Center–Crane told us that rare earth magnets enable microwave tubes to effectively focus the radar’s energy. Without the magnets, the radars cannot function and provide the needed capability to the warfighter. Further, he said that there are no substitutes for the rare earths in these magnets. His assessment was based, in part, on his knowledge of and relationships with sub-tier contractors and weapon system program officials. See figure 5 for a graphic example of how rare earths enter the defense supply chain for radars based on information from a defense industrial base report on radars, a subject matter expert and other DOD officials, and company representatives. He added that after the potential unavailability of rare earths in 2010, the Navy made a deliberate effort to understand the materials, vendors, and supply chains for DOD radars in order to determine the impact if rare earths were unavailable. We found the Navy’s efforts are similar to some of the company approaches, discussed earlier, for managing risk. DLA-Strategic Materials officials later said that it is not always necessary to track a material through the supply chain to the weapon system to make a stockpiling recommendation but did so when beneficial. For example, for scandium used in ships, DLA-Strategic Materials did conduct a study that went from mine to platform and included program offices and prime contractors in their research due to specific manufacturing issues. Federal internal control standards state that management should define objectives clearly to enable the identification of risks and define risk tolerances in specific and measurable terms, including defining what is to be achieved, who is to achieve it, how it will be achieved, and time frames for achievement. Ultimately, SMPB has a goal of ensuring availability of rare earths that are critical to national security. DOD has taken actions without knowing the extent of the underlying risks the unavailability of rare earths have on its weapon systems specifically and national defense generally. By taking a comprehensive approach to meet this goal, such as addressing processing of stockpiled materials from identified shortfalls and defining metrics to measure risk and mitigating actions, the SMPB may be better positioned to guide other DOD offices when to report rare earths availability issues and to analyze the impact of the unavailability of the materials. Reliable access to the material it needs, such as rare earths, is a bedrock requirement for DOD. Accordingly, a department-wide approach that facilitates DOD focusing its resources on those rare earths that are critical to national security would enable the department to meet its needs before supply for a specific rare earth becomes an emergency. However, DOD has no comprehensive, department-wide approach to determine which rare earths are critical to national security, and how to deal with potential supply disruptions to ensure continued, reliable access. It is important that such an approach includes, for example, leveraging the dispersed expertise in the department to identify which rare earths are critical, analyzing risks to their supply and the effects of a potential disruption, and taking actions to mitigate the specific risks. Developing a comprehensive approach for ensuring a sufficient supply of rare earths for national security needs—one that can establish criticality, assess supply risks, and identify mitigating actions—would better position DOD to help ensure continued functionality in weapon system components should a disruption occur, even though supply disruptions in rare earths have not occurred over the last several years. SMPB, with its statutory responsibility and leadership from MIBP and DLA-Strategic Materials, is well-positioned to take the lead on such an approach. There is not yet agreement on what constitutes “critical” rare earths. While various organizations’ definitions of critical may be similar, DOD has identified 15 of the 17 rare earths as critical over the last 5 years. This makes establishing priorities to analyze supply risk difficult. DLA- Strategic Materials does a methodical job of analyzing risks for all materials, but its focus is a four-year timeframe with stockpiling as its mitigation tool. MIBP relies on other DOD organizations to identify and elevate risks, relies primarily on the market to resolve supply disruptions, and has not put in place measures to evaluate the success of its mitigating actions. The efforts by the military departments, such as the Navy, to identify and mitigate risks by monitoring the defense supplier base have been limited in scope or lacked department-wide involvement. Without clear definitions and metrics to identify associated risk tolerances, it will be difficult for MIBP to monitor and adjust its mitigating actions. To fully identify and mitigate risks associated with the availability of rare earths, we recommend that the Secretary of Defense take the following three actions: Direct the SMPB to designate which, if any, rare earths are critical to national security in order to provide a common DOD understanding of those materials and focus resources. Direct the SMPB to analyze the effect of unavailability of rare earths designated as critical to national security and develop a strategy to help ensure a secure supply for those designated critical to national security. Direct MIBP to define reliable sources and secure supply for rare earths in measurable terms and to provide metrics to determine the effectiveness of its actions to better ensure continued availability. We provided a draft of this report to DOD for review and comment. DOD concurred with all our recommendations. DOD’s written comments are reprinted in appendix II. DOD and the United States Geological Survey also provided technical comments that we incorporated into the report as appropriate. DOD concurred with our first two recommendations to the Secretary of Defense to direct the SMPB to designate which rare earths, if any, are critical to national security and to analyze the effects of the unavailability of rare earths critical to national security. In DOD’s written response it identified that the SMPB will convene a meeting with the purpose of accomplishing both these tasks before the end of fiscal year 2016. DOD also concurred with our recommendation to the Secretary of Defense to direct MIBP to define reliable sources and secure supply for rare earths and provide metrics to determine the effectiveness of its actions. In response DOD wrote that MIBP addresses this recommendation by carrying out its responsibilities under 10 U.S.C. § 139c by providing its input to the Secretary of Defense’s Biennial Report on Stockpile Requirements and that the metrics and analyses used in Biennial Report on Stockpile Requirements do evaluate the effectiveness of the department’s actions. However, we are concerned whether the Biennial Report on Stockpile Requirements addresses the department’s responsibilities under 10 U.S.C. § 139c. As stated earlier in the report, in carrying out responsibilities under 50 U.S.C. § 98 et seq., DLA-Strategic Materials officials caveat their analyses as being valid for a single point in time and for decisions related to the National Defense Stockpile and not for other statutory responsibilities such as MIBP’s identification of materials critical to national security in 10 U.S.C. § 139c. Further, MIBP, in its response, has not explained how its input for the Biennial Report on Stockpile Requirements will define reliable sources and secure supply, and what metrics that the report will provide to determine the effectiveness of the department’s mitigation efforts. In addition, DOD, in its technical comments, disagreed with our characterization that DOD has no department-wide approach for critical materials. We agree that DLA-Strategic Materials’ process may be ongoing, methodical, and incorporate information from DOD, government, and industry sources, however, as stated in the report, the assessments are limited to a four-year time frame related to DOD defined national emergencies. Further, during our review, DLA-Strategic Materials officials told us that they caveat their analyses as being valid for a single point in time and for decisions specifically related to the National Defense Stockpile, and thereby not necessarily for determining criticality for national security purposes. We continue to believe our findings demonstrate the need for a comprehensive approach for ensuring a sufficient supply of rare earths for national security needs—one that can establish criticality, assess supply risks, and identify mitigating actions— beyond planning scenarios used for purposes of the National Defense Stockpile. Such an approach would better position DOD to help ensure continued functionality in weapon system components should a disruption occur. We are sending copies of this report to the appropriate congressional committees and the Secretary of Defense. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The Joint Explanatory Statement accompanying the Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act (NDAA) for Fiscal Year 2015 included a provision for GAO to review the Department of Defense’s (DOD) efforts to identify and mitigate risks in its rare earth materials (rare earths) supply chain, including the Defense Logistics Agency-Strategic Materials’ (DLA-Strategic Materials) stockpiling efforts. We assessed the extent that DOD (1) determined which rare earths, if any, are critical to national security; and (2) has identified and mitigated risks associated with rare earths, including the effects of a potential supply disruption. To determine the extent DOD identified which rare earths, if any, were critical to national security, we reviewed DOD reports from 2011 to 2015 to understand the analyses and criteria that DOD conducted and used to determine critical rare earths. We selected 2011 to 2015, because we last reported on rare earths in 2010. We reviewed DOD reports from the Office of the Undersecretary of Defense for Acquisition, Technology, and Logistics including the biennial Strategic and Critical Materials Report on Stockpile Requirements for the National Defense Stockpile and the Annual Industrial Capabilities Report from 2011 through 2015 to determine the analyses DOD had conducted to identify which rare earths may be critical. We reviewed relevant legislation including the Strategic and Critical Materials Stock Piling Act (50 U.S.C. § 98 et seq.), 10 U.S.C. § 139c that outlines the responsibilities of the Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy (MIBP), and 10 U.S.C. § 187 that outlines the duties of the Strategic Materials Protection Board (SMPB). We also reviewed available meeting minutes from the SMPB from 2007 through 2015. Further we reviewed relevant DOD components' actions to determine if they had separately identified any critical rare earths in their supply chains. We interviewed DOD officials from MIBP, SMPB, and DLA-Strategic Materials, which is the program manager of the National Defense Stockpile. In addition, we collected data, documents, and conducted interviews with officials from the DOD components, such as Defense Procurement and Acquisition Policy and the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness, the military departments—Air Force, Army, and Navy—and their respective research laboratories, and members of the Joint Industrial Base Working Group. We collected data supporting DLA-Strategic Materials assessment of materials from 2011 to 2015, documents, and conducted interviews with officials at other offices and agencies that had knowledge of rare earths, the defense industrial base, and the National Defense Stockpile including: Office of the Inspector General; Defense Logistics Agency, Warstopper Program; Congressional Research Service; the Department of the Interior, United States Geological Survey; Department of Commerce, Bureau of Industry and Security; and the Department of Energy. To assess the extent to which DOD has identified risks and taken action to mitigate the risks associated with the availability of rare earths, and analyzed the effects of a potential supply disruption, we reviewed DOD reports from 2011 to 2015 to understand the analyses DOD had conducted to identify risks related to the availability of rare earths and any mitigating actions. We reviewed DOD reports from the Office of the Undersecretary of Defense for Acquisition, Technology, and Logistics including the biennial Strategic and Critical Materials Report on Stockpile Requirements for the National Defense Stockpile and the Annual Industrial Capabilities Report from 2011 through 2015 to determine the analyses DOD had conducted to identify and mitigate risks from rare earths. We reviewed relevant legislation including the Strategic and Critical Materials Stock Piling Act (50 U.S.C. § 98 et seq.), 10 U.S.C. § 139c that outlines the responsibilities of MIBP, and 10 U.S.C. § 187 that outlines the duties of the SMPB. In addition, we reviewed applicable policies, such as DOD Instruction 5000.60, Defense Industrial Base Assessments (July 18, 2014), to determine additional requirements for DOD in managing risks in its rare earths supply chain. We also reviewed available meeting minutes from the SMPB from 2007 through 2015. Further we reviewed relevant DOD components' actions to determine if they had separately identified any risks from rare earths in their supply chains and taken mitigating actions. We interviewed DOD officials from MIBP, SMPB, and DLA-Strategic Materials, the program manager of the National Defense Stockpile. We also collected documents and conducted interviews with the Institute for Defense Analyses, a not-for-profit corporation that operates three federally funded research and development centers, that conducts research and created and operates the econometric model for DLA-Strategic Materials; and with Oak Ridge National Laboratory, a federally funded research and development center that developed the Strategic Materials Analysis and Reporting Topography software tool. In addition, we collected data, documents, and conducted interviews with officials from the DOD components, such as Defense Procurement and Acquisition Policy and the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness, the military departments—Air Force, Army, and Navy—and their respective research laboratories, and members of the Joint Industrial Base Working Group. We collected data, documents, and conducted interviews with officials at other offices and agencies that had knowledge of rare earths, the defense industrial base, and the National Defense Stockpile including: Defense Contract Management Agency–Industrial Analysis Center; Office of the Inspector General; Defense Logistics Agency, Warstopper Program; Congressional Research Service; the Department of the Interior, United States Geological Survey; Department of Commerce, Bureau of Industry and Security; and the Department of Energy. We conducted interviews and collected information for a non- generalizable sample of 20 cases for illustrative purposes on rare earths and materials risk management that included: Three DOD offices (Naval Surface Warfare Center–Crane both Radars and Lasers, and Army Program Executive Office for Ammunition) with purview over at least seven weapon systems selected on rare earths in the weapon systems; Three vendors of rare earth components selected on rare earths in Two rare earths companies selected on rare earths in their products; One trade association selected on its involvement in the rare earth Six individuals selected on their knowledge of rare earths; Three defense contractors selected on their defense products and materials risk management processes; and Two companies, including a petroleum company, selected on their materials risk management processes. We reviewed DOD’s sources of data for its analytical processes. Based on our review, we determined that the information that we collected were sufficiently reliable for our report. We assessed DOD’s policies, procedures, and practices against criteria in applicable statutes, Standards for Internal Control in the Federal Government, and GAO’s framework for risk assessment. We conducted this performance audit from February 2015 to February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, the following staff members made key contributions to this report: Penny Berrier, Assistant Director; James Kim; Matthew Jacobs; Jeffrey Harner; Stephanie Gustafson; Bob Swierczek; Roxanna Sun; Marie Ahearn; Jean McSween; Katrina Pekar- Carpenter; Pedro Almoguera; Godwin Agbara; Chris Murray; and Darnita Akers. | DOD depends on rare earths that contain one or more of 17 similar metals which have unique properties, such as magnetism at high temperatures, to provide functionality in weapon system components. Many steps in the rare earths supply chain, such as mining, are conducted in China, a situation that may pose risks to the continued availability of these materials. The Joint Explanatory Statement accompanying the Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for 2015 included a provision for GAO to review DOD efforts to identify and mitigate risks in its rare earths supply chain. This report assesses the extent that DOD (1) determined which rare earths, if any, are critical to national security; and (2) has identified and mitigated risks associated with rare earths, including the effects of a potential supply disruption. GAO reviewed DOD reports from 2011-2015 and relevant legislation; and collected information from DOD, the military departments, and industry organizations. Three Department of Defense (DOD) offices have identified certain rare earth materials (rare earths) as critical for some defense applications, such as lasers, but DOD has not taken a comprehensive, department-wide approach to identifying which rare earths, if any, are critical to national security. Specifically, DOD offices have not yet agreed on what constitutes “critical” rare earths. Using different statutorily-based definitions, these offices have identified 15 of the 17 rare earths as critical over the last 5 years (see table). DOD's current approach to identifying and mitigating risks associated with rare earths is fragmented. With different interpretations of which rare earths are critical, establishing priorities to analyze supply risk becomes difficult. For example, the Defense Logistics Agency-Strategic Materials office methodically analyzes risks for all materials, but its focus is a four-year timeframe with stockpiling as its mitigation tool. The Manufacturing and Industrial Base Policy office relies on other DOD organizations to identify and elevate risks, relies primarily on the market to resolve supply disruptions, and has not put in place measures to evaluate the success of its mitigating actions. According to DOD, supply disruptions in rare earths have not occurred over the last several years. Regardless, the Strategic Materials Protection Board has not developed a comprehensive approach for ensuring a sufficient supply of rare earths for national security needs—one that can establish criticality, assess supply risks, and identify mitigating actions. Such an approach would better position DOD to help ensure continued functionality in weapon system components should a disruption occur. GAO recommends that DOD designate which rare earths are critical to national security, and develop a comprehensive approach to help ensure a secure supply by identifying risk metrics, among other activities. DOD concurred with all the recommendations in this report and provided timeframes for action. |
Section 313 of EPCRA generally requires facilities at which toxic chemicals are manufactured, processed, or otherwise used to report annually to EPA and the states on, among other things, releases of these substances. The requirement applies to facilities with 10 or more full-time employees in specified industries that exceed the chemical reporting thresholds specified in the act. EPA makes the data in the TRI available and accessible to the public in various formats, including a computerized database on the Internet. The Pollution Prevention Act of 1990 expanded the information collected in the TRI to include data on the industries’ efforts to reduce pollution at its source and on recycling. EPA has further expanded the TRI by, in November 1994, requiring reports on additional chemicals and, in May 1997, requiring reports by additional industrial groups. In October 1996, EPA also announced that it was considering an expansion that would require industries to report the amounts of toxic chemicals entering a facility, transferred into products and waste, and leaving the facility. This concept has been referred to as “materials accounting” or “chemical use data.” EPA expects to propose a rule on this requirement in 1998. The TRI currently contains data on the amounts of over 600 chemicals that have been emitted to the environment (the air, water, or land) and/or transferred off-site as waste. Although this information on a nearby facility’s releases provide some indication of potential risk to human health and the environment, local communities also need information on the chemicals’ toxicity—the degree of danger to animal or plant life—and the extent of their exposure to the releases to more fully understand the risks. Even the most toxic chemicals do not cause harm to an individual unless sufficient exposure occurs. More specifically, comprehensive risk information includes data on (1) what chemicals have been released, how, where, and in what amounts; (2) what toxicities are associated with exposure to each chemical and how toxic that chemical is; and (3) who has been exposed to the chemical and how often, to how much, and for how long. The TRI’s information on the amount of releases represents estimated aggregate amounts for a full reporting year. Additional details on the duration or timing of these releases would be needed to more fully understand the risks. For example, a chemical release may be more severe if the releases are concentrated over a short period, rather than occurring in smaller amounts over an entire reporting year. Almost from the start of the TRI program in 1987, EPA has been asked by communities and other users to expand the inventory to provide them with more information on the risks posed by the chemical releases. More recently, in its April 1995 report on EPA, the National Academy of Public Administration (NAPA) recommended that the agency add risk factors to the TRI. According to NAPA, the TRI is a useful, but incomplete, tool to inform the public and company officials about toxic releases. NAPA said that, by linking risk information to the inventory’s chemical reports, businesses would have an incentive to reduce the most hazardous emissions first. Under section 312 of EPCRA, employers must annually submit a hazardous chemical inventory form to designated state and local emergency planning organizations, as well as local fire departments. The form generally contains information regarding the amount of hazardous chemicals present at a facility, by category, as well as their general location. The designated recipients of the inventory form may request more detailed information, such as specific chemical identities and exact locations, from individual facilities. The public may generally obtain information submitted under section 312, although the exact locations of chemicals must be withheld under certain circumstances. While section 313 of EPCRA requires TRI reporting on the emissions of over 600 chemicals by approximately 22,000 facilities, section 312 of EPCRA requires reporting on thousands of hazardous chemicals that are present at an estimated 868,500 manufacturing and nonmanufacturing facilities. In September 1997, EPA announced, as one of its strategic goals, the expansion of the public’s right to know about the environment. In addition, EPA announced, as a principle to guide senior management’s decision-making and priority setting, that agency actions should maximize public participation and community right-to-know efforts. In making this announcement EPA stated its intent to empower state, local, and tribal governments and the American public by providing citizens with information to help them make informed decisions regarding environmental issues affecting their communities. To do this, EPA said that it would expand the content of its databases, improve the data’s quality and usability, and make the data widely available through the Internet and other sources. Although EPA does not have any plans to expand the TRI to include information on the human health and environmental risks posed by toxic chemical releases, the agency has three projects under way that will provide communities with substantially more data on nearby facilities, the relative toxicity of their chemical releases, and the potential exposure to the releases. Two of these projects—the Relative Risk-Based Environmental Indicators Project and the Cumulative Exposure Project—are efforts by EPA to use toxic release data and other information to improve the agency’s consideration of potential health and environmental risks in setting priorities and developing policies, primarily to identify specific chemicals, sources of chemical emissions, or geographic areas for priority action to reduce risks. The other project—the Sector Facility Indexing Project—provides information on the facilities and their environmental performance, including the amounts of their toxic releases and their history of compliance with environmental laws. EPA recognizes that these projects separately and collectively are not definitive assessments of risks to individual communities. Nonetheless, the projects could expand the information available to the public on the facilities and toxic releases in their areas. EPA’s plans to make the earliest of these projects—the Sector Facility Indexing Project—publicly available generated considerable concern on the part of industry and some states over the accuracy and appropriateness of the data for public use. EPA made substantial efforts to identify and correct the data’s inaccuracies and decided to delay including the information on the toxicity of chemical releases, which was controversial with industry and the states, before the project’s data were made available on the Internet in May 1998. Unless addressed first, similar issues about stakeholders’ involvement, the data’s accuracy, and how the information may be interpreted by the public are likely as EPA makes the results of other projects available to the public. For example, the toxicity information that EPA was considering for the Indexing Project is a component of the Relative Risk-Based Environmental Indicators Project. According to TRI program officials, EPA has no plans to expand the data in the TRI to incorporate toxicity and exposure information. The officials said that, when the Congress was considering the passage of EPCRA, the issue of whether the TRI should contain risk information was debated and it was decided that information on the amounts of toxic releases, which are referred to as hazard information, would be sufficient. The officials further stated that the TRI has worked well in encouraging industry to reduce toxic releases and that it is not practicable to develop and add the information that would be needed to provide the public with accurate assessments of the risks from TRI releases in specific communities. In its annual summary reports of TRI releases, EPA has added discussions on the potential health and environmental effects of the covered chemicals and on the factors involved in assessing risks. General information on the use and the potential effects of chemicals is also available from various other sources within and outside EPA. For various toxic chemicals, the agency is preparing fact sheets that describe how they are generally used, how exposure to them might occur, what happens to them in the environment, and how they affect human health and the environment. The information needed to assess risks is often not available. Data on the amounts, the durations, and the methods of individuals’ exposure to chemicals is generally limited, and little is known about the toxic effects of many of the chemicals used in commerce. According to EPA, for 43 percent of the chemicals produced in high volumes, no data from tests on their basic toxicity currently exist. In April 1998, Vice President Gore directed EPA to proceed with the Chemical Right-to-Know Initiative, which is to accelerate the collection and dissemination of information about widely used chemicals to which people, especially children, may be exposed. Major aspects of the initiative involve getting industries to provide more complete test data on chemicals that are produced in high volumes and to perform additional testing for chemicals that children are most likely to encounter as well as having EPA review persistent chemicals that accumulate in body tissues to determine whether these chemicals should be subject to TRI reporting or to lower thresholds for reporting. The Sector Facility Indexing Project, which was initiated by EPA’s Office of Enforcement and Compliance Assurance in 1995, provides extensive information through the Internet on over 600 facilities in five major industries: (1) auto assembly; (2) iron and steel production; (3) petroleum refining; (4) pulp manufacturing; and (5) primary smelting and refining of aluminum, copper, lead, and zinc. The project consolidates information that has been available to the public through different data systems, publications, and several places on the Internet. For each facility, the project provides information on its location, production or production capacity, surrounding populations, and permits held under major environmental programs; the number of inspections received; its record of compliance with federal regulations; and any chemical releases, spills, or transfers off-site. According to EPA, facilities can use this project to compare their data against those of similar facilities or simply to monitor their own regulatory performance. Government agencies can use the information as a planning tool, for example, to identify facilities for assistance in complying with regulations. Environmental and community groups will have easier access to information that they can use to learn about the environmental performance of facilities near them. EPA plans to evaluate the project and may then expand it to include other industry sectors and more types of data. For example, the agency is examining ways to add data about chemicals that are reported under other statutes, such as the Clean Air Act, and data on the toxicity and relative risks of toxic releases—this information is being considered under the Relative Risk-Based Environmental Indicators Project. EPA had earlier proposed to include the toxicity information, but industry and states expressed concerns about the accuracy of the information and whether it would mislead the public about the risks posed by chemical releases. According to a project official, the agency received comments from many stakeholders that the toxicity data did not go far enough in examining the potential risks and that the risk components should be factored into the project along with the toxicity information. The project official said that toxicity information allows users to examine where potential hazards might be without respect to whether the population might be affected, whereas relative risk-based analysis examines potential interactions between chemical releases, toxicity, weather patterns, chemical dispersion properties, and surrounding populations. The official stated that incorporating relative risk-based information into the project is a long-term goal. EPA’s Office of Pollution Prevention and Toxics initiated the Relative Risk-Based Environmental Indicators Project to use TRI’s release information as a measure of the impact of EPA’s efforts to improve the environment. The project involves developing a computer model that assigns numeric values to individual risk elements, such as the amount of chemical releases, the chemical’s toxicity, and estimates of exposure and exposed populations, so one chemical release can be compared to another. For example, a value is assigned for the toxicity of the chemical release from a weighting index that reflects the toxicity of the chemical relative to others. Similar values are calculated for the other elements and these can then be added together to arrive at a “risk-based” value for a particular release at a facility. In turn, the values for all of a facility’s releases can be summed to be analyzed for trends over time or compared with those of other facilities. According to EPA, the project will enable potential users to analyze the relative risks of releases by medium (i.e., air, water, or land), chemical, geographic area, industry sector, specific facility, or a combination of these and other variables. As a result, users will be able to examine trends or to rank and prioritize the releases for strategic planning, risk-related targeting for enforcement and compliance, and community-based environmental protection purposes. The model is being tested by EPA’s regions, states, and tribal groups and may be made available to a wide audience of users later this year. The model, however, will only provide an indicator value for chronic human health effects through exposure via the air. It will not address acute human health or ecological effects or other pathways of exposure, such as water. The model is expected to eventually (1) provide for potential chronic and acute human health and ecological effects and other exposure pathways and (2) incorporate additional census data that will allow users to analyze the effects of chemical releases on exposed populations by such demographics as race, age, and income. According to EPA, the indicators model must often rely heavily on certain assumptions about individual sites because the information is generally not available. Because the model does not produce a formal risk assessment, it is to be used primarily as a risk-screening tool rather than an attempt to quantify the potential health risks to individuals at the community level. EPA’s Office of Policy, Planning, and Evaluation is developing the Cumulative Exposure Project as a priority-setting and policy development tool. The project is intended to use existing data and methods to estimate a national distribution of cumulative exposures to environmental pollutants, including those reported under the TRI. Because people tend to be exposed through multiple ways to numerous pollutants originating from a variety of sources, EPA proposes to estimate cumulative exposures by combining measured and modeled concentrations of pollutants in the air, food, and drinking water with human activity and consumption patterns. (The TRI’s data are used only for the project’s air pollutants component.) The ultimate goal is to develop analyses of multiple exposures and multiple pollutants, thereby providing EPA with the ability to identify the potentially most significant environmental exposures (among those considered in the project) and the most affected communities or demographic groups. According to EPA, this information will enhance the consideration of cumulative exposures to pollutants in developing environmental policy. The project’s air pollutants component uses the TRI, other data from EPA on emissions, and a model from EPA on the dispersion of pollutants in the atmosphere to estimate the outdoor concentrations of 148 hazardous air pollutants (also referred to as air toxics) that are regulated under the Clean Air Act. In addition to enabling users to compare concentrations across regions, states, and census tracts, estimates can be developed for subpopulations and for the relative contributions to outdoor concentrations from broad sectors of the economy, such as transportation, manufacturing, and waste management. The significance of the concentrations for a specific census tract can be determined by comparing them to a set of benchmark concentrations derived by EPA from available data for carcinogens (cancer-causing agents) and noncarcinogens. Officials from the Cumulative Exposure Project expect to complete the air toxics component and make the results publicly available through the Internet by the end of calendar year 1998. This component of the project will provide estimates of the concentrations in the outdoor air of the 148 hazardous air pollutants for 1990 only. EPA’s Office of Air and Radiation plans to use the project’s model to measure the success of its efforts to control air pollution in reducing exposure to hazardous air pollutants. Data for succeeding years will be needed to determine trends and progress, and the office is planning updating the data. According to project officials, the database is large and adding additional years will be labor-intensive. In addition, EPA’s Science Advisory Board, which was established in the Office of the Administrator to provide advice on scientific matters, urged the agency to expand its efforts to measure concentrations of air toxics as part of its work to assess cumulative outdoor levels of air toxics. The Board concluded that the overall conceptual framework for the project was sound but noted that the project suffers or will be handicapped, at least in the near term, from limitations in available data based on actual measurements of concentrations of air toxics. Although the data reported under section 312 of EPCRA can be valuable to local emergency planning committees in their efforts to develop emergency plans and to reduce emergency personnel’s exposure to harmful chemicals, the use of the data by the wider public has been limited. The data are compiled on a community and state basis and often are not computerized for easy access. Moreover, the lack of an integrated database makes it extremely difficult, if not impossible, to compare facilities within an industry or to perform regional or national studies or comparisons. During the past few years, two EPA regions have initiated projects to integrate state databases. One of these projects also was intended to assess the potential for a national chemical inventory database. This project was terminated due to other priorities and then resumed with its purpose solely to create a regional database. Although EPA considers a national computerized database potentially worthwhile, the agency has no specific plans to assess the feasibility for such a database. Local emergency planners can use the chemical inventory data to develop plans needed to respond to emergencies, such as spills of hazardous materials in factories. Fire departments and other emergency responders have access to the data to help develop response plans before they arrive at the scene of a chemical accident or at a fire at a facility using hazardous chemicals. People who are considering buying or renting housing nearby also can use the data to learn about the chemicals that are present in that community. Individual citizens, as well as various local groups, can also use chemical inventory data to improve their ability to protect human health and the environment by engaging in dialogues with industry representatives about reducing chemical risks, preventing accidents, and limiting chemical exposure. According to local emergency planning officials, environmental consultants and attorneys also have requested this information to perform environmental site assessments in compliance with federal and state laws, and environmental groups have requested it to perform studies of chemical risks. The news media may also be interested in this information to inform the public about chemical releases that may have occurred during accidents. Although chemical inventory data can be useful to local citizens, the information has not been used extensively. A 1994 nationwide study performed for EPA under a cooperative agreement found that most local emergency planning committees received few inquiries from local residents for the data. During the period from June 1993 through June 1994, about 80 percent of the local emergency planning committees that were considered to be functioning received six or fewer inquiries, and more than 40 percent received no inquiries. Eight of the 10 officials of state emergency planning commissions and 19 of the 20 officials of local emergency planning committees that we talked to said that demand for the data was low in their geographic areas. Industry representatives have expressed concern about this low use, considering their costs to report the data. EPA has estimated that providing the data will cost industry $247 million during the period from February 1997 through January 2000, and industry representatives have maintained that the costs would be better justified if EPA took actions to improve access to and use of the data. For example, a major oil refiner, concerned about the cost and limited use of the data, suggested that EPA take responsibility for ensuring that the data are computerized to improve access to them. Furthermore, a major industrial trade association said that EPA should make better use of the data before it seeks additional information from industry, such as through its plans to expand reporting requirements for the TRI. While local emergency planning committees and state emergency response commissions are not required to computerize their data, computerization could make the chemical inventory data more useful to the public. For example, according to state and local officials, potential users can more easily aggregate and manipulate the data. EPA has supported efforts to computerize the chemical inventory data. For example, in 1996, EPA’s Chemical Emergency Preparedness and Prevention Office provided $822,000 in computer software to local emergency planning committees and state emergency response commissions to increase their capabilities to computerize their data. A 1997 nationwide study performed for EPA showed that 39 percent of the local emergency planning committees had computerized their data and an additional 42 percent planned to do so. Because of the lack of computerized data, copies of the individual completed reporting forms have to be located and reviewed. The officials from the local emergency planning committees and from the state emergency response commissions that we interviewed generally believed that access to and use of the chemical inventory data would potentially improve if the data were made available through the Internet. Once available, the data could be used to present different environmental scenarios. For example, in early 1998, an environmental organization used the data to make available on the Internet an accident scenario that showed the number of people vulnerable to potential accidental releases at 10 facilities that were operated by a major chemical manufacturer. The same analysis also provided environmental data showing the percentage of minorities at risk near each of those facilities. Although none of the local or state officials in our sample had placed chemical inventory data on the Internet, they generally said that they would consider doing so to potentially increase public use of the data. Some states not included in our sample are using or planning to use the Internet to provide such data. Recently, Idaho has used $75,000 in grant funds from EPA’s Chemical Emergency Preparedness and Prevention Office to computerize the state’s chemical inventory data and put that information on the Internet. Oregon plans to make its chemical inventory data available on the Internet within the next year. A June 1998 EPA-proposed rule on EPCRA discusses, among other things, the potential for streamlining facilities’ reporting of the data by reducing the requirement for reporting to state emergency response commissions, local emergency planning committees, and fire departments to one central database that would be accessible to all three entities. EPA also suggests that a statewide database on the Internet would provide greatly expanded public access. Once chemical inventory data have been computerized, their usefulness can be enhanced by integrating the data from various local and state databases to obtain a fuller understanding of the chemicals being stored and used throughout the country. We noted that officials in EPA regions I and IV recently initiated projects designed to integrate chemical inventory data from state databases and to make the data available on the Internet. In 1995, Region IV (Atlanta) initiated work to integrate data from eight states in the region and to make the integrated database available to users of the data in each of those states. According to a regional official, it is expected that the automated database will be available by the end of fiscal year 1999. While the Region IV project is designed to provide a regional database, another project started by EPA Region I (Boston) envisioned a national database of chemical inventory data. In January 1995, Region I initiated a feasibility study for the database and, in October 1996, awarded a contract for developing software needed to integrate the databases of the six New England states located within the region. Region I intended that the integrated database for the six states would be a prototype leading to a computer system for EPA, the states, environmental groups, and the public to use in accessing national chemical inventory data. With an integrated system, data formats would be the same throughout the country and this would enable users to make comparisons among individual facilities throughout the nation; would provide for local, state, and regional comparisons of chemical inventories; and would enable users to discern national trends for the quantities of individual chemicals and groups of chemicals. Although EPA’s Chemical Emergency Preparedness and Prevention Office endorsed the Region I project, it did not provide any funding, and in June 1998, the region terminated the software development contract because of higher regional priorities. Subsequently, in July 1998, Region I’s manager for that project told us that the region had resumed the project by using regional staff resources. According to the project manager, five of the six states in the region had information in the database and data from the sixth state will be added. At this time, it is uncertain whether EPA will use the regional database as a prototype for a national database. An official from the Chemical Emergency Preparedness and Prevention Office told us that it is understandable that Region I had earlier terminated the project to focus on other priorities because no legislative mandate exists for EPA to develop either a regional or national database for this information. Nonetheless, the official said it would be regrettable if EPA did not have the opportunity to examine the effectiveness of such databases in making chemical inventory data more accessible and useful to current and potential users. According to the official, his office is concerned that, although EPCRA does not provide for EPA to receive the chemical inventory data and does not make the agency responsible for ensuring that they are accurate, states and industry may hold EPA accountable for the data’s quality if the agency aggregates the data from state databases and makes the information available to the public in either regional or national databases. The official said that the data would have to be aggregated from states using varying formats and data elements for the information. EPA’s recent efforts to publicly communicate environmental information have brought objections from some state and industry stakeholders who provide and/or use the data. Such stakeholders have stated that, while they generally favor EPA’s publicly disseminating data under the agency’s “right-to-know” authorities, they are concerned about the manner in which EPA’s data dissemination projects have been managed. For example, in questioning the accuracy of EPA’s data, state representatives have stated that inaccurate or misleading information provided to the public would result in the unproductive use of federal and state resources in clarifying the data. Industrial stakeholders stated that EPA has not adequately involved them in its information dissemination initiatives and does not have appropriate agencywide policies, procedures, and standards governing decisions about disseminating data, including mechanisms to identify and correct errors, such as outdated information on facilities in violation of the environmental terms of their operating permits. State and industrial stakeholders have discouraged EPA from publicly reporting environmental data without assessing their accuracy and effectively communicating to potential users the limitations that should be placed on using the data (e.g., communicating the limitations that apply to using the data as an indicator of risk to human health). According to industrial stakeholders, EPA has not collaborated with them to identify and resolve concerns prior to disseminating environmental information. For example, industry stakeholders told us that the Sector Facility Indexing Project had been in existence for more than a year before they became aware of it and requested that EPA hold a public meeting to invite their input on the project. Comments from the public meeting, held in May 1997, raised concerns about inaccuracies in the data and a lack of clarifications accompanying the data to help users understand their potential uses and limitations. The stakeholders also maintained that, when they brought errors to EPA’s attention, they found that the agency had not established procedures to identify such errors or to correct them after they are found and reported by others. In response to stakeholders’ concerns, EPA held meetings with state and industry representatives to discuss the accuracy of specific data and procedural problems and then incorporated changes based on these meetings, prior to releasing the data from the Sector Facility Indexing Project on the Internet in May 1998. The changes included correcting errors in the data, explaining limitations on how the data can be used, and establishing a feedback mechanism to report errors in the data. However, industry representatives told us that EPA still lacks agencywide policies, procedures, and standards necessary to govern future data dissemination activities, including a clear set of ground rules for stakeholders’ participation in data administration. They believe that individual EPA offices currently are given too much authority in determining the value of their projects to potential users and in deciding procedural issues, such as the requirements for the data’s accuracy and the extent of stakeholders’ involvement in the projects’ design and development. To discuss the concerns about the data’s accuracy and procedures that had been raised by state, industry, and other stakeholders, we met with EPA officials responsible for each of the three projects. Although EPA had not established agencywide policies, procedures, and standards for guiding the design of the projects and the release of the information to the public, the officials maintained that, in carrying out the projects, they have made efforts to consider the users’ needs, to obtain outside review, and to respond to concerns over accuracy and other issues as they arose. For example, an official of the Sector Facility Indexing Project said that EPA worked for 3 years to identify the facilities to be included in the project and to collect and verify the data. According to the official, each of the facilities received a copy of its compliance and enforcement data for review to help ensure that any problems were identified before the information was distributed, and before the facilities’ review, EPA had asked the states to review the data and make appropriate changes. According to the official, facilities commented on the accuracy of 4 percent of the 38,000 major data elements they received for review and about half of their comments were accepted for changes. The official told us that this high rate of accuracy indicates that industry was objecting to the project because of how the information may be interpreted rather than its inaccuracy. EPA has taken several agencywide actions to address concerns that stakeholders have raised about EPA’s information dissemination processes. For example, in April 1998, EPA’s Deputy Administrator announced that the agency’s Chief Information Officer will lead an effort to develop a strategic plan to implement an agencywide approach to improve the quality of EPA’s data. He said that the plan should address the specific roles and responsibilities of program offices and stakeholders and that one of the principal components of the plan should be a strategy to help ensure that “our error correction process is well-defined, efficient, and transparent to our partners, the public, and the regulated community.” Initially, the plan was targeted for completion by September 30, 1998, but the Chief Information Officer told us that EPA now plans to have a draft completed by that date and to submit it for review by EPA’s Common Sense Initiative Council during its October 1998 meeting. The Chief Information Officer and other EPA officials responsible for the plan’s development told us that the plan is a high priority within the agency and that it is being closely coordinated with the Office of Reinvention and the agency’s newly established Center for Environmental Information and Statistics, which also plays a key role in addressing stakeholders’ concerns. In a February 1997 announcement of plans to establish the agency’s Center for Environmental Information and Statistics, the EPA Administrator noted that the Center was being created to improve the agency’s collection and management of information and to provide for better public access to “quality-assured” environmental statistics and information. The Center’s principal responsibilities include enhancing access to EPA’s databases, integrating information across agency programs, boosting stakeholders’ participation in EPA’s information policy, and helping communities better understand environmental information. An important function of the Center is to review the degree to which EPA’s existing databases can meet the varying demands of a wide range of information users, including community groups, nongovernmental organizations, and state and federal agencies. The Center currently is leading EPA’s efforts to assess the overall quality and applicability of 31 of EPA’s major national databases. These reviews include assessments of the data’s accuracy and limitations. The assessments for accuracy will include quality checks performed by EPA’s program offices as well as statistical reviews performed by the Center. Limitation assessments being performed by the Center will focus on identifying databases’ constraints with respect to their primary purposes as well as their suitability for alternate uses. EPA’s Chief Information Officer told us that his office has provided program offices with general guidance on issues relating to information resources management. For example, chapter 21 of EPA’s Information Resources Management Policy Manual establishes the agency’s policy on the public’s access to EPA’s information. This policy statement establishes the general principles to govern the public’s access to and dissemination of information gathered and maintained by EPA and defines the information resources management responsibilities of the agency’s various offices. One of the principles set forth is that new and enhanced data systems, data collections, and databases are to be designed with consideration of the need to permit and promote the public’s access. However, policies and procedures for program offices to follow in designing, developing, and implementing information dissemination projects have not been issued. In the absence of such policies and procedures, as noted by a January 1998 EPA advisory council study, information management has been administered largely through EPA’s program offices by using a decentralized organization and management structure and has typically been shaped by the program offices’ policies and procedures to meet the needs of their various internal and external users. The study concluded that inconsistencies have arisen among the programs regarding procedures to determine the data’s accuracy, communicate the limitations of their use, and involve stakeholders in information management decisions. The Deputy Director of the Center for Environmental Information and Statistics and the Chief Information Officer told us that the Center’s role and EPA’s strategy for improving data’s quality are evolving and, in the future, could involve developing guidance for program offices to follow in their information dissemination activities. The Deputy Director told us that such guidance could include policies, procedures, and standards for (1) setting priorities and performing cost-benefit analyses to determine which information projects should receive agency resources, (2) developing standards for the accuracy of data and mechanisms to determine and correct errors, (3) obtaining stakeholders’ involvement and analyzing users’ needs and (4) establishing other protocols that program offices should follow in designing information dissemination projects. He told us, however, that the Center has no specific plans to develop such policies, procedures, and standards. EPA is making progress in its efforts to provide communities with more information on releases of toxic chemicals in their areas. The data on hazardous chemicals that facilities must provide under section 312 of EPCRA could be another substantial source of information for communities, if access to the data could be improved through greater computerization. Furthermore, the value of the data could also be increased if they were contained in an integrated regional or national database that allows for comparing nearby facilities with others within an industry or in other geographic locations. Although EPA’s Chemical Emergency Preparedness and Prevention Office believes that such databases could have substantial benefits, the agency has not assessed the potential costs and benefits of developing them. While state and industrial stakeholders have expressed support for EPA’s efforts to make more environmental information publicly available, some stakeholders are concerned about how it is being done. Principally, they are concerned about the data’s accuracy, the appropriateness of some of the information for the public’s use, and how they have been involved in the design and implementation of the projects. Industry representatives have also expressed concern that the data required by EPCRA section 312 are costly to report but used little by the public. EPA has issued a policy statement on public access to the agency’s information that provides general principles for its offices to follow and has recently initiated steps to develop a strategic plan to improve its information management. However, it currently has no plans to develop implementing policies, procedures, and standards to help ensure that its offices’ information dissemination activities are carried out in accordance with the policy statement. To help ensure that EPA provides the public with data that are accurate, complete, and relevant to its needs, we recommend that the EPA Administrator supplement the agency’s existing policies on information resources management by developing agencywide policies and procedures that specify guidance and standards for program offices involved in designing, developing, and implementing information dissemination projects. Such guidance and standards should address obtaining stakeholders’ involvement in the projects’ design and development, testing for and correcting errors in the data, and communicating contextual information on the data’s uses and limitations. Given the potential usefulness of EPCRA section 312 data to the public, we recommend that the EPA Administrator evaluate options to make the data more accessible and implement the most cost-effective option that provides availability on a regional and national basis. In implementing the project, EPA should use the policies and standards for dissemination projects that we have recommended. We provided copies of a draft of this report to EPA for its review and comment. Representatives of EPA’s offices responsible for the activities discussed in the report, including the Chief Information Officer and the Acting Assistant Administrator for Solid Waste and Emergency Response, said that the report, in general, accurately describes the agency’s efforts to make information on risks from releases of toxic chemicals available to local communities, to provide the public with chemical inventory information, and to develop policies for publicly disseminating environmental information. The officials concurred with our recommendation that the EPA Administrator supplement EPA’s existing information resources management policy by developing agencywide policies and procedures that specify guidance and standards for program offices involved in designing, developing, and implementing information dissemination projects. However, the Acting Assistant Administrator for Solid Waste and Emergency Response disagreed with our recommendation that the EPA Administrator evaluate options for making the data collected under EPCRA section 312 more accessible and implement the most cost-effective option to make that information available on a regional and national basis. The Acting Assistant Administrator said that there is no legislative mandate for requiring industry to submit EPCRA 312 data to EPA or for using that data to develop a national database. He also said that it would be difficult to aggregate the data from all the states, many of which have different reporting formats and many of which do not currently computerize the data. In addition, the Acting Assistant Administrator said that the Chemical Emergency Preparedness and Prevention Office does not currently have the resources to develop and maintain such a database. He said that the office’s current focus is on implementing section 112(r) of the Clean Air Act, which includes developing a national database of risk management plans that contain a wealth of information on the chemical risks at various facilities. Furthermore, the Acting Assistant Administrator said that any effort to develop a regional and national EPCRA section 312 database should include the involvement of the public and that it is possible, if not probable, that the public would like to know some information not included in the section 312 database and would not be interested in certain data that are included. Nonetheless, we have retained the recommendation in the report and note that, by calling for EPA to “evaluate options” and “implement the most cost-effective option,” the recommendation gives EPA considerable flexibility to overcome the obstacles that the agency described. We recognize that EPA does not have a specific legislative mandate to create a regional or national database of EPCRA section 312 data. However, one of EPA’s 10 strategic goals is “expansion of Americans’ right to know about their environment,” and the agency has been and is currently involved in various activities across its programs to make more environmental information available to the public. Not all of these activities are specifically directed by legislative mandates. We further recognize that EPCRA does not require industry to submit section 312 reports to EPA. However, as agency officials noted, EPA can request the data from the states. We are aware that the Chemical Emergency Preparedness and Prevention Office has limited resources and is currently working to implement section 112(r) of the Clean Air Act. Given the potential usefulness to the public, we believe that making EPCRA section 312 data more accessible should be considered in the context of agencywide right-to-know priorities and resources rather than those of the Chemical Emergency Preparedness and Prevention Office. Although certain options, such as EPA’s creating and maintaining a unique national database of EPCRA section 312 information, could be costly, the efforts of regions I and IV in integrating the various databases of the states in the regions indicate that low-cost options could be available. Although not all states have computerized databases, EPA, in recent years, has provided grant funds to assist the states in computerizing their data, and about two-thirds of the states have done so. We agree that stakeholders should be involved in any effort to make EPCRA section 312 data more accessible. In addition to the public, these stakeholders would include emergency planning and response personnel, who need to use the data, and industry, which must report the data. Making more or less of this information available to meet the public’s needs would be options to be considered in carrying out our recommendation. In calling for EPA to adopt the most cost-effective option, we recognize that the public’s desire for additional information would need to be weighed against the costs of reporting, compiling, and maintaining it. EPA also provided some technical comments on our draft report. We have revised our report, as appropriate, in response to these comments. We performed our review from November 1997 through August 1998 in accordance with generally accepted government auditing standards. (See app. I for a detailed description of our scope and methodology.) We are providing copies of this report to other appropriate congressional committees; the Director, Office of Management and Budget; and the Administrator, EPA. We will also make copies available to others on request. If you or your staff have any questions, please call me at (202) 512-6111. Major contributors to this report are listed in appendix II. To identify the Environmental Protection Agency’s (EPA) initiatives to provide additional information on the risks posed by toxic chemical releases to local communities, we held discussions with EPA’s Chief Information Officer and officials of EPA’s Office of Pollution Prevention and Toxics, which has responsibility for the Toxic Release Inventory (TRI) program; Office of Policy, Planning, and Evaluation; Center for Environmental Information and Statistics; and Reinvention Office. To determine the status of these initiatives, we interviewed officials responsible for implementing the projects and reviewed documents obtained from them. We also reviewed reports and written comments on the projects by EPA’s Science Advisory Board, state officials, and industry representatives. We discussed the projects and EPA’s overall efforts to provide environmental information to the public with the Coalition for Effective Environmental Information, which was formed by various industry firms and groups to monitor and provide input on EPA’s public information efforts and representatives of various firms and associations, such as those in the mining, petroleum, and chemical industries. In addition, we attended a September 1997 conference of TRI users and held discussions with representatives of the Unison Institute and OMB Watch, who support and are involved in making environmental information available to the public. To determine EPA’s policies and standards for providing information to the public, we interviewed the Chief Information Officer and the Deputy Director of the Center for Environmental Information and Statistics. We discussed how data collected under EPCRA section 312 are made available to the public, the public’s requests for access to the data, and ongoing and planned efforts to improve access with selected State Emergency Response Commissions and Local Emergency Planning Committees. Because state-by-state data on the number of facilities reporting under section 312 are not available, we selected the State Emergency Response Commissions of the 10 states that had the largest amounts of TRI chemical releases. For each of these states, we selected two Local Emergency Planning Committees that representatives of their respective commissions indicated were the most active in improving public access to the data. We also contacted state emergency response commissions in two other states that were undertaking initiatives to improve public access. We discussed EPA’s efforts to improve access to section 312 data with officials of the agency’s Office of Chemical Emergency Preparedness and Prevention, as well as EPA Regions I and IV, which at the time of our review had their own projects under way. We also discussed the public’s access to and the potential use of the data with various people knowledgeable about that data at EPA as well as in academia, industry, and public interest groups. Bruce Skud, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative mandate, GAO determined the status of the Environmental Protection Agency's (EPA) efforts to: (1) provide communities with risk information on toxic chemical releases in their areas; (2) make the Emergency Planning and Community Right-to-Know Act's (EPCRA) chemical inventory information publicly accessible; and (3) develop policies, procedures, and standards for disseminating environmental information to the public. GAO noted that: (1) EPA has three projects under way that would provide additional data to communities on releases of toxic chemicals from nearby manufacturing facilities; (2) although these projects are not being designed to comprehensively define an individual community's risks, collectively, they would substantially expand the information available to communities; (3) in addition to the Toxic Release Inventory's (TRI) quantities of chemical releases, this information is to include data on individual facilities' history of compliance with environmental laws, the relative toxicity of chemical releases, the dispersion of the releases to surrounding areas, and the estimated concentrations of the chemicals in the outdoor air from sources not covered by the TRI; (4) however, each of these initiatives has a different scope and timeframe for completion, and it could be several years before the initiatives' full promise would be realized; (5) although the data from the chemical inventory that is reported under section 312 of the EPCRA are potentially useful for such purposes as a citizen's finding out what chemicals are used at a nearby facility, public use has been limited; (6) much of the information has not been computerized to provide easy access and when it has, it is not available in regional or national databases that permit comparisons among industries or geographical areas; (7) EPA estimates that 868,500 facilities provide local emergency planning committees, fire departments, and the states in which they are located with data on thousands of hazardous chemicals; (8) in recent years, EPA has taken some steps to assist local and state efforts to computerize the data, and two EPA regions have initiated efforts to consolidate computerized state databases; (9) while EPA believes that such efforts might prove to be worthwhile, it has not provided funding for nor assessed the potential benefits and costs of developing a national computerized database for this information; (10) EPA has not developed policies, procedures, and standards to govern key aspects of its projects to disseminate information, such as the Sector Facility Indexing Project; (11) EPA also has not developed standards to assess the data's accuracy and mechanisms to determine and correct errors; and (12) while EPA has several initiatives under way to improve its data management practices, it has no specific plans to provide its program offices with guidance for designing, developing, and implementing their information dissemination projects. |
With respect to its workload and workforce, EPA has struggled for years to identify its human resource needs and to deploy its staff throughout the agency in a manner that would do the most good. In 2010, we reported that rather than establishing a process for budgeting and allocating human resources that fully considered the agency’s workload, EPA requested funding and staffing through incremental adjustments based largely on historical precedent. We noted that the agency had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. Moreover, EPA’s human capital management systems had not kept pace with changing legislative requirements and priorities, changes in environmental conditions in different regions of the country, and the much more active role that states now play in carrying out the day-to-day activities of federal environmental programs. We recommended, among other things, that EPA link its workforce plan to its strategic plan and establish mechanisms to monitor and evaluate its workforce planning efforts. EPA generally agreed with these recommendations. Our recent work has also identified additional challenges related to workload and workforce management. For example, in July 2011, we reported that EPA had made considerable progress in meeting goals to contain and control contamination at high-risk hazardous waste sites. We also reported, however, that EPA had not rigorously analyzed its remaining workload or the resources it needed to meet its cleanup goals. We recommended that EPA assess its remaining cleanup workload, determine whether the program has adequate resources, and take steps to reallocate its resources or revise its goals. An assessment could also help EPA develop budget estimates and requests that align with program needs. EPA agreed with the recommendation. Also in July 2011, we identified challenges EPA faces in managing its laboratories and its related workforce. EPA operates a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities located in 30 cities across the nation. We reported that EPA had not fully addressed findings and recommendations of independent evaluations of its science activities dating back to 1992 and that its laboratory activities were largely uncoordinated. We also found that, consistent with our 2010 report on workforce planning, EPA did not use a comprehensive planning process for managing its laboratories’ workforce. Specifically, we reported that EPA did not have basic information on its laboratory workload and workforce, including demographic data on the number of federal and contract employees working in its laboratories. Without such information, we reported, EPA could not successfully undertake succession planning and management to help the organization adapt to meet emerging and future needs. Because of the challenges identified in this report, we made recommendations to address workforce and workload planning decisions. EPA generally agreed with our findings and recommendations. In September 2010, we reported on EPA’s library network and found that EPA had not completed a plan identifying an overall strategy for its libraries, implementation goals, or a timeline. EPA had developed a draft strategic plan, but it did not describe how funding decisions were made. We reported that setting out details for such decisions, to ensure that they are informed and transparent, was especially important because of the decentralized nature of the library network. We recommended, among other things, that EPA complete its strategic plan for the library network, including implementation goals and timelines. As part of this effort, we recommended that EPA outline details for how funding decisions were to be made to ensure they are informed and transparent. EPA concurred with our recommendations. Finally, our July 2011 report on EPA laboratories also identified challenges related to EPA’s management of its real property. Federal real property management is an area we have identified as part of our high- risk series because of long-standing problems with over reliance on leasing, excess and underused property, and protecting federal facilities. The need to better manage federal real property was underscored in a June 2010 presidential memorandum that directed agencies to accelerate efforts to identify and eliminate excess properties to help achieve a total of $3 billion in cost savings by 2012. In July 2010 EPA reported to the Office of Management and Budget (OMB) that it did not anticipate the disposal of any of its owned laboratories and major assets in the near future because these assets were fully used and considered critical for the mission of the customer and agency as a whole. However, we found that EPA did not have accurate and reliable information called for by OMB on (1) the need for facilities, (2) property use, (3) facility condition, and (4) facility operating efficiency, to inform such a determination. We made several recommendations for EPA to improve its physical infrastructure and real property planning, including improving the completeness and reliability of operating-cost and other data needed to manage its real property and report to external parties. EPA concurred with the recommendations. EPA relies on other federal and state agencies to help implement its programs. Given the federal deficit and the government’s long-term fiscal challenges, it is important that EPA improve coordination with its federal and state partners to reduce administrative burdens, redundant activities, and inefficient uses of federal resources. We have identified key practices for enhancing and sustaining collaboration among federal agencies, such as establishing the roles and responsibilities of collaborating agencies; leveraging their resources; and establishing a process for monitoring, evaluating, and reporting to the public on the results of collaborative efforts. In a September 2011 report on Chesapeake Bay restoration efforts, for example, we found that federal and state agencies were not working toward the same strategic goals. We also surveyed federal officials who said that some form of collaboration was necessary to achieve the goals of a strategy for protecting and restoring the Chesapeake Bay watershed. This collaboration could be between federal agencies, federal and state agencies, or federal agencies and other entities. We recommended, among other things, that EPA work with federal and state stakeholders to develop common goals and clarify plans for assessing progress. EPA generally agreed with the recommendations. In an August 2011 report on pharmaceuticals in drinking water, we found that an interagency work group of eight federal agencies (including EPA) tasked with developing a better understanding of the risks from pharmaceuticals in drinking water and identifying areas for future federal collaboration had disbanded in 2009 without producing a final report. We also reported that EPA coordinated informally with the Food and Drug Administration and the United States Geological Survey to collect data that could support regulatory decisions, but it did not have a formal mechanism for sustaining this collaboration in the future. We recommended that EPA establish a work group or formal mechanism to coordinate research on pharmaceuticals in drinking water. EPA agreed with the recommendation. In a 2009 report on rural water infrastructure, we reported that, from fiscal years 2000 through 2008, EPA and six federal agencies obligated $1.4 billion for drinking water and wastewater projects to assist communities in the U.S.-Mexico border region. We found that the agencies’ efforts to fund these projects were ineffective because the agencies, except the Indian Health Service, had not comprehensively assessed the region’s needs and did not have coordinated policies and processes for selecting and building projects. As a result, we suggested that Congress consider establishing an interagency task force to develop a plan for coordinating funding to address the region’s most pressing needs. Related to our findings on interagency coordination issues, our past and present work seeks to assist Congress and federal agencies in identifying actions needed to reduce duplication, overlap, and fragmentation; achieve cost savings; and enhance revenues. In March 2011, we issued our first annual report to Congress in response to a new statutory requirement that GAO identify federal programs, agencies, offices, and initiatives—either within departments or government-wide—which have duplicative goals or activities. The report identified 34 areas where agencies, offices, or initiatives had similar or overlapping objectives or provided similar services to the same populations or where government missions were fragmented across multiple agencies or programs. The report also identified 47 additional areas—beyond those directly related to duplication, overlap, or fragmentation—offering other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue to the Treasury. With respect to EPA, the report included our findings on rural water infrastructure, as well as the agency’s role in duplicative efforts to support domestic ethanol production. Related to the statutory requirement that GAO identify and report on federal programs, agencies, offices, and initiatives with duplicative goals or activities, we are monitoring developments in the areas already identified and will address any additional significant instances of duplication as well as opportunities for cost savings in future annual reports. We are developing a methodology to ensure that we conduct a systematic review across the federal government and report on the most significant instances of duplication, overlap, or fragmentation through the issuance of annual reports in 2012 and 2013, as well as the report we issued in March 2011. Our 2012 and 2013 reports will include the results of present and planned work related to EPA. In addition to our published work, we periodically assist appropriations and authorizing committees by reviewing agency budget justification documents. To this end, we review agencies’ budget requests, conduct selected analyses, and evaluate the support for and adequacy of agencies’ justifications for these requests. We often review the justification for programs of congressional interest, new programs and initiatives, and existing programs and practices. We typically provide the results of our analysis in data sheets or briefings to appropriating and authorizing committees. Over the years, our periodic review of EPA’s budget justification documents has led to two recurring observations. First, EPA has not consistently provided detailed justification for its activities when requesting new or expanded funding. In some cases, we have noted that such requests have not included (1) clear justification for the amount of funding requested or a detailed description of the type and scope of activities the funding would support, or (2) information on the management controls, such as a schedule for spending the requested funds, EPA would use to ensure the efficient and effective use of requested funding. Second, our reviews have often focused on the agency’s efforts to make use of unliquidated balances, or those funds that have been appropriated and properly obligated but not expended. In particular, this situation results from circumstances where no-year budget authority was obligated to a contract, grant, or interagency agreement that has expired with some level of funding remaining unexpended. Over the years, we have encouraged EPA to recover these unliquidated amounts through a process known as “deobligation.” When EPA deobligates funds from expired contracts, grants, or interagency agreements, it can “recertify” and re-use these funds, subject to certain restrictions, assuming the amounts have not expired and remain available for new obligations. Use of recertified funds can offset some need for new funding. Over the years, we have observed that EPA has made progress in its efforts to recover unliquidated funds from expired contracts, grants, and interagency agreements. For example, in 2010, EPA deobligated and recertified about $163 million, primarily in its Superfund, State and Tribal Assistance Grants, and Leaking Underground Storage Tanks accounts. While we have observed progress in recovering these funds, we have also observed that EPA’s budget justification documents do not describe the amount of deobligated and recertified funding available for new obligations. We have also observed that such information could be useful to Congress because the availability of recertified amounts could partially offset the need for new funding. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact David Trimble 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 Michael Hix (Assistant Director), Ross Campbell, Ellen W. Chu, Tim Guinane, Kristin Hughes, Karen Keegan, Felicia Lopez, Jamie Meuwissen, and Cheryl Peterson. 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 Environmental Protection Agency (EPA) faces a number of management and budgetary challenges, which are particularly important as Congress seeks to decrease the cost of government while improving its performance. EPA operates in a highly complex and controversial regulatory arena, and its policies and programs affect virtually all segments of the economy, society, and government. From fiscal years 2000 through 2010, the agency's budget rose in nominal terms from $7.8 billion to $10.4 billion, but has remained relatively flat over this period in real terms. This testimony highlights some of the major management challenges and budgetary issues facing a range of EPA programs and activities today. This testimony focuses on (1) management of EPA's workload, workforce, and real property; (2) coordination with other agencies to more effectively leverage limited resources; and (3) observations on the agency's budget justifications. This testimony is based on prior GAO products and analysis.. Recent GAO work has identified challenges with EPA's efforts to manage its workload, workforce, and real property and made recommendations to address these challenges. In 2010, GAO reported that EPA had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. GAO recommended, among other things, that EPA link its workforce to its strategic plan and establish mechanisms to monitor and evaluate their workforce planning efforts. A 2011 review of EPA's efforts to control contamination at hazardous waste sites found that the program was making progress toward its goals but that EPA had not performed a rigorous analysis of its remaining workload to help inform budget estimates and requests in line with program needs. Regarding real property management--an area that GAO has identified as part of its high-risk series--GAO reported that EPA operated a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities in 30 cities. GAO found that EPA did not have accurate and reliable information on its laboratories to respond to a presidential memorandum directing agencies to accelerate efforts to identify and eliminate excess properties. The report recommended that EPA address management challenges, real property planning decisions, and workforce planning. GAO has reported on opportunities for EPA to better coordinate with other federal and state agencies to help implement its programs. Given the federal deficit and the government's long-term fiscal challenges, it is important that EPA improve its coordination with these agencies to make efficient use of federal resources. In a September 2011 report on the Chesapeake Bay, GAO found that federal and state agencies were not working toward the same strategic goals and recommended that EPA establish a working group or formal mechanism to develop common goals and clarify plans for assessing progress. In a 2009 report on rural water infrastructure, GAO reported that EPA and six other federal agencies had funded water and wastewater projects in the U.S.-Mexico border region. GAO suggested that Congress consider establishing an interagency task force to develop a plan for coordinating this funding. These findings were included in GAO's March 2011 report to Congress in response to a statutory requirement for GAO to identify federal programs with duplicative goals or activities. Periodic GAO reviews of EPA's budget justifications have led to two recurring observations. First, with respect to proposals for new or expanded funding that GAO has examined, EPA has not consistently provided clear justification for the amount of funding requested or information on the management controls that the agency would use to ensure the efficient and effective use of requested funding. Second, GAO's reviews have found that EPA's budget justification documents do not provide information on funds from appropriations in prior years that were not expended and are available for new obligations. Such information could be useful to Congress because these funds could partially offset the need for new funding. The work cited in this testimony made a number of recommendations intended to address management and related budget challenges, including improving the agency's workforce and workload planning, as well as its coordination with other federal agencies. EPA generally agreed with these recommendations. |
TEA-21 authorized a total of $36 billion in “guaranteed” funding for a variety of transit programs, including financial assistance to states and localities to develop, operate, and maintain transit systems. Under one of these programs, New Starts, FTA identifies and selects fixed-guideway transit projects for funding—including heavy, light, and commuter rail; ferry; and certain bus projects (such as bus rapid transit). FTA generally funds New Starts projects through FFGAs, which establish the terms and conditions for federal participation in a New Starts project and also define a project’s scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. To obtain an FFGA, a project must progress through a local or regional review of alternatives and meet a number of federal requirements, including providing information for the New Starts evaluation and rating process (see fig. 1). As required by TEA-21, New Starts projects must emerge from a regional, multimodal transportation planning process. The first two phases of the New Starts process—systems planning and alternatives analysis—address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different corridor-level options, such as rail lines or bus routes. The alternatives analysis phase results in the selection of a locally preferred alternative—which is intended to be the New Starts project that FTA evaluates for funding, as required by statute. After a locally preferred alternative is selected, project sponsors submit a request to FTA for entry into the preliminary engineering phase. Following completion of preliminary engineering and federal environmental requirements, the project may be approved by FTA to advance into final design, after which the project may be approved by FTA for an FFGA and proceed to construction, as provided for in statute. FTA oversees grantee management of projects from the preliminary engineering phase through construction and evaluates the projects for advancement into each phase of the process, as well as annually for the New Starts report to Congress. We have recognized the New Starts program as a good model that the federal government could use for approving other transportation projects. To help inform administration and congressional decisions about which projects should receive federal funds, FTA assigns ratings based on a variety of financial and project justification criteria, as defined by its program regulations, and then assigns an overall rating. These criteria are identified in TEA-21 and reflect a broad range of benefits and effects of the proposed project, such as cost-effectiveness, as well as the ability of the project sponsor to fund the project and finance the continued operation of its transit system (see fig. 2). Projects are rated at several points during the New Starts process—as part of the evaluation for entry into preliminary engineering and final design, and yearly for inclusion in the New Starts annual report. FTA assigns the proposed project a rating of high, medium-high, medium, low-medium, or low for each criterion, then assigns a summary rating for local financial commitment and project justification. Finally, FTA develops an overall project rating of “highly recommended,” “recommended,” “not recommended,” or “not rated.” (See table 1 for the criteria FTA uses to evaluate projects.) The exceptions to this process are statutorily “exempt” projects, which are those that request less than $25 million in New Starts funding. These projects are not required to submit project justification information—although FTA encourages them to do so—and do not receive ratings from FTA; thus, the number of projects in preliminary engineering or final design may be greater than the number of projects evaluated and rated by FTA. As required by statute, the administration uses the FTA evaluation and rating process, along with the stage of development of New Starts projects, to decide which projects to recommend to Congress for funding. Although many projects receive an overall rating of “recommended” or “highly recommended,” only a few are proposed for FFGAs in a given fiscal year. FTA proposes “recommended” or “highly recommended” projects for FFGAs when it believes that the projects will be able to meet certain conditions during the fiscal year that the proposals are made. These conditions include the following: All non-New Starts funding must be committed and available for the project. The project must be in the final design phase and have progressed to the point where uncertainties about costs, benefits, and impacts (e.g., environmental or financial) are minimized. The project must meet FTA’s tests for readiness and technical capacity, which confirm there are no cost, project scope, or local financial commitment issues remaining. Of the 34 projects in preliminary engineering or final design for the fiscal year 2006 cycle, 27 were evaluated and rated and 7 were statutorily exempt from the rating process. Four projects were recommended for funding with the expectation that they would be ready for new FFGAs before the end of fiscal year 2006, and an additional 6 projects were identified as potentially receiving a recommendation for New Starts funding outside of FFGAs. The administration’s fiscal year 2006 budget proposal requests a total of $1.5 billion for the New Starts program, an amount similar to requests for the past 2 fiscal years. (See app. II for the administration’s 2006 budget proposal and FTA’s project ratings.) FTA’s Annual Report on New Starts: Proposed Allocations of Funds for Fiscal Year 2006 (“annual report”) listed a total of 34 projects in preliminary engineering and final design, and FTA evaluated and rated 27 of them. Seven were statutorily exempt from being rated because they requested less than $25 million in New Starts funding. Of the 27 projects that were rated, 2 were highly recommended, 12 were recommended, 8 were not recommended, and 5 were designated “not rated.” In its annual report, FTA said that projects were designated as “not rated” because they did not submit the required information or because of FTA’s continuing concerns about the reliability of the transportation benefits forecast for these projects. According to FTA, a principal source of these concerns was inconsistent assumptions used in defining the baseline alternative and the proposed New Starts project, making it difficult to isolate the impacts of the proposed project. In some cases, the local travel demand models were inconsistent with FTA guidance and good planning practice. FTA is currently working with the sponsors of these projects to improve the forecasts. As shown in figure 3, the combined number of recommended and highly recommended projects declined sharply from 27 in the fiscal year 2003 evaluation cycle to 14 in the fiscal year 2004 evaluation cycle, while the combined number of not recommended and not rated projects rose from 6 to 18. As we previously reported, this was primarily due to difficulties project sponsors encountered when implementing the new cost- effectiveness measure—the Transportation System User Benefits (TSUB) measure—and adjusting to FTA’s preference policy that favors projects that seek a federal New Starts share of no more than 60 percent of the total project costs. According to FTA, the information that was provided by project sponsors in their reports on TSUB highlighted previously unknown problems with many local models that forecast travel demand. FTA first incorporated both of these changes beginning with the fiscal year 2004 evaluation cycle. Project ratings generally improved (i.e., there were more projects with recommended ratings and fewer with not recommended ratings) in the fiscal year 2005 evaluation cycle as project sponsors improved their financial plans, grew more comfortable with the new cost- effectiveness measure, and made corrections and improvements to their models that forecast travel demand, according to FTA. While the combined number of not rated and not recommended projects was approximately the same in the fiscal year 2005 and 2006 evaluation cycles, the number of projects receiving ratings of at least recommended has decreased slightly again. Unlike in previous years, however, there was no obviously identifiable reason for this change, except for the fact that some projects moved out of the ratings pool and into construction, according to FTA. The fiscal year 2006 rating cycle saw the smallest total number of projects in preliminary engineering and final design during the TEA-21 period. The number of projects evaluated and rated has decreased slightly every year, from 42 projects in the fiscal year 2000 rating cycle to 27 projects in the most recent cycle. During this same time frame, the number of exempt projects grew steadily through the fiscal year 2004 cycle but has been declining ever since. FTA officials suggested that these trends could be the result of a combination of factors. First, many of the projects that TEA-21 authorized have worked their way through the New Starts process and obtained FFGAs, and thus are not subject to the annual evaluation and rating process. At the same time, new projects entered preliminary engineering each year and were rated for the first time. FTA officials speculated that additional projects would be included in reauthorization legislation and would enter the New Starts pipeline over the course of the reauthorization period. Second, FTA has increased the level of scrutiny it applies to projects attempting to advance from alternatives analysis to preliminary engineering to help ensure that only the strongest projects enter the New Starts pipeline. Third, FTA has worked with project sponsors to reduce the number of inactive projects in the New Starts pipeline. Fourth, since the time TEA-21 was enacted, some state and local transportation agencies have been feeling the impact of local budget constraints, making it more difficult to secure local funding for proposed New Starts projects. This could be exacerbated by FTA’s policy of favoring projects that seek a federal New Starts share of no more than 60 percent of the total project costs. As we reported in 2004, several project sponsors told us that FTA’s push for a lower federal New Starts share would likely affect their decision to advance future transit projects. Therefore, we recommended that FTA examine the impact of the preference policy on projects in the evaluation process. FTA is considering how to conduct such an examination. FTA’s evaluation process informed the administration’s recommendation to fund four projects that are expected to be ready for new FFGAs before the end of fiscal year 2006, including Charlotte, South Corridor Light Rail Transit; New York, Long Island Rail Road East Side Access; Phoenix, Central Phoenix/East Valley Light Rail Transit Corridor; and Pittsburgh, North Shore Light Rail Transit Connector. The total capital cost of these four projects is estimated to be $9.9 billion, of which the total federal New Starts share is expected to be $3.6 billion. FTA executed an FFGA for the Phoenix project in January 2005 and for the Charlotte project in May 2005. The other two projects are expected to be ready for FFGAs before the end of fiscal year 2006. According to FTA, the remaining projects that received overall ratings of recommended or highly recommended do not yet pass FTA’s readiness tests for FFGAs. The administration also proposed reserving $158.6 million in New Starts funding for final design and early construction activities for as many as six “other projects,” including San Diego, Mid-Coast Light Rail Transit Extension; Denver, West Corridor Light Rail Transit; New York, Second Avenue Subway; Washington County (Oregon), Wilsonville to Beaverton Commuter Rail; Dallas, Northwest-Southeast Light Rail; and Salt Lake City, Weber County to Salt Lake City Commuter Rail. These six projects were in or nearing final design, received overall highly recommended or recommended ratings, and had cost-effectiveness ratings above “low.” According to FTA officials, no other projects met these criteria. The annual report did not specify amounts for particular projects to ensure that the project is moving forward as anticipated prior to making specific funding recommendations to Congress, according to FTA officials, because projects may encounter unexpected financial or other obstacles that slow their progress. For example, FTA told us that the sponsor for one of the projects is considering a significant expansion of the project scope, which would put it back in preliminary engineering and render it ineligible for the funds FTA proposed reserving for the “other projects” for fiscal year 2006. Reserving funds for these projects without specifying a particular amount for any given project will allow the administration to make “real time” funding recommendations when Congress is making appropriations decisions. FTA does not anticipate that all of the six projects will be recommended for funding in fiscal year 2006. The administration’s fiscal year 2006 budget proposal requests that $1.5 billion be made available for the New Starts program, an amount similar to that requested in the last two fiscal years. Figure 4 illustrates the specific budget allocations the administration has proposed for fiscal year 2006, including the following: $634.6 million would be allocated among the 16 projects with existing grant agreements, $590 million would be allocated to four projects expected to be proposed for new FFGAs, $158.6 million would be allocated to as many as six “other” projects to continue project development, and $122.5 million is reserved to be allocated among projects in preliminary engineering, at the discretion of Congress and as provided in law. Anticipated FFGAs ($590 million) Existing FFGAs ($635 million) extensions to existing systems that are ferry boats or ferry terminal facilities or that are approaches to ferry terminal facilities. FTA had approximately $2.2 billion in commitment authority—that is, the amount of funding authorized for New Starts projects—remaining as of May 2005. TEA-21 and subsequent amendments and legislation provided FTA the authority to make about $13.5 billion in funding commitments for New Starts projects. Surface transportation programs, including the New Starts program, were scheduled to expire in September 2003, but have subsequently been extended through June 2005. According to FTA officials, the commitment authority for fiscal year 2006 and beyond will be addressed in the next surface transportation authorization legislation. However, FTA officials told us that there will not be sufficient commitment authority remaining to execute all four proposed FFGAs until additional commitment authority is provided through congressional authorization. FTA has made 16 changes to the New Starts application, evaluation, rating, and project development oversight processes since the fiscal year 2001 evaluation cycle—the first full evaluation and rating cycle after the enactment of TEA-21. FTA has used a variety of written and electronic methods to communicate information about these changes, although it primarily relies on reporting instructions, roundtables, and workshops. For nine of these changes, FTA did not publish information about the change in the Federal Register or institute a rulemaking process and for six of these nine changes did not provide any avenues for public review and comment prior to implementing the changes. FTA has said that all of the changes it has made are consistent with the evaluation framework outlined in the existing regulations governing the New Starts process. Some project sponsors we interviewed thought certain changes helped to improve the process; however, a considerable number of project sponsors expressed concern that they did not have an opportunity to comment on many of the changes before they were implemented and have experienced considerable challenges while attempting to incorporate some of the changes. For example, some changes have required project sponsors to devote additional agency resources, as well as time. We identified 16 changes that FTA made to the New Starts application, evaluation, rating, and project development oversight processes since the fiscal year 2001 evaluation cycle. These changes range from requiring that projects undergo a risk assessment to instituting new practices for funding recommendations. (See table 2 for complete list of changes.) For example, FTA made two significant changes to the evaluation and rating process for the fiscal year 2004 evaluation cycle. First, FTA implemented the TSUB measure as a variable in the calculation of cost-effectiveness and mobility improvements. The new measure is intended to calculate the change in the amount of travel time and costs that people incur for taking a trip. This is a more comprehensive measure than the old “cost per new rider” measure because it takes into account a broader set of benefits to transit riders, including new and existing transit riders. Second, in response to language contained in appropriations committee reports, FTA instituted a preference policy favoring projects that seek a federal New Starts share of no more than 60 percent of the total project cost. As shown in table 2, FTA implemented changes for a variety of reasons, including simplifying the New Starts process and focusing more on results and performance. Although the impetus for each change varied, FTA officials stated that, in general, all the changes were intended to make the process more rigorous, systematic, and transparent. For example, the requirement for project sponsors to develop a plan for evaluating the impacts of the project and the accuracy of travel forecasts—that is, a Before and After study—will identify lessons learned and hold transit agencies accountable for results. In our previous work we have commented on a number of these changes and made some recommendations for improving the New Starts process. (See app. III for a list of recommendations from previous reports.) Some project sponsors we interviewed thought that certain changes helped to improve the process. For instance, seven project sponsors stated that the “make the case” document helped them focus on the key benefits of the projects and three said it helped them “sell” the project to local decisionmakers or the public. In addition, many project sponsors acknowledged that the TSUB measure is more comprehensive than the old “cost per new rider” measure. However, project sponsors expressed a variety of concerns about the effects the changes had on the steps required to complete the application process and about FTA’s implementation of the changes. For instance, for the “make the case” document, 15 project sponsors stated that FTA did not create clear expectations, 10 noted that FTA prepared no written guidance, and 5 indicated that FTA did not provide specific examples or templates. A few of these project sponsors also stated that they did not feel like they understood what FTA wanted for the “make the case” document, and eight said that they had to produce multiple iterations of the document. Twelve project sponsors also mentioned they were not clear about how FTA was using the document. In addition, when asked what effect the implementation of the TSUB measure had on their project, 13 of 26 project sponsors said it made the application process more expensive, and 20 of 26 said that this measure required them to spend significantly more time to complete the application. Similar comments were made by project sponsors about other changes, including the risk assessment and Before and After study requirements. For example, when asked what effect the risk assessment requirement has had on their project, 4 of the 26 project sponsors said it resulted in a more rigorous or systematic evaluation and rating process, 7 said it made the process more expensive, and 5 said it delayed their project. Three project sponsors noted that each of the individual requirements add to the overall workload and eventually result in the application process becoming a full-time project. However, some project sponsors observed that as they become more familiar with each change and as FTA issues more guidance, such as for using FTA’s software to calculate the TSUB value, the change has become less burdensome. In March 2005, FTA announced a new practice for the New Starts program whereby the administration will generally target funding recommendations to projects able to achieve at least a medium or higher cost-effectiveness rating. FTA announced this change through a “Dear Colleague” letter sent to FTA grantees, including current New Starts project sponsors. The letter was also posted on the home page of FTA’s Web site. The administration’s previous policy had been to recommend projects for funding that received at least a medium-low cost-effectiveness rating, provided that they met all other criteria and project readiness requirements. In the letter to project sponsors, FTA explained that the impetus for change was the concerns that GAO, the Office of Management and Budget, the Department of Transportation’s Inspector General, and Congress raised about recommending projects for funding that had medium-low cost- effectiveness ratings. In the letter, and in subsequent communication to project sponsors, FTA also stated that the practice applies to a recommendation for funding and not to the way the project’s overall rating is determined. For example, a project can still receive an overall recommended project rating with a medium-low cost-effectiveness rating and can advance from preliminary engineering to final design with this rating; however, as a general rule, the project would not be recommended for funding by the administration. FTA has said that this new practice will help it to further prioritize and distinguish among projects for federal funding, which is important given current fiscal challenges and the resulting need to maximize the benefit of every federal dollar invested in transportation. According to FTA officials, the four New Starts projects with anticipated FFGAs for the fiscal year 2006 cycle (see app. II) will not be affected by the new practice. However, FTA has said that the six New Starts projects that are categorized as “other projects” in the fiscal year 2006 annual report— and therefore eligible for a portion of the $158.6 million in New Starts funds FTA reserved—will be subject to the new cost-effectiveness funding recommendation practice and will continue to be subject to this practice when they apply for an FFGA. According to FTA, two of the six “other projects” currently do not meet this standard, and FTA is working with them to improve their cost-effectiveness rating. Six project sponsors we interviewed expressed concern as to whether they would be able to make the necessary modifications to their projects in order to earn a higher cost- effectiveness rating by the next evaluation cycle—which begins in August 2005. Also, seven project sponsors commented that FTA puts too much emphasis on the cost-effectiveness measure, and four indicated that the new cost-effectiveness practice increases this emphasis. FTA officials stated that FTA and the administration consider more than just cost- effectiveness in making funding recommendations, noting that every project that received a not recommended rating in the last 2 years did so because of its poor financial summary rating. In addition to the new cost-effectiveness practice in the March “Dear Colleague” letter, FTA also proposed five technical changes to the way cost- effectiveness is calculated and asked for industry comment on these proposed changes by April 1, 2005. All comments were posted on the Department of Transportation’s online docket and were available for public review. The proposed changes included (1) adjusting the cost- effectiveness rating breakpoints (i.e., low, low-medium, medium, medium- high, high) for inflation, and possibly applying a regional index in an effort to address cost differences across the country; (2) permitting project sponsors to utilize either a 2025 or 2030 planning horizon to be consistent with metropolitan planning organizations’ regional planning processes; (3) permitting standardized costs and the proposed adjustments to useful life estimates, which clarify and lengthen these estimates for a number of assets; (4) permitting modal constants for new guideway modes as a means of enabling travel models to estimate the effect of improvements to transit service quality beyond the time and cost measures already accounted for in the travel models (such as comfort and reliability); and (5) excluding some soft costs (e.g., administrative expenses) from the calculation of annualized capital costs for the purpose of calculating cost-effectiveness. FTA officials told us that they wanted to obtain industry comment on the proposed changes and to use this feedback to help decide which proposed changes to adopt. Officials from FTA also said the deadline for industry comments was driven by the reporting deadlines for the New Starts annual evaluations and the need to promptly release reporting instructions for the News Starts program. On the basis of FTA’s review of the proposed changes and project sponsor responses, FTA announced in an April 29th “Dear Colleague” letter its decision to incorporate three of the five proposed changes for the fiscal year 2007 cycle—adjusting rating breakpoints for inflation, permitting the 2030 design year forecast, and permitting the use of the standardized cost categories’ useful life assumptions to calculate annualized capital costs for the purpose of calculating cost-effectiveness. FTA stated that further research is needed on the other two proposed changes. FTA incorporated the three technical changes into its fiscal year 2007 reporting instructions, which were released to project sponsors on May 3, 2005. FTA communicates information about changes to project sponsors through a variety of different methods, including annual reporting instructions, “Dear Colleague” letters to project sponsors, conversations with project sponsors, roundtables and workshops with FTA officials and project sponsors, and the FTA Web site. FTA officials indicated that they most heavily rely on regulations, reporting instructions, and roundtables and workshops to communicate information about changes to the New Starts application, evaluation, rating, and project development oversight processes. In particular, FTA officials told us that they use the workshops as a two-way communication vehicle, during which they can explain the New Starts application and evaluation process to project sponsors. The workshops are usually held two to four times a year in conjunction with a transit industry conference. For example, during the American Public Transportation Association (APTA) legislative conference in early March 2005, FTA officials held a workshop to discuss the New Starts process as well as the administration’s new cost-effectiveness funding recommendation practice. The agency also holds two New Starts roundtables each year to explain the application and evaluation process and allow project sponsors the opportunity to have an open discussion with FTA officials as well as share information on best practices. FTA used this year’s New Starts roundtables in New York and San Francisco to, among other things, respond to questions about the recently introduced changes. FTA’s annual reporting instructions also describe changes to the application and evaluation process, in addition to providing guidance to project sponsors on preparing their New Starts submittal. For instance, in the reporting instructions for the New Starts report for the fiscal year 2005 evaluation cycle, FTA introduced the change to the weighting system used to calculate the project justification rating. Project sponsors told us that they generally learn about changes through one or more of FTA’s communication methods, although they have varying views on the effectiveness of the different methods. Most project sponsors we interviewed said that they typically view the roundtables and workshops and conversations with FTA officials as generally or very effective methods for learning about changes. However, some concerns were also raised about these communication methods. First, three project sponsors stated that they feel compelled to attend all of FTA’s workshops and roundtables in order to keep up with the changes to the New Starts process because these meetings are the primary methods FTA uses to introduce changes. Others noted that they have received inconsistent information about changes depending on the source. As a result, 18 of 26 project sponsors stated they prefer to obtain information about the changes directly from FTA officials—and 11 of these project sponsors stated that they prefer to receive the information in writing for documentation purposes. Eleven of the 26 project sponsors we interviewed said that FTA’s Web site was generally or very ineffective as a method for communicating information about changes. Project sponsors cited a variety of challenges in using the Web site as a source of information about changes to the New Starts program. For example, some project sponsors stated the Web site was difficult to navigate and had a poor search engine, while others stated they had difficulty finding information about the New Starts program and that in some cases the information they retrieved from the Web site was not up to date. Several project sponsors indicated that maintaining a central repository for all information related to the New Starts program on FTA’s Web site would be helpful. Of the 16 changes that FTA has made to the New Starts application, evaluation, rating, and project development oversight processes since the fiscal year 2001 evaluation cycle, seven underwent rulemaking, including providing formal notice to the transit industry and soliciting public comment, while nine changes did not (see table 2). The Freedom of Information Act requires federal agencies to publish in the Federal Register notice of changes to programs and the Administrative Procedure Act sets out the rulemaking process—which would include notifying the public and soliciting and considering comments, among other things—required to make changes to agencies’ rules and procedures. FTA last undertook rulemaking for the New Starts program in 1999 at the direction of TEA-21 and issued regulations in December 2000. Officials from FTA told us that they have not amended their regulations to incorporate the nine changes made to the New Starts process since that time because, in their opinion, the changes are within the framework of the current regulations. FTA officials also said that some of the changes—such as the risk assessment requirement—involve project development oversight and do not affect the evaluation and rating process; therefore, in their view, the changes do not need to be included in program regulations. However, by making changes outside of the regulatory process, FTA has missed an opportunity to obtain formal public input on the proposed changes, which would increase the transparency of the agency’s decision-making process and ensure that the views of project sponsors and other interested parties are considered. There are a range of options available to FTA for obtaining industry input, from the more formal rulemaking process to less formal ways of soliciting comment. In those instances where FTA determines that a formal rulemaking process is unnecessary, it could provide project sponsors an informal opportunity to review and comment on any substantive changes proposed for the New Starts program, as FTA recently did when it solicited public comment on proposed technical changes to the rating process. Of the nine changes that were not published in the Federal Register and did not undergo rulemaking, six were made without providing other avenues for public review and comment prior to their implementation. For example, FTA did not seek industry input before implementing the risk assessment requirement, project justification criteria weights, and the “make the case” changes to the document. The limited opportunities to review and comment on proposed changes have resulted in implementation problems, according to some project sponsors. In addition, FTA did not provide project sponsors the opportunity to comment on the administration’s recently announced cost-effectiveness funding recommendation practice. Many project sponsors expressed concern about the way FTA has developed and implemented changes to the New Starts process. For example, 14 of the 26 project sponsors with whom we spoke said that they have generally not been given an opportunity to offer input into prospective changes before they are implemented. Many project sponsors noted that the March “Dear Colleague” letter was a step in the right direction in that it was one of the first times since the last rulemaking that FTA had sought their input on proposed changes. However, five project sponsors commented that FTA did not give them sufficient time to review and comment on the proposed changes. In addition, FTA did not publish these changes in the Federal Register and provide at least 30 days’ notice, the minimum time typically required when changes are subject to the Administrative Procedure Act. Congressional committees have also expressed concerns about the transparency by which FTA makes changes to the evaluation and rating process, as shown by the bills to reauthorize surface transportation programs—introduced in early 2005—that offer a more formalized approach for providing notice to and soliciting comment from project sponsors. In particular, the House reauthorization bill would require that FTA provide notice and an opportunity for comment at least 60 days before issuing any “nonregulatory substantive changes.” The Senate proposal states that FTA should issue periodic descriptions of the rating criteria and allow for public comment. (See app. IV for information about other changes proposed by the House and Senate.) Project sponsors offered a number of suggestions for improving FTA’s communication about changes to the New Starts process. For example, nine project sponsors told us that FTA should provide them with an opportunity to offer input into a change before it is made. Thirteen project sponsors mentioned that FTA should provide them with more lead time when the agency requires them to implement a change. For example, a number of project sponsors expressed concern that the recent technical changes to the cost-effectiveness calculation announced in April 2005 were made too close to when New Starts information is due—June for travel forecasts and “make the case” documents and August for the remaining application materials. In addition, eight project sponsors expressed that FTA should develop a standard schedule for when it announces and implements changes to the New Starts process. For example, one project sponsor suggested that FTA announce all changes at its New Starts roundtable a year before the changes are to be implemented. Our previous body of work on organizational transformation indicates that communication with stakeholders should be a top priority for any agency, is most effective when done early and often in any process, and is central to forming the partnerships that are needed to develop and implement an organization’s strategies. An effective communication strategy should facilitate an honest two-way exchange with, and allow for feedback from, stakeholders. This communication is central to forming the effective internal and external partnerships that are vital to a program’s success. For the past 2 years, FTA officials have announced at the roundtables that they are planning to develop and implement a strategy for improving communication among FTA offices and between FTA and project sponsors. FTA officials have told us that the strategy could include providing a single FTA point of contact for project sponsors and improving the distribution of policy, guidance, and procedures, perhaps using tools such as a listserve or webinar, as it did when it sought comments from project sponsors on the recent cost-effectiveness changes. FTA has implemented new communications tools, such as the webinar, but has not developed a comprehensive communications strategy. Many of the measures FTA uses to evaluate and rate New Starts projects predate TEA-21 and have evolved over time. In developing these measures, FTA has historically sought industry input by way of formal rulemaking as well as outreach sessions, workshops, and reports. Although both TEA-21 and FTA’s current New Starts program regulations emphasize the importance of using a multiple-measure approach for evaluating projects, FTA assigns a 50 percent weight to both the cost-effectiveness and the land use criteria when developing the project justification summary rating. The other three project justification criteria are not weighted, although the mobility improvements criterion is used as a “tie-breaker” when the average of the cost-effectiveness and land use ratings falls equally between two ratings (e.g., between “medium” and “medium-high”). According to FTA officials, FTA does not use these criteria because the underlying measures have weaknesses that diminish their use in distinguishing among projects. Project sponsors we interviewed offered suggestions for improving all of the project justification measures. Through the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and TEA-21, Congress has directed FTA to use multiple criteria in evaluating and rating New Starts projects. In particular, TEA-21 identifies a series of financial and project justification criteria that reflect a broad range of benefits and effects of the proposed projects. The financial criteria include the share of non-New Starts funding and the capital and operating finance plans. The project justification criteria identified by TEA-21 include mobility improvements, cost-effectiveness, operating efficiencies, and environmental benefits. TEA-21 also identifies several additional statutory “considerations” to the evaluation process, including land use issues. TEA- 21 directs FTA to “evaluate and rate the project as ‘highly recommended,’ ‘recommended,’ or ‘not recommended,’ based on…the project justification criteria,” among other things. FTA has recognized and acknowledged the congressional intent for New Starts projects to be evaluated using multiple measures. For instance, in a January 2005 report to Congress, FTA states that it is “clear that Congress intends FTA to evaluate projects based on more than cost-effectiveness criteria” and that the “statutory framework is consistent with the concept that a wide range of benefits should be considered in evaluating projects.” “It is important to note that the measure for cost-effectiveness is not intended to be a single, stand-alone indicator of the merits of a proposed new starts project. It is but one part of the multiple measure method that FTA uses to evaluate project justification under the statutory criteria. While cost-effectiveness is an important consideration, so are mobility improvements, environmental benefits, and the other factors described both in TEA-21 and elsewhere in this rule.” FTA has repeated the importance of using a multiple measure approach in many reports and other documents since then, including its annual reports to Congress. The New Starts regulations identify the measures FTA will use to evaluate projects from the project justification criteria outlined in TEA- 21. Figure 5 shows the project justification criteria identified by TEA-21 and the associated measures identified by FTA in the New Starts regulations. (See app. V for more detail on these measures.) The measures FTA uses to evaluate and rate New Starts projects have evolved over time, beginning years before TEA-21, through an iterative process involving Congress and the transit industry. FTA (then known as UMTA) introduced the first system for rating New Starts projects in 1984. At that time, projects were rated on cost-effectiveness (cost per new rider) and local financial commitment. Through ISTEA in 1991, Congress added mobility improvements, environmental benefits, and operating efficiencies to the list of criteria FTA should use to evaluate projects and also added land use policies as an additional factor for consideration. FTA circulated a policy paper in 1994, asking for public comment on its proposed measures and procedures for assessing projects to address the requirements laid out in ISTEA. The agency received 31 responses from transit operators, metropolitan planning organizations, state departments of transportation, and other interested parties. FTA used these responses in finalizing its criteria and measures in a notice published in 1996 in the Federal Register. In the 1994 policy paper, FTA also solicited comments on the appropriateness of using a multiple-measure method for evaluating projects. Respondents generally agreed that this was appropriate, although they were split on how (or whether) the various criteria should be weighted. FTA formally adopted the multiple-measure approach in 1996. TEA-21 required FTA to issue regulations for the evaluation and rating process, and FTA used that rulemaking opportunity to revise several of the project justification measures. Before and during the rulemaking process, FTA conducted outreach sessions around the country, soliciting comments on its processes and procedures for managing the New Starts program. FTA issued a Notice of Proposed Rulemaking in 1999 and received comments from 41 individuals and organizations. In response to the comments, FTA made several changes to the project justification measures. For example, many of these commenters objected to the “cost per new rider” measure for cost-effectiveness, saying that the focus on new riders ignores benefits provided to other riders, which may bias the measure against cities with “mature” transit systems. In response, FTA replaced it with the incremental cost per hour of TSUB measure (to capture benefits to both new and existing riders). The agency also added a mobility improvements measure for employment near stations to complement the existing low-income households near stations measure in response to industry comments that a system that is located near low-income households is of little use to residents unless it can also provide access to employment and other activity centers. Since issuing the regulations, FTA has continued efforts to fine-tune and improve some of the project justification measures. For example, FTA convened a panel of experts from the Urban Land Institute to discuss the land use measures and is seeking industry input on possible changes. FTA’s Strategic Business Plan for Fiscal Year 2005 includes deliverables to (1) develop a land use measure that is more quantifiable, offers a better basis for distinguishing among projects, and provides grantees information with which to improve their projects and (2) develop a methodology for measuring the congestion relief benefits of New Start projects. Both are scheduled to be completed by summer 2005. FTA officials told us that the fiscal year 2005 program plan included research funds for these efforts. In addition, as discussed previously, FTA recently instituted technical modifications to the cost-effectiveness measure. Despite the requirement to use multiple measures, FTA does not use three of the five project justification criteria in calculating a project’s rating. Specifically, FTA currently assigns a weight of 50 percent each to the cost- effectiveness and land use criteria; the other three project justification criteria are not assigned weights (see fig. 6). In its annual report for fiscal year 2006, FTA stated that it assigns individual ratings for the other three project justification criteria and reports them in the annual report, but these ratings “are not considered in the determination of an overall project justification rating.” FTA does, however, use all three financial commitment criteria in developing a project’s rating. FTA officials told us that they do not use the mobility improvements, environmental benefits, and operating efficiencies criteria in determining the project justification summary rating because the measures do not, as currently structured, provide meaningful distinctions among competing New Starts projects. Many project sponsors we interviewed had similar views, noting that individual projects are too small to have much impact on the whole region or the whole transit system. For example, one of the environmental benefits measures requires project sponsors to measure the project’s impact on the annual number of tons of emissions forecast for the region for various pollutants. FTA officials also said that they do not assign weight to the mobility improvements measures in determining the project justification rating because they believe that the employment and low- income household measures do not meaningfully distinguish among projects, and the user benefits are already captured in the cost- effectiveness measure. Therefore, to count the user benefits as part of the mobility improvements would result in a double-counting of the benefits. In contrast, FTA officials told us that the cost-effectiveness and land use measures help to make meaningful distinctions among projects. For example, according to FTA, existing transit supportive plans and policies demonstrate an area’s commitment to transit projects and are a strong indicator of a project’s future success. Because FTA officials believe that these project justification measures do not provide meaningful distinctions among projects and are not factored into a project’s rating, FTA does not stringently evaluate the projects on the associated criteria. For instance, according to FTA’s New Starts reporting instructions, every project must submit data on operating efficiencies and automatically receives a score of medium on that criterion. Similarly, a project that is in a nonattainment area for a pollutant and that demonstrates a projected decrease in that pollutant gets a high environmental benefits rating, while a project in an attainment area that demonstrates a decrease gets a medium environmental benefits rating. The New Starts regulations do not specify the weights that should be assigned to each project justification criterion. FTA sought industry input on whether there should be a weighting system in the last rulemaking process; however, according to FTA officials, the agency did not receive input that was useful to inform its policy. Consequently, the regulations are silent on the weights that should be assigned to each criterion and do not prohibit FTA from treating various criteria as more important than other criteria. FTA instituted its current weighting system with the fiscal year 2004 evaluation cycle after determining that the operating efficiencies, environmental benefits, and mobility improvements measures do not effectively distinguish among projects and that there is overlap among the mobility and cost-effectiveness measures. Because the regulations do not set forth the weights that should be assigned to each criterion, FTA did not amend the regulations when it instituted the current weighting system. Although FTA does not use all of the project justification criteria identified in TEA-21 to calculate project ratings, project sponsors must submit information for all five project justification criteria and FTA publishes this information for each project in the New Starts annual report. FTA officials offered several reasons for requiring project sponsors to continue to provide this information. First, TEA-21 requires FTA to consider these criteria when evaluating projects. Even though not all of the project justification criteria count toward the rating, FTA officials told us that they review and consider all five criteria and, therefore, are operating within the evaluation framework established in TEA-21 and the New Starts regulations. Second, FTA officials said that they believe that mobility improvements, environmental benefits, and operating efficiencies are important and should be a part of the evaluation process, even though FTA does not yet have measures for these criteria that help make distinctions among projects for the purpose of rating and funding decisions. No measures are specified in TEA-21, which only describes the criteria FTA should use to evaluate and rate projects, so FTA has the flexibility to revise the measures as needed. FTA officials stated that they continue to examine and pursue options to improve the measures and that FTA has committed approximately $500,000 of its fiscal year 2005 research funds to continue its work to improve the New Starts measures. The officials also said that they would wait to change these measures until legislation governing the New Starts program is reauthorized. They said that they will have to institute a formal rulemaking process at that time and would use that opportunity to solicit public comment on the New Starts evaluation and rating process. Third, FTA officials told us that information on these three criteria is presented in the annual report and may be useful to Congress and local decisionmakers. A number of project sponsors we spoke to expressed frustration that they must prepare and submit information for all the measures for the five project justification criteria even though some of this information does not contribute to the projects’ ratings. Project sponsors we interviewed, as well as FTA, the Department of Transportation’s Inspector General, and other industry experts have identified various strengths and weaknesses of the project justification measures used to evaluate the New Starts projects. For example, all of these sources acknowledge that FTA’s measure of cost-effectiveness does not capture benefits that accrue to highway users as more people switch to the improved transit system and highway congestion decreases. According to the department’s Inspector General, the omission of highway travel time savings means that the benefits from proposed projects that convey significant travel time savings for motorists are not recognized in the selection process. FTA noted that current local models used to estimate future travel demand for New Starts are incapable of estimating reliable highway travel time savings as a result of the New Starts project. According to the department’s Inspector General, this limitation is due to unreliable local data on highway speeds. FTA is working with the Federal Highway Administration to study ways to remedy this problem. Table 3 shows the strengths, weaknesses, and other concerns most commonly mentioned by the New Starts project sponsors we interviewed. In addition, in a recent report on the benefits and costs of transportation improvements, we identified challenges in measuring the benefits and costs of transit investments—some of which are relevant to the measures used by FTA to evaluate New Starts projects. For example, desirable changes in land use are indirect benefits of a transportation investment, which are difficult to forecast and quantify. We also reported that social benefits such as reductions in environmental costs—including reduced emissions—were difficult to quantify and value. Additionally, we reported that there is great variation in the models local transportation planning agencies use to develop travel forecasts (which underlie many of the New Starts measures), producing significant variation in forecast quality and limiting the ability to assess quality against the general state of practice. Some experts have also found that travel demand models tend to predict unreasonably bad conditions in the absence of a proposed highway or transit investment. In particular, travel forecasting does not contend well with land-use changes or effects on nearby roads or other transportation alternatives that result from transportation improvements or growing congestion. Before conditions get as bad as they are forecasted, people make other changes, such as residence or employment changes, to avoid the excessive travel costs. Our previous work has stated that agencies successful in measuring performance had performance measures that, among other things, demonstrate results and cover multiple priorities. Specifically, successful measures (1) are aligned with agencywide goals and mission and are clearly communicated throughout the organization; (2) are clearly stated, with a name and definition that are consistent with the methodology used to calculate the measures; (3) have a measurable target; (4) are objective; (5) are reliable; (6) cover core program activities; (7) have limited overlap with other measures; (8) provide balance in ensuring that various priorities are covered; and (9) address governmentwide priorities, such as quality and cost of service. For example, measures that are not objective may result in performance assessments that are systematically over- or understated, and a lack of balance could create skewed incentives when measures overemphasize some goals. While these successful attributes were developed specifically for performance measures, they also could be useful in determining how to improve other types of measures, such as those FTA uses to evaluate and rate New Starts projects. The sponsors of the 26 projects we interviewed had many suggestions for improving the project justification measures. These suggestions ranged from adding measures to the mobility improvements, environmental benefits, and land use criteria to changing the way in which operating efficiencies are calculated. The most commonly cited suggestions are listed in table 4, but we did not determine whether the suggestions were appropriate or feasible. FTA officials told us that they received limited suggestions for specific measures or methodologies for mobility improvements, environmental benefits, and operating efficiencies during the rulemaking process. TEA-21 and FTA’s New Starts regulations clearly state that New Starts projects should be evaluated and rated using multiple criteria. Further, the statute and regulations identify the project justification criteria that should be used in the evaluation process, including mobility improvements, environmental benefits, operating efficiencies, cost-effectiveness, and land use, as well as the financial commitment criteria that should be used in the evaluation process. The regulations also identify the measures that will be used to operationalize the criteria. Although FTA uses all three financial criteria, in practice, FTA uses only two of the project justification criteria— cost-effectiveness and land use—to calculate a project’s overall rating. FTA’s reliance on two of the five project justification criteria, coupled with the recent cost-effectiveness practice for funding—which further emphasizes one criterion—is drifting away from the multiple-measure evaluation and rating process outlined in TEA-21 and the current New Starts regulations. According to FTA officials, FTA does not assign weights to environmental benefits, operating efficiencies, and mobility improvements because of weaknesses in the measures and the overlap of some measures that could result in double-counting of benefits. FTA has made notable progress in improving the measures for cost-effectiveness and land use, including seeking advice from experts and the transit industry and conducting pilot tests since the enactment of TEA-21. However, given that FTA has been statutorily directed to also use environmental benefits, operating efficiencies, and mobility improvements in evaluating and rating projects, it is imperative that FTA either pay additional attention to improving these three criteria so that they can be more explicitly used in the evaluation process or explicitly demonstrate the linkages between these criteria and the measures used. FTA has made a number of changes intended to enhance the rigor of the program over the past 6 years, and some of these changes, such as the Before and After study, risk assessment, and cost-effectiveness practice could help FTA hold project sponsors accountable for results and maximize the benefits of each dollar invested. However, FTA could improve the transparency of changes made to the New Starts program by giving project sponsors an opportunity to review and comment on any substantive changes before they are implemented. The Freedom of Information and Administrative Procedure Acts establish formal processes for notifying the public and making changes to federal programs, including soliciting comments about proposed changes. If FTA officials determine that a formal rulemaking process is unnecessary, FTA could still provide project sponsors an opportunity to review and comment on any substantive changes proposed for the New Starts program, potentially avoiding some of the implementation problems that have occurred in the past. In addition, the review and comment period could help FTA improve the proposed changes as well as gain industry buy-in and support for changes—elements that are critical for success. FTA could also strengthen its communication efforts by improving its Web site so that project sponsors view it as a viable source for obtaining information about changes to the New Starts program. The Web site could provide a central forum for comprehensive, up-to-date information on the New Starts program and could also be useful for publicizing FTA’s activities to improve the application, evaluation, rating, and oversight processes. Much of this information is already available on FTA’s Web site. However, the information that remains is scattered in different locations and many project sponsors told us that it was difficult to locate needed information. Making the information easier to find could help reduce confusion about the New Starts process. To ensure that the New Starts regulations reflect FTA’s current evaluation and rating process, and to ensure that FTA’s New Starts evaluation process and policies are objective, transparent, and follow the intent of federal statute, we recommend that the Secretary of Transportation direct the Administrator, FTA, to take the following four actions: ensure that the agency’s regulations governing the New Starts evaluation and rating process reflect FTA’s current weighting practices for the criteria when the regulations are revised; improve the measures for evaluating New Starts projects so that all five project justification criteria can be used in determining a project’s overall rating, or provide a crosswalk in the agency’s New Starts regulations showing clear linkages between the criteria outlined in statute and the criteria and measures used in the rating process; publish future changes to the New Starts program in the Federal Register and subject future changes to the New Starts program to the rulemaking process or, at a minimum, a 30-day informal review and comment period, as appropriate. As part of this process, the agency should develop criteria for determining which changes should be subject to the rulemaking process, as outlined in federal statute, or to an informal review and comment period. At a minimum, these criteria could include changes that impose new reporting requirements or new analysis on project sponsors, changes to the principles used to recommend projects for funding, and changes to the weights assigned to the criteria used to evaluate and rate projects. The criteria should be communicated to Congress and to project sponsors and others in the transit community; and consolidate information and guidance related to the New Starts program in one location on the agency’s Web site and regularly review this information to ensure it is up to date and easy to access. We provided a draft of this report to the Department of Transportation for review and comment. Officials from the Department and FTA indicated that they generally agreed with the report’s findings, conclusions, and recommendations. FTA officials also provided technical clarifications, which we incorporated as appropriate. We are sending copies of this report to congressional committees with responsibilities for transit issues; the Secretary of Transportation; the Administrator, Federal Transit Administration; and the Director, Office of Management and Budget. We also will make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions on matters discussed in this report, please contact me 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 contacts and key contributors to this report are listed in appendix VI. To address our objectives, we reviewed the administration’s fiscal year 2006 budget request, the Federal Transit Administration’s (FTA) annual New Starts report, FTA’s New Starts regulations, FTA’s 2004 and 2005 reporting instructions for the New Starts program, federal statutes pertaining to the new Starts program, and previous GAO reports. We also interviewed FTA officials and representatives from the American Public Transportation Association, New Starts Working Group, and the Association of Metropolitan Planning Organizations. In addition, we attended FTA’s New Starts roundtables with project sponsors in New York and San Francisco in April and May 2005, respectively. We also conducted semistructured interviews with project sponsors from the 26 projects that were evaluated and rated in the fiscal year 2006 evaluation cycle (see table 5). These interviews were designed to gain project sponsors’ perspectives on a number of topics, including the manner in which FTA communicates changes to the New Starts application, evaluation, rating, and project development oversight processes; the impact of the changes that FTA has made to the application, evaluation, rating, and project development oversight processes since the fiscal year 2001 evaluation cycle—the first full evaluation and rating cycle after the enactment of the Transportation Equity Act for the 21st Century (TEA-21); and the measures FTA uses to evaluate projects. To verify the clarity, length of time of administration, and understandability of the interview questions, as well as to determine whether respondents had sufficient knowledge and information to answer the questions, we pretested the questions with three project sponsors. We made changes to the content and format of the final set of interview questions as a result of these pretests. After conducting the interviews with sponsors from all 26 projects, we used a content analysis to systematically determine project sponsors’ views on key interview questions and identify common themes in project sponsors’ responses. Two analysts reached consensus on the coding of the responses, and a third reviewer was consulted in case of disagreements, to ensure that the codes were reliable. To ensure the reliability of information presented in this report, we interviewed FTA officials about FTA’s policies and procedures for compiling the New Starts annual reports, including FTA’s data collection and verification practices for New Starts information. Specifically, we asked them whether their policies and procedures had changed significantly since we reviewed them for our 2004 report on New Starts. FTA officials told us that there were no significant changes in their data collection and verification policies and procedures for New Starts information. Therefore, we concluded that the FTA information presented is sufficiently reliable for the purposes of this report. We conducted our work from November 2004 through May 2005 in accordance with generally accepted government auditing standards, including standards for data reliability. Projects with existing full funding grant agreements (FFGAs) Kansas City—Southtown Bus Rapid Transit (BRT) The Federal Transit Administration (FTA) should prioritize the projects it rates as highly recommended or recommended and ready to receive New Starts funds. FTA officials told us that their recently implemented cost-effectiveness practice was partly in response to this recommendation. FTA will generally not recommend funding for a project that does not achieve at least a “medium” cost-effectiveness rating. FTA should make commitment authority allocated to projects for which the federal funding commitments have been withdrawn available for all projects competing for New Starts funding (i.e., “release” the funding). In fiscal year 2003, FTA released $157 million in commitment authority reserved for a Los Angeles Mid-City subway project that had been suspended for more than 3 years. FTA should amend its regulations governing the level of federal funding share for projects to reflect its policy of favoring projects that request less than 60 percent New Starts funding. FTA disagreed with this recommendation, arguing that its preference policy is not a legally binding requirement and therefore should not be reflected in the New Starts regulations. However, the agency did change the way it characterized the policy in its fiscal year 2006 New Starts annual report. This document states that FTA “generally” will not recommend funding for projects that request more than a 60 percent New Starts share of funding. FTA should issue additional guidance to transit agencies describing FTA’s expectations regarding the local travel forecasting models and the specific type of data FTA requires to calculate the Transportation System User Benefits measure. FTA completed several actions and has other ongoing efforts to address the recommendation. (1) FTA provided additional guidance in its reporting instructions, clarifying the practices that must be followed in preparing the Transportation System User Benefits measure. (2) FTA provided additional guidance in July 2003, on how it would evaluate the measures in the fiscal year 2005 rating process. (3) FTA held several special workshops for transit agencies on Transportation System User Benefits, travel forecasting, and development of transit alternatives. (4) FTA initiated a proactive outreach to project sponsors to help them prepare and evaluate the measure, identifying weaknesses in their proposed measure and suggesting improvements. (5) FTA has a number of ongoing planned improvements to its guidance, including developing a users guide to the Summit software, developing case studies and exemplary practices, and updating its guidance on travel forecasting for New Starts projects. FTA should clearly explain the basis on which it decides which projects will be recommended for funding outside of full funding grant agreements, and what projects must do to qualify for such a recommendation. These explanations should be included in FTA’s annual New Starts report and other published New Starts guidance. In its fiscal year 2006 New Starts report, FTA described its criteria for recommending projects for funding outside of full funding grant agreements. These criteria include projects that were in or nearing final design, received overall highly recommended or recommended ratings, and had cost-effectiveness ratings above a “low.” FTA should examine the impact of its preference policy on projects currently in the evaluation process, as well as projects in the early planning stages, and examine whether its policy results in maximizing New Starts funds and local participation. FTA has not implemented this recommendation. Establishes a “Small Starts” program for projects develop a streamlined evaluation process for projects requesting less than $75 million in New Starts funds. Eliminates the “exempt” classification for projects requesting between $25 million and $75 million in New Starts funding, with a total project cost of less than $200 million. These projects would be evaluated through a streamlined rating process. requesting less than $25 million in New Starts funding and allows FTA to analyze and rate all projects through a streamlined process. Maintains the “exempt” classification for projects requesting less than $25 million in New Starts funding. Expands New Starts funding eligibility to include rapid transit operating in nonexclusive lanes) requesting less than $75 million to be eligible for New Starts funding. nonfixed-guideway projects with a majority of fixed- guideway components seeking between $25 million and $75 million as part of its “Small Starts” initiative. Maintains the current rating system. recommended,” “recommended,” and “not recommended” ratings) to five levels of ratings: “high,” “medium-high,” “medium,” “medium-low,” and “low.” Maintains the maximum New Starts share at 80 percent for individual projects (in contrast to the administration’s reauthorization proposal, which would lower the maximum New Starts share to 50 percent). Maintains the maximum New Starts share at 80 percent for individual projects. Specifically prohibits FTA from requiring a nonfederal share that is more than 20 percent of the project’s cost. Requires FTA to provide notice and an opportunity for review and evaluation process and criteria and allow for public comment. comment at least 60 days before issuing any nonregulatory substantive changes. Transportation System User Benefits per project passenger mile (normalized travel time savings) In addition to the individuals named above, other key contributors to this report were Bert Japikse, Jessica Lucas-Judy, Sara Ann Moessbauer, and Gary Stofko. Highway and Transit Investments: Options for Improving Information on Projects’ Benefits and Costs and Increasing Accountability for Results. GAO-05-172. Washington, D.C.: January 24, 2005. Mass Transit: FTA Needs to Better Define and Assess Impact of Certain Policies on New Starts Program. GAO-04-748. Washington, D.C.: June 25, 2004. Mass Transit: FTA Needs to Provide Clear Information and Additional Guidance on the New Starts Ratings Process. GAO-03-701. Washington, D.C.: June 23, 2003. Mass Transit: Status of New Starts Program and Potential for Bus Rapid Transit Projects. GAO-02-840T. Washington, D.C.: June 20, 2002. Mass Transit: FTA’s New Starts Commitments for Fiscal Year 2003. GAO- 02-603. Washington, D.C.: April 30, 2002. Mass Transit: FTA Could Relieve New Starts Program Funding Constraints. GAO-01-987. Washington, D.C.: August 15, 2001. Mass Transit: Implementation of FTA’s New Starts Evaluation Process and FY 2001 Funding Proposals. GAO/RCED-00-149. Washington, D.C.: April 28, 2000. Mass Transit: Challenges in Evaluating, Overseeing, and Funding Major Transit Projects. GAO/T-RCED-00-104. Washington, D.C.: March 8, 2000. Mass Transit: “Mobility Improvements” Is One of Many Factors Used to Evaluate Mass Transit Projects. GAO/RCED-00-6R. Washington, D.C.: October 15, 1999. Mass Transit: Status of New Starts Transit Projects With Full Funding Grant Agreements. GAO/RCED-99-240. Washington, D.C.: August 19, 1999. Mass Transit: FTA’s Progress in Developing and Implementing a New Starts Evaluation Process. GAO/RCED-99-113. Washington, D.C.: April 26, 1999. | The Transportation Equity Act for the 21st Century (TEA-21) and subsequent legislation authorized about $13.5 billion in guaranteed funding for the Federal Transit Administration's (FTA) New Starts program, which is used to select fixed guideway transit projects, such as rail and trolley projects, and to award full funding grant agreements (FFGA). GAO assessed the New Starts process for the fiscal year 2006 cycle. GAO identified (1) the number of projects that were evaluated, rated, and proposed for new FFGAs and the proposed funding commitments in the administration's budget request; (2) changes FTA has made to the New Starts application, evaluation, rating, and oversight processes since the fiscal year 2001 evaluation cycle and how these changes have been communicated to project sponsors; and (3) how FTA developed the measures used to evaluate and rate projects from the criteria outlined in TEA-21 and how those measures are used in the rating process. For the fiscal year 2006 evaluation cycle, FTA evaluated and rated 27 projects and identified 4 projects that were expected to be ready for new FFGAs before the end of fiscal year 2006 and an additional 6 projects that may be eligible for other funding outside of FFGAs. The administration's fiscal year 2006 budget proposal requests $1.5 billion for the New Starts program, a request similar to that of the past 2 years. FTA has made 16 changes to the New Starts application, evaluation, rating, and oversight processes since the fiscal year 2001 cycle that were primarily intended to make the process more rigorous and systematic. Seven of the 16 changes underwent rulemaking, including providing formal notice to the transit industry and soliciting comment, while 9 changes did not. FTA officials said that these nine changes are consistent with the existing regulations governing the New Starts process or relate to the project development oversight process rather than the evaluation and rating process and, therefore, in their opinion, do not need to undergo formal rulemaking. By not consistently soliciting public opinion, however, FTA is missing an opportunity to obtain stakeholder buy-in, increase the transparency of the New Starts process, and lessen potential difficulties project sponsors face in implementing the changes. Many of the measures FTA uses to evaluate and rate New Starts projects have evolved over time, with industry input, through formal rulemaking and informal efforts, such as workshops and reports. Although both TEA-21 and FTA's New Starts program regulations emphasize the importance of using a multiple-measure approach for evaluating projects, FTA assigns weight to all three financial criteria but only two of the five project justification criteria in developing a project's rating. FTA officials said that they do not use the other three project justification criteria--which are specified in TEA-21--because the measures fail to distinguish among projects. Project sponsors we interviewed offered suggestions for improving all of the project justification measures, and FTA has efforts underway to improve some of the measures. |
DOD and the military services classify TWVs by weight or payload capacity into three categories—light, medium, and heavy—although the definitions of each class vary among the services. Each class generally includes multiple variants or models built on a common chassis. For example, the Army’s FMTV consists of 2.5- and 5-ton capacity trucks, each with the same chassis and includes cargo, tractor, van, wrecker, and dump truck variants. Table 1 lists the TWVs acquired by the military services over five fiscal years, fiscal years 2007 through 2011. Requirements for TWVs have evolved over the last decade, in part, due to the operational threats encountered in Afghanistan and Iraq. TWVs were traditionally viewed as utility vehicles that required little armor because the vehicles operated behind the front lines. However, the tactics used against forces in these countries dictated that vehicles needed more protection. For example, the HMMWV was conceived and designed to support operations in relatively benign environments behind the front line, but it proved to be highly vulnerable to attacks from improvised explosive devices, rocket-propelled grenades, and small arms fire when it was required to operate in urban environments. As a result, DOD identified an urgent operational need for armored tactical vehicles to increase crew protection and mobility of soldiers. Although the initial solution—the Up- Armored HMMWV—provided greater protection, the enemy responded by increasing the size, explosive force, and type of improvised explosive devices, which were capable of penetrating even the most heavily armored vehicles. Consequently, the Mine Resistant Ambush Protected (MRAP) vehicle was approved in 2007 as a rapid acquisition capability. DOD recognized that no single manufacturer could provide all of the vehicles needed to meet requirements quickly enough, so it awarded contracts to multiple manufacturers. The AECA authorizes the President to control the export of arms, such as TWVs. The authority to promulgate regulations on these items has been delegated to the Secretary of State. State administers arms transfer controls through the International Traffic in Arms Regulations and designates, with the concurrence of DOD, the articles and services deemed to be arms. These arms constitute the United States Munitions List (USML). DOD’s TWVs are generally designated as Category VII (Tanks and Military Vehicles) items on the USML. Arms, including TWVs, can be sold and exported to foreign governments through the FMS program or DCS. Under the FMS program, the U.S. government procures items on behalf of eligible foreign governments using the same acquisition process used for its own military needs. While State has overall regulatory responsibility for the FMS program and approves such sales of arms to eligible foreign governments, DOD’s Defense Security Cooperation Agency administers the program. Alternatively, the DCS process allows foreign governments to directly negotiate with and purchase arms from U.S. manufacturers. For TWVs controlled on the USML, manufacturers must generally apply for an export license to State’s Directorate of Defense Trade Controls, which authorizes the export of arms to foreign governments. State officials assess all arms export requests through the FMS program and DCS license applications against 12 criteria specified in the Conventional Arms Transfer Policy, as summarized in table 2. DOD officials assess the technical risks of the sensitive or classified electronic equipment associated with the sale of TWVs to foreign governments, including the type of armor, sensors or weapons attached to the vehicle, and any signature information. Aside from these technologies, State and DOD officials said the departments generally consider the technology associated with TWVs comparable to commercially available trucks and do not have any additional policies pertaining to the sale of TWVs to foreign governments. In accordance with the AECA, recipient countries of arms, including TWVs, must generally agree to a set of U.S. arms transfer conditions, regardless if sold through the FMS program or DCS. The conditions include agreeing to use the items only for intended purposes without modification, not to transfer possession to anyone not an agent of the recipient country without prior written consent of the U.S. government, and to maintain the security of any defense article with substantially the same degree of protection afforded to it by the U.S. government. To ensure compliance with these conditions, recipient countries must permit observation and review by U.S. government representatives on the use and possession of U.S. TWVs and other arms. While the majority of TWVs that DOD purchases are regulated on the USML, a small number that lack armor, weapons, or equipment that would allow armor or weapons to be mounted are considered to be dual- use items—having both commercial and military applications. These items are controlled under the Export Administration Act of 1979, which established Commerce’s authority to control these items through its Export Administration Regulations and Commerce Control List. On the Commerce Control List, DOD’s TWVs are generally designated as Category 9 (Propulsion Systems, Space Vehicles, and Related Equipment) items. For DCS of such items, U.S. manufacturers must comply with the Export Administration Regulations to determine if an export license from the Commerce’s Bureau of Industry and Security is required. The U.S. TWV industrial base includes seven vehicle manufacturers, over 90 major subsystem suppliers, and potentially thousands of parts and component suppliers. Four of the seven manufacturers provided approximately 92 percent of all TWVs purchased by DOD in fiscal years 2007 through 2011. Figure 1 identifies the manufacturers, the vehicles they produced, and the percent of all vehicles purchased by DOD from each manufacturer in fiscal years 2007 through 2011. Although these manufacturers produced 11 different families of TWVs, which included over 50 vehicle variants, they generally relied on common suppliers for major subsystem components. For example, the manufacturers relied on six or fewer suppliers to provide components, such as engines or tires. In contrast, the manufacturers relied on more than 25 armor suppliers, in part, because there was a shortage of vehicle armor during initial MRAP production. DOD reported that the requirements for armor, in response to the conflicts in Iraq and Afghanistan, provided an opportunity for several suppliers to begin producing armor, which eventually resolved the armor shortage. In addition to these suppliers, manufacturers we met with reported there were potentially thousands of other companies that produced parts for these vehicles. See figure 2 for more information on the number of suppliers that produced major subsystems on DOD’s TWVs. DOD purchased over 158,000 TWVs in fiscal years 2007 through 2011 but plans to buy significantly less from now through fiscal year 2017. DOD demands for TWVs increased dramatically in response to the operational demands and threats experienced by U.S. forces during Operation Enduring Freedom and Operation Iraqi Freedom. For example, between fiscal years 1998 through 2001, before these two wars began, Army budget documents indicate plans to purchase approximately 5,000 HMMWVs. After the start of Operation Enduring Freedom, Army budget documents in 2003 reflected an increased requirement for HMMWVs and, at the time, it planned to purchase approximately 23,000 though fiscal year 2009. However, after Operation Iraqi Freedom began, the need for HMMWVs increased further and the Army reported that it ultimately purchased approximately 64,000 between 2003 through 2009. As U.S. forces began to draw down from the conflicts in Iraq and Afghanistan, DOD’s operational requirements for TWVs declined. For example, while DOD bought over 100,000 TWVs in fiscal years 2007 and 2008, DOD plans to purchase less than 1,000 TWVs in fiscal years 2015 and 2016. In all, DOD plans to purchase approximately 8,000 TWVs in fiscal years 2012 through 2017, as shown in figure 3. Future defense budgets will likely constrain new vehicle purchases and the size of a fleet the military services will be able to sustain. Army officials told us that it would cost approximately $2.5 billion per year to sustain its current fleet of approximately 260,000 TWVs and meet any new TWV requirements. Officials stated, however, that the Army can no longer afford and does not need such a sized fleet, in part, due to budget cuts and potential force structure changes. The Army is re-evaluating how many TWVs it needs and can afford, which will be outlined in a revised TWV strategy. In developing this revised strategy, Army officials recognize that the Army has a relatively young fleet of TWVs, averaging 9 years of age, many of which will be part of its fleet through 2040. While this revised strategy has not been completed, the Army has already made changes to reduce its TWV costs. For example, in February 2012 the Army reduced the number of FMTVs it planned to purchase by approximately 7,400 vehicles. At that time, the Army also terminated a HMMWV modernization effort, known as the Modernized Expanded Capability Vehicle, which was intended to improve vehicle performance and crew protection on over 5,700 HMMWVs. Officials stated that this effort was terminated, in part, because of DOD-wide funding constraints. Army officials estimate that these actions will result in a total savings of approximately $2.7 billion in fiscal years 2013 through 2017. Furthermore, Army officials stated that the Army plans to reduce the size of its TWV fleet to match force structure requirements. They also stated that, as of July 2012, the Army plans to reduce its total fleet by over 42,000 vehicles. Officials added that more vehicles could be divested depending on any future force structure changes and budget constraints. Despite budget constraints, the industrial base will have some opportunities over the next several years to produce a new TWV for DOD. The Joint Light Tactical Vehicle (JLTV) is a new DOD program, designed to fill the gap between the HMMWV and MRAP by providing near-MRAP level protection while maintaining all-terrain mobility. As we previously reported, the Army and Marine Corps are pursuing a revised developmental approach for JLTV and awarded technology development contracts to three industry teams. The program completed the technology development phase in January 2012. Last month, the Army awarded three contracts for the JLTV’s engineering and manufacturing development phase. While production contracts will not be awarded for some time, DOD reports that it plans to purchase approximately 55,000 JLTVs over a 25-year period with full rate production beginning in fiscal year 2018. With production of other TWVs for DOD largely coming to an end in fiscal year 2014, DOD considers the JLTV program to be critical in maintaining an industrial base to supply TWVs to the military. In addition to new production, the Army and Marine Corps also plan to invest in sustainment efforts that could be completed by the U.S. TWV industrial base. These efforts include restoring or enhancing the combat capability of vehicles that were destroyed or damaged due to combat operations. For example, Marine Corps officials reported that it plans to recapitalize approximately 8,000 HMMWVs beginning in fiscal year 2013. In addition, the Army is in the process of resetting the portion of its FMTV fleet that was deployed through at least fiscal year 2017 as well as recapitalizing some of its heavy TWVs. Despite the significant decrease in DOD TWV purchases, the four manufacturers we met with generally reported that these sales remain an important part of their revenue stream. However, there is a wide range in the degree to which the manufacturers were reliant on DOD in a given year. For example, as shown in table 3, one manufacturer reported that for 2007 its revenue from sales to DOD accounted for 4 percent of its total revenue while another manufacturer reported such revenue was as high as 88 percent, with the other two manufacturers falling within that range. Among the four manufacturers, the extent of reliance on revenue from DOD sales varied, in part, because of vehicles sold in the commercial truck and automotive sectors. Aside from producing TWVs, manufacturers produced or assembled commercial vehicles, such as wreckers, fire trucks, school buses, and handicap-accessible taxis, as well as vehicle components, such as engines, transmissions, and suspensions. According to the four manufacturers, their suppliers of TWV major subsystem components generally produced items in the commercial automotive and truck industries. For example, according to manufacturers, suppliers generally produced parts, such as engines, transmissions, axles, and tires for their commercial vehicles in addition to supplying parts for the TWVs they produce. However, vehicle armor, a major TWV component, is primarily a defense-unique item and those suppliers were not typically used in the manufacturers’ commercial vehicles. DOD currently has several studies under way to better understand the U.S. TWV industrial base, its capabilities, and how declining DOD sales may affect it. In 2011, DOD’s Office of Manufacturing and Industrial Base Policy began a multifaceted review of the U.S. TWV industrial base that includes surveying suppliers, conducting site visits, and paneling experts. The Army’s TACOM Life Cycle Management Command also has ongoing studies, including a review to assess the health of the industrial base and others intended to identify its supplier base and any risks associated with sustaining DOD’s TWV fleet. Some of the goals of these different studies are to better understand how different vehicle supply chains affect others, identify single point failures in the supply chain, and provide DOD leadership with improved information so they may better tailor future acquisition policies. U.S. manufacturers sold relatively few TWVs for use by foreign governments in fiscal years 2007 through 2011, when compared to the 158,000 vehicles sold to DOD over that same period. However, most of the manufacturers we met with stated that while sales of TWVs to foreign governments have not equaled those sold to DOD, such sales are becoming an increasingly important source of revenue as DOD purchases fewer vehicles. According to data provided by DOD and the four manufacturers, foreign governments purchased approximately 28,000 TWVs, either through the FMS program or through DCS, in fiscal years 2007 through 2011. In addition to these sales to foreign governments, manufacturers reported they exported approximately 5,000 other TWVs that were different vehicles than those DOD purchased during that time period. Nearly all TWVs sold to foreign governments were sold through the FMS program rather than through DCS. DOD reports that about 27,000 TWVs were sold through the FMS program, while the four manufacturers we met with reported that about 700 vehicles were sold through DCS in fiscal years 2007 through 2011.See figure 4 for a comparison of TWVs sold to DOD and to foreign governments through the FMS program and DCS in fiscal years 2007 through 2011. Approximately 95 percent of TWVs purchased through the FMS program from fiscal year 2007 through 2011 were paid for using U.S. government funding through different security and military assistance programs. The U.S. Congress authorizes and appropriates funds for assistance programs that support activities, such as security, economic, and governance assistance in foreign countries. Examples of such assistance programs include the Afghanistan Security Forces Fund and Iraq Security Assistance Fund, which were sources of funding for TWVs purchased for Afghanistan and Iraq through the FMS program. While Afghanistan and Iraq were the largest recipients of U.S. manufactured TWVs through such assistance programs, DOD officials informed us that as the war efforts conclude there, U.S. funding for TWVs for these two countries’ security forces has declined and is not planned to continue. In addition, a smaller number of TWVs were sold through the FMS program to countries using their own funds. Figure 5 identifies the countries that purchased the most U.S. manufactured TWVs with U.S. or their own funds through the FMS program. U.S. manufacturers of TWVs and foreign government officials we met with identified a number of interrelated factors that they perceive as affecting whether a foreign government decides to purchase U.S. manufactured TWVs. These included potential future competition from transfers of excess (used) U.S. military TWVs, competition from foreign manufacturers, and differing foreign requirements for TWVs. In addition, these U.S. manufacturers and foreign government officials expressed mixed views on the effect the U.S. arms transfer control regimes may have on foreign governments’ decisions to buy U.S. vehicles. These officials said that processing delays and end-use restrictions can influence foreign governments’ decisions to buy U.S. TWVs. Despite these issues, foreign government officials said the U.S. arms transfer control regimes would not adversely affect their decisions to purchase a U.S.-manufactured TWV that best meets their governments’ requirements. The U.S. manufacturers we met with regard the Army’s intent to reduce its TWV fleet size as a risk to their future sales of TWVs to foreign governments. Army officials said it is still assessing its TWV requirements and potential plans to divest over 42,000 vehicles, but they acknowledge that a number of these TWVs could be transferred through the FMS program. The four U.S. manufacturers consider these used vehicles to be a risk to their future sales of U.S. TWVs to foreign governments because foreign governments could be less likely to purchase new vehicles from U.S. manufacturers if the U.S. Army transfers these used vehicles through foreign assistance programs. U.S. manufacturers told us they would like more involvement in DOD’s decisions on its plans for these divested vehicles so they may provide input on potential effects on the industrial base. Commerce’s Bureau of Industry and Security reviews proposed FMS of divested items to identify effects on the relevant industry. During this review, Commerce provides industry with the opportunity to identify any impacts of the potential FMS on marketing or ongoing sales to the recipient country. When approving these transfers, State and Defense Security Cooperation Agency officials said the U.S. government must also weigh national security and foreign policy concerns, which could outweigh industrial base concerns with transfers of used DOD TWVs to foreign countries. While concerned about the potential for competition from the FMS of these retired vehicles, U.S. manufacturers also view these planned divestitures as a potential to provide repair or upgrade business that could help sustain their production capabilities during a period of low DOD demand. Some manufacturers we met with stated that they would like to purchase DOD’s used TWVs, before they are made available to foreign governments, so they may repair or upgrade them and then sell them to foreign governments. DOD is currently reviewing its policies to determine which vehicles, if any, could be sold back to manufacturers. Another manufacturer, while not interested in purchasing the vehicles, expressed interest in providing repair or upgrade services on the used TWVs before they are sold to foreign governments. Defense Security Cooperation Agency officials stated that excess defense articles, such as the used TWVs, are generally made available to foreign governments in “as is” condition and recipient countries are responsible for the cost of any repairs or upgrades they may want to make. They added that in such instances, it could be possible for U.S. manufacturers to perform such services, but it would be at the direction of the purchasing country, not the U.S. government. Foreign government and manufacturer officials that we interviewed identified a number of TWV manufacturers that compete with U.S. manufacturers for international sales. Examples of foreign manufacturers are shown in table 4. Officials from two countries that had not purchased U.S. manufactured TWVs explained that their countries have a well established automotive industrial base capable of producing TWVs that meet their governments’ needs. While all of the foreign officials we interviewed reported that their countries had no policies that favor their domestic manufacturers, governments that have not purchased U.S. TWVs generally purchased vehicles from domestic manufacturers. For example, foreign officials from one country said that all of their government’s TWVs are assembled within its borders. While all of the competitors to U.S. TWV manufacturers are not headquartered in the purchasing countries, foreign officials reported that many of these companies have established dealer and supplier networks within their countries. Foreign officials reported that these domestic dealer and supplier networks make vehicle sustainment less expensive and more manageable, in part, because it is easier and quicker to obtain replacement parts or have vehicles repaired. In contrast, foreign officials said that U.S. TWV manufacturers do not generally have the same dealer and supplier networks within their countries. They added that this can make maintenance of the U.S. vehicles more expensive, in part, due to the added cost of shipping. In addition to the number of TWV manufacturer competitors, foreign officials also reported that there is limited foreign demand for TWVs. Foreign officials reported that their governments purchase relatively few TWVs compared to the U.S. government, in part, because their fleet size requirements are much smaller. Foreign officials we interviewed reported TWV fleets that ranged in size from 2 to 9 percent the size of the U.S. Army’s fleet. For example, foreign officials from one country stated that their military was in the process of upgrading its entire fleet of approximately 7,500 vehicles, which is less than 3 percent of the size of the U.S. Army’s TWV fleet. Foreign government officials also explained that U.S. manufacturers can generally produce TWVs to meet their governments’ requirements, but the vehicles U.S. TWV manufacturers are producing for DOD do not necessarily align with these requirements. Foreign government officials identified the following areas where their governments’ requirements differ from those of DOD: DOD’s TWVs are generally larger than what their government can support. For example, officials from one foreign government reported that its military considered purchasing U.S. manufactured MRAP vehicles but did not have the cargo planes required to transport a vehicle the size and weight of DOD’s MRAP vehicles. Instead, according to the official, this country purchased a mine and ambush protected vehicle developed by one of its domestic manufacturers that is smaller and lighter than the DOD’s MRAP vehicles and better aligned with its transportation capabilities. Their governments do not always require the same level of capabilities afforded by DOD’s TWVs and, in some cases, requirements may be met by commercially available vehicles. For example, foreign government officials identified a number of vehicles in their governments’ tactical fleets that are based on commercial products from automobile companies such as Jeep and Land Rover. Their governments have different automotive or design standards for military vehicles that do not always align with those produced for DOD by U.S. manufacturers. For example, officials from one country said that their military is required to purchase right-side drive vehicles, which are not always supported by U.S. manufacturers. While their military can obtain a waiver to purchase a left-side drive vehicle, this presents training challenges as the majority of the vehicles in its fleet are right-side drive vehicles. Foreign officials said that while U.S. manufacturers are capable of meeting these requirements, foreign competitors may be more familiar with these requirements. Manufacturers that we interviewed said they produce or are developing TWVs to better meet foreign customers’ requirements. For example, one U.S. manufacturer said it was developing a right-side drive variant of one of its vehicles and another manufacturer said that it has a line of TWVs for its international customers that better meets those requirements. U.S. manufacturers and foreign officials expressed mixed views on the effect the U.S. arms transfer control regimes may have on the sale of U.S.-manufactured TWVs to foreign customers. Officials we met with reported that, generally, the U.S. arms transfer control regimes do not inhibit foreign governments from purchasing U.S. manufactured TWVs. Accordingly, we found that once the FMS and DCS process was initiated, no eligible foreign sales or licenses for U.S. TWVs were denied. For example, State officials reported that no countries eligible to participate in the FMS program were denied requests to purchase TWVs in fiscal years 2007 and 2011. Similarly, State DCS license data indicated that no licenses for vehicle purchases were denied from fiscal years 2008 through 2011. While sales of TWVs to foreign governments are generally approved by the U.S. government once initiated, U.S. manufacturers and foreign officials said that foreign governments may prefer to purchase vehicle manufactured outside the United States, in part, due to the amount of time to process sales and licenses requests and end-use restrictions associated with the U.S. arms transfer control regimes. Specifically, manufacturers said the congressional notification process can result in lengthy delays during the FMS and DCS approval process. The AECA requires notification to Congress between 15 and 45 days in advance of its intent to approve certain DCS licenses or FMS agreements. Preceding the submission of this required statutory notification to the U.S. Congress, State provides Congress with an informal review period that does not have a fixed time period for action. One manufacturer stated that this informal review period, in one case, lasted over a year and, after which, the prospective customer decided to not continue with the purchase. Another manufacturer said that the informal congressional notification process is unpredictable because there is no set time limit for review, making it difficult for the manufacturer to meet delivery commitments to foreign customers. State officials acknowledged that the informal congressional notification period can delay the DCS and FMS process because there is no designated time limit for review. According to State officials, the department established a new tiered review process in early 2012 to address this issue by establishing a time bounded informal review period that is based on the recipient country’s relationship with the U.S. government. The formal notification period remains unchanged. Foreign officials said when TWVs that meet their governments’ requirements are available from manufacturers outside the United States, AECA restrictions on third party transfers and end-use administrative requirements associated with U.S. manufactured vehicles could affect their governments purchasing decisions. Foreign officials explained that there are a number of TWV manufacturers outside the United States that can meet their requirements and vehicles sold by those manufacturers do not necessarily come with the same end-use restrictions as U.S. vehicles. For example, the AECA restricts the transfer of arms, including U.S. manufactured, TWVs to a third party without consent of the U.S. government. Some foreign officials said their governments prefer to use private companies, when possible, to make repairs and maintain its TWV fleet because it can reduce costs compared to government repair work. These foreign officials said that U.S. third party transfer restrictions require that their governments obtain permission from the U.S. government before transferring a U.S. TWV to a private company for repairs, which creates an administrative burden. Additionally, foreign governments are required to maintain information on U.S. TWVs’ end-use and possession that must be available to U.S. officials when requested to ensure compliance with U.S. end-use regulations. Foreign officials from one country said the maintenance of this information is an administrative burden and will be more difficult to manage as their government tries to reduce its workforce in a limited budget environment. Foreign officials said that TWVs purchased from manufacturers outside of the Untied States are not generally encumbered with these same restrictions and administrative burdens, making maintenance of these vehicles easier and cheaper, in some cases. State officials acknowledged these concerns from foreign governments but said these restrictions play an important role in protecting U.S. national security interests. Foreign officials reported, however, that the U.S. arms transfer control regimes would not adversely affect their decision to purchase a U.S. vehicle that best meets their governments’ requirements in terms of capabilities and cost. Foreign officials said that U.S. manufacturers make vehicles that are reliable and highly capable. When their governments have requirements that align with those associated with U.S. manufactured vehicles, foreign officials said that the U.S. arms transfer control regimes would not be a factor in their governments’ decisions to purchase the vehicles. Foreign officials that we interviewed also said their governments are experienced buyers of U.S. arms and are able to successfully navigate the FMS and DCS processes and U.S. end-use restrictions to obtain the military equipment they require. The volume of TWVs DOD purchased to meet operational requirements in Iraq and Afghanistan was unique due to specific threats. Many of these vehicles are no longer needed and DOD’s need for new TWVs is expected to decline in coming years. Further, given the current budgetary environment, DOD cannot afford to support the size of its current fleet or buy as many vehicles as it once did. Though U.S. manufacturers increased their production to meet those past needs, they will be challenged in responding to the sharp decline in DOD’s TWV requirements in future years. As DOD continues its studies of the U.S. TWV industrial base, it may be better positioned to address these challenges and how DOD can mitigate any risks to sustaining its TWV fleet. It is unlikely that sales to foreign governments will ever offset declines in sales to DOD, but foreign sales may be more important to the industrial base now more than ever. U.S. manufacturers, however, are presented with a number of factors that affect their ability to sell TWVs to foreign governments. While no foreign officials indicated that their governments would not buy U.S. TWVs, there has been relatively limited demand for the vehicles U.S. manufacturers have produced for DOD. Further, there are many foreign manufacturers that can supply vehicles that meet foreign governments’ requirements. Each of the U.S. manufacturers we met with was either selling or developing alternative vehicles that better meet foreign governments’ requirements, but the extent to which those efforts will stimulate additional sales has yet to be seen. Further, U.S. manufacturers raised concerns that their competitors could eventually include the U.S. military as it makes plans to divest itself of used TWVs that it could make available to foreign governments at reduced costs or for free. Additionally, while U.S. manufacturers perceived the U.S. arms transfer control regimes to be more burdensome than those of other countries, the regimes are not a determining factor when foreign governments seek to purchase TWVs. We provided a draft of this report to DOD, State, and Commerce, as well as the four manufacturers and five foreign governments with whom we met, for their review and comment. DOD and State provide technical comments and two of the manufacturers provided clarifications, which we incorporated into the report as appropriate. Commerce, two manufacturers, and the five foreign governments informed us that they had no comments. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army and the Navy; the Secretary of State; Secretary of Commerce; and the four manufacturers and five foreign governments with whom we met. In addition, the report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix I. In addition to the contact name above, the following staff members made key contributions to this report: Johana R. Ayers, Assistant Director; Patrick Dudley; Dayna Foster; Beth Reed Fritts; Justin Jaynes; Julia Kennon; Roxanna Sun; Robert Swierczek; Bradley Terry; Brian Tittle; and Alyssa Weir. | DODs need for TWVs dramatically increased in response to operational demands and threats experienced in Afghanistan and Iraq. TWVs primarily transport cargo and personnel in the field and include the High Mobility Multi-purpose Wheeled and Mine Resistant Ambush Protected vehicles. The U.S. TWV industrial base, which includes manufacturers and suppliers of major subsystems, increased production to meet DODs wartime requirements. That base now faces uncertainties as DODs budget declines and operational requirements for these vehicles decrease. In addition to sales to DOD, U.S. manufacturers sell vehicles to foreign governments. The Senate Armed Services Committee Report on a bill for the National Defense Authorization Act for Fiscal Year 2012 directed GAO to (1) describe the composition of the U.S. TWV industrial base, (2) determine how many U.S. manufactured TWVs were purchased by foreign governments from fiscal years 2007 through 2011, and (3) identify factors perceived as affecting foreign governments decisions to purchase these vehicles. GAO analyzed data from DOD on U.S. and foreign government TWV purchases, as well as sales data from the four primary U.S. TWV manufacturers. GAO also collected data from five foreign governments, including those that did and did not purchase U.S. TWVs. The U.S. tactical wheeled vehicle (TWV) industrial base includes seven manufacturers that utilize common suppliers of major subsystems, such as engines and armor. Four of these manufacturers reported that their reliance on sales to the Department of Defense (DOD) varies, in part, as they also produce commercial vehicles or parts. Collectively, the seven manufacturers supplied DOD with over 158,000 TWVs to meet wartime needs from fiscal years 2007 through 2011. DOD, however, plans to return to pre-war purchasing levels, buying about 8,000 TWVs over the next several years, in part, due to fewer requirements. Almost 28,000 U.S.-manufactured TWVs were purchased for use by foreign governments from fiscal years 2007 through 2011. Approximately 92 percent of these vehicles were paid for using U.S. security assistance funds provided to foreign governments. Iraq and Afghanistan were the largest recipients of such assistance, but officials stated that DOD does not plan to continue funding TWV purchases for these countries. While sales to foreign governments are unlikely to offset reductions in DOD purchases, manufacturers reported that foreign sales are becoming an increasingly important part of their revenue stream. Sales of U.S.-manufactured TWVs to foreign governments may be affected by multiple interrelated factors, including the availability of used DOD vehicles for sale, foreign competition, differing vehicle requirements, and concerns associated with U.S. arms transfer control regimes. U.S. manufacturers said sales of used Army TWVs to foreign governments could affect their ability to sell new vehicles. U.S. manufacturers and foreign governments also identified a number of non-U.S. manufacturers that produce TWVs that meet foreign governments requirements, such as right-side drive vehicles. While U.S. manufacturers can produce vehicles that meet these requirements, vehicles they produced for DOD generally have not. Finally, manufacturers and foreign officials had mixed views on how the U.S. arms transfer control regimes may affect foreign governments decisions to purchase U.S. vehicles. U.S. manufacturers and foreign officials expressed concerns with processing times and U.S. end-use restrictions, but foreign officials also said that such concerns have not been a determining factor when purchasing TWVs that meet their requirements. GAO is not making recommendations in this report. DOD, the Department of State, and two manufacturers provided technical or clarifying comments on a report draft that were incorporated as appropriate. |
Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs—known as credit subsidy costs—of their loan insurance or guarantee programs and include the costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs. When estimated cash inflows exceed expected cash outflows, a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite is true, the program is said to have a positive credit subsidy rate—and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates—reestimates— on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and provides permanent and indefinite budget authority for reestimates that reflect increased program costs. Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. The Omnibus Budget Reconciliation Act of 1990 required the HUD Secretary to take steps to ensure that the Fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least a 2 percent ratio at all times thereafter. actuarial review of the economic net worth and soundness of the Fund. The annual actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires that the HUD Secretary annually report to Congress on the results of the review. Pub. L. No. 101-508. risk, which arises as borrowers become unable to make payments on insured mortgages. Agencies also face counterparty risk. That is, an agency may suffer losses due to weaknesses or uncertainties in the work of its counterparties, which include lenders and appraisers for FHA and issuers for Ginnie Mae. And all agencies face operational risks, the risk of loss resulting from inadequate or failed internal processes, deficiencies in staff numbers, training, and skills, or external events. The Fund’s capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the Fund’s economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio). According to annual actuarial reviews of the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and 0.5 percent in 2009 (see fig. 1). For 2010 and 2011, the ratios were 0.5 and 0.24 percent, respectively. In its November 2011 report to Congress, HUD cited several reasons for the declines from 2010 to 2011. These included the following: Home prices were expected to continue falling. Forecasts for the 2010 actuarial study predicted house price declines of about 2.8 percent before bottoming out in the middle of 2011. Forecasts for the 2011 actuarial study predicted declines of 5.6 percent for FHA’s single- family portfolio in 2011. Higher-than-expected declines in house values contributed to both higher defaults and claims and higher loss- on-claim than anticipated in 2010. More loans, particularly from the housing bubble years of 2006-2008 were in serious delinquency, and a significant percentage had been there for more than 1 year. Claims become the most likely outcome for extended delinquency loans, many of which are in foreclosure. For the first time, the actuarial calculations built in a factor recognizing the elevated redefault potential from the increased number of active loans with a previous serious delinquency (3 months or more). The independent actuaries also made a decision to treat foreclosure actions likely affected by so called robosigning problems as expected claims in 2012. In reviewing the components of the capital ratio, the combination of a relatively stable economic value (numerator of the ratio) and a declining insurance-in-force (denominator) over much of the decade increased the capital ratio. However, since 2008, the economic value has fallen as the insurance-in-force has risen, dramatically lowering the capital ratio (see fig. 2). At the same time, the Fund’s condition has worsened from a budgetary perspective. Historically, FHA has estimated that its loan insurance program was a negative subsidy program (that is, estimated cash inflows exceeded expected cash outflows). On the basis of these estimates, FHA accumulated substantial balances in a budgetary account known as the capital reserve account, which holds reserves in excess of those needed for estimated credit subsidy costs and helps cover unanticipated increases in those costs such as higher-than-expected claims. Reserves needed to cover estimated subsidy costs are held in the Fund’s financing account. However, in recent years, the capital reserve account has covered large upward reestimates of FHA’s credit subsidy costs through transfers to the financing account. As a result, balances in the capital reserve account fell dramatically—from $22 billion at the end of 2007 to an estimated $4.4 billion by the end of 2010 (see fig. 3). depleted, FHA would need to draw on permanent and indefinite budget authority to cover additional increases in estimated credit subsidy costs. FHA’s latest annual report to Congress raises the possibility that, if house prices were to decline in 2012, the expected future losses on the current, outstanding portfolio could exceed current capital resources. These would be offset by the expected net receipts from the new 2012 cohort of loans. But, according to HUD, if house prices were to decline in 2012 by an amount rivaling that of 2011, these new loans would not be expected to generate sufficient net receipts to offset any potential decline in value of the current outstanding portfolio, potentially necessitating assistance from the Department of the Treasury (Treasury). Under one stress scenario in which house prices decline by 13.7 percent in 2011, rather than the 5.6 percent assumed in the baseline scenario, and house prices decline another 1.3 percent in 2012, HUD estimates that it may require $13 billion in assistance from Treasury to ensure the financing account has sufficient loss reserves. By the end of 2011, the balance in the capital reserve account rose slightly to $4.7 billion. As we reported in September 2010, FHA and its actuarial review contractor enhanced their methods for assessing the Fund’s financial condition but still were addressing other methodological issues that could affect the reliability of estimates of the capital ratio. Annual actuarial reviews of the Fund use statistical models to estimate the probability that loans will prepay or result in insurance claims on the basis of certain loan and borrower characteristics (such as loan-to-value ratios and borrower credit scores) and key economic variables (such as house prices and interest rates). FHA and its contractor have enhanced these models in recent years, by incorporating additional variables related to loan performance and developed an additional model to predict loss rates on insurance claims. Also, consistent with recommendations we made in a prior report, in 2003, the actuarial reviews began to analyze the impact of more pessimistic economic scenarios—for example, nationwide declines in home prices—than they did previously. However, the current methodology is significantly limited by its reliance on a single economic forecast to produce the estimate of the capital ratio that is used to determine if the Fund is meeting the 2 percent capital reserve requirement. This approach does not fully account for the variability in future house prices and interest rates that the Fund may face. As a result, baseline estimates of the capital ratio may tend to underestimate insurance claims and mortgage prepayments and therefore may overestimate the Fund’s economic value. In a November 2003 report, the Congressional Budget Office concluded that FHA could project the Fund’s cash flows more accurately by using an approach (stochastic simulation) that involves running simulations of hundreds of different economic paths to produce a distribution of capital ratio estimates. Given the uncertainty that always surrounds estimates of future economic activity, the report we issued in 2010 recommended that HUD require the actuarial review contractor to use stochastic simulation of future economic conditions, including house prices and interest rates, to estimate the Fund’s capital ratio and include the results of this analysis in FHA’s annual report to Congress on the financial status of the Fund. However, the most recent annual report does not include an estimate of the Fund’s capital ratio using this technique. In response to our 2010 report, FHA officials told us that they were planning to require the actuarial review contractor to use a stochastic simulation model for future actuarial reviews. But, these officials said that the model would be used to examine the implications of extreme economic scenarios on the Fund, and decisions about using the model to estimate the Fund’s capital ratio had not been made. FHA faces risks resulting from its operations. FHA’s loan volume grew significantly from 2006 to 2010. In 2006, FHA insured almost half a million loans, totaling $70 billion in mortgage insurance. By 2010, it had more than tripled to 1.7 million loans insured or about $319 billion in mortgage insurance. During the same time period, FHA’s single-family staff increased 8 percent, from 932 employees in 2006 to 1,011 employees in 2010, while increases in key workload areas often surpassed 100 percent as follows: Staff in the homeownership centers’ Processing and Underwriting Division grew at a slower rate (22 percent) than key workload items, particularly volume-driven loan reviews (which increased by more than 100 percent). Increases in contractor staff and workload related to management of foreclosed or real estate-owned properties were substantial, but noncontractor staff levels increased at more modest levels. Loss mitigation actions more than doubled from 2006 to 2010, while loss mitigation staff levels remained relatively constant. Although FHA has taken steps to assess credit and operational risks facing its single-family insurance programs, its current risk-assessment strategy is not comprehensive because it is not integrated across the agency and lacks annual assessments and mechanisms to anticipate changing conditions. To address credit risk and help improve the financial condition of the Fund (which is supported by borrower premiums), FHA raised premiums and made or proposed policy or underwriting changes. For example, in April 2011, FHA increased its annual insurance premiums from 0.85 percent to 1.10 percent for borrowers with 30-year loans with initial loan-to-value ratios of 95 percent or less and from 0.90 percent to 1.15 percent for borrowers with 30-year loans with initial loan-to-value ratios greater than 95 percent. Additionally, FHA increased down- payment requirements for borrowers with lower credit scores. FHA also has proposed reducing allowable seller contributions at closing, thereby helping to ensure that buyers put more of their own funds into the home purchase. Further, FHA has been revising its mortgage scorecard algorithm to recognize the effect of various risk elements not currently discerned by the scorecard and determine what cases warrant manual underwriting. According to FHA, these revisions are in the early stages, and no completion date has been set. To address operational risks and improve its risk-assessment strategy, in 2010, FHA established the Office of Risk Management and Regulatory Affairs and created the position of Deputy Assistant Secretary for Risk Management and Regulatory Affairs, which reports directly to the Assistant Secretary for Housing-FHA Commissioner. To provide assistance to the Office of Risk Management (one of the offices within the Office of Risk Management and Regulatory Affairs) in developing a risk- management strategy and organizational structure and establishing risk- management policies and processes, FHA hired a consultant to produce a comprehensive report and recommend best practices for its operation.According to FHA officials, FHA plans to adopt the consultant’s recommendation to establish an enterprise risk committee to address overall risk to the organization and a second tier of committees to address program and operational risks. In addition, in 2009 the Office of Single Family Housing implemented an internal quality control initiative at headquarters and the four homeownership centers. For the areas identified as high-risk, headquarters and the homeownership center divisions developed plans to document control objectives and established a monitoring strategy in which each homeownership center submits quarterly reports to headquarters on the effectiveness of the controls, including the status of any mitigation efforts. However, FHA’s risk-assessment strategy raises several issues. First, FHA’s current risk-assessment strategy is not comprehensive because it is not integrated throughout the organization. While the consultant recommended that FHA integrate risk assessment and reporting throughout the organization, currently the Office of Single Family Housing’s quality control activities and the Office of Risk Management’s activities remain separate efforts. FHA officials noted that until the Office of Risk Management sets up a governance process, the integration suggested by the consultant would not be possible. In the meantime, FHA officials stated that every effort was being made to help ensure that the Office of Risk Management’s activities complemented program office activities. Second, contrary to HUD guidance, the Office Single Family Housing has not conducted an annual, systematic review of risks to its program and administrative functions since 2009. According to an official in this office, although management intended to conduct an annual assessment, the dates slipped because of changes in senior leadership in the Office Single Family Housing, and few staff were available to perform assessments (because of attrition and increased workload). Finally, the Office of Single Family Housing’s current risk-assessment efforts do not include procedures for anticipating potential risks presented by changing conditions. The consultant’s report proposes a reporting process and templates for identifying emerging risks and provides specific examples. Office of Risk Management officials told us that, once they are operational, the risk committees eventually would determine the exact design and content of these reports and templates. Moreover, implementation and integration of the new risk-assessment strategy and its planned tools has been slow because of delays in defining the Office of Risk Management’s authority, difficulty filling new staff positions in the Office of Risk Management, and changes in FHA leadership. All these factors limit FHA’s effectiveness in identifying, planning for, and addressing risk. More specifically, without an integrated risk-assessment strategy, certain risks may not be fully addressed at the operational level in a way that minimizes risk to the insurance programs; without annual reassessments of its risks, the Office of Single Family Housing lacks assurance that its quality control efforts address all its risks; and without ongoing mechanisms in place to anticipate and address new or emerging risks, FHA lacks a systematic approach to help the agency identify, analyze, and formulate timely plans to respond most effectively to changed conditions and risks. Therefore, we recommended that FHA (1) integrate the internal quality control initiative of the Office of Single Family Housing into the operational risk processes of the Office of Risk Management, (2) conduct an annual risk assessment, and (3) establish ongoing mechanisms—such as use of the report templates from the 2010 consultant’s report—to anticipate and address risks that might be caused by changing conditions. FHA agreed with the recommendations and, as of January 2012, indicated that it either was working toward achieving the recommendations or had plans to do so in the very near future. For example, FHA said it would leverage or integrate existing risk management efforts as soon as the Office of Risk Management’s final governance structure and risk management strategies were in place. The agency also stated that the Office of Risk Management would conduct an annual risk assessment as a component of its overall risk management strategy. It stressed that ongoing mechanisms to anticipate and address risks related to changing conditions would be part of the office’s strategy. With growth in loan volume, the number of lenders and appraisers (or counterparties) participating in FHA’s single-family programs also has grown. The total number of FHA-approved lenders increased 24 percent, from 10,370 in 2006 to 12,844 in 2010. The number of FHA-approved appraisers increased approximately 67 percent from 33,553 in 2006 to 56,192 in 2010. FHA has made recent changes to address risks posed by its lenders and appraisers. For example, on May 20, 2010, FHA stopped approving new loan correspondents. And as of January 1, 2011, existing loan correspondents could no longer participate in FHA programs. Former loan correspondents now can participate only as third-party originators through sponsorship by FHA-approved lenders. As a result, as of September 2011, the number of FHA-approved lenders had declined to about 3,700. Furthermore, the agency has increased the net worth requirement for approved lenders. On May 20, 2011, FHA increased the requirement for existing lenders to $1 million, except for lenders classified as small under the Small Business Administration’s size standards (their requirement increased to $500,000). As of May 20, 2013, FHA will require a net worth of $1 million for all lenders, plus 1 percent of the total loan volume in excess of $25 million, to a maximum required net worth of $2.5 million. To help ensure that lenders and appraisers follow its policies and procedures, FHA also has enhanced the criteria used to select loans for reviews. Specifically, since May 3, 2010, the agency has considered high- risk loan or borrower characteristics, such as certain types of refinanced loans and loans to borrowers with low credit scores. Additionally, FHA increased the number of risk factors used to target lenders for review. FHA also has revised its approach for overseeing appraisers. FHA has addressed staffing and training needs and succession planning to some extent, but it lacks plans that strategically address future workforce needs, including replacing retiring staff. Although workforce planning practices used by leading organizations include defining critical skills and skill gaps, FHA’s current approach does not have mechanisms for doing so. FHA previously had a multiyear workforce plan that identified the critical competencies; analyzed skills and competencies, including gaps; and proposed comprehensive strategies to address these gaps, but it has not created another such plan. Instead, FHA has relied on occasional Resource Estimation and Allocation Process studies and annual managerial assessments of staffing and training needs. FHA also currently does not have a succession plan, although a plan for 2006–2009 identified mission-critical positions, analyzed existing staff competencies, assessed the number of retirement-eligible employees, and determined the probability of near-term retirements. Succession planning is particularly important because, as of July 2011, almost 50 percent of the Office of Single Family Housing staff at headquarters were eligible to retire in the next 3 years. The percentage of staff eligible to retire at the homeownership centers was even higher—63 percent. While FHA has taken some steps to address succession planning, these steps have been limited. FHA implemented two initiatives focused on succession planning. The first, begun in 2010, was intended to help ensure that, at any given time, at least two additional supervisors, managers, or executives could perform the work of each supervisor, manager, or executive. However, this does not apply to staff positions beyond management. The second initiative also began in 2010. Its goal is to train and develop staff. Neither initiative assesses the number of retirement-eligible employees in critical positions as required by HUD guidance. According to FHA officials, as resources have dwindled, they have considered all their positions to be critical. Department of Housing and Urban Development, Succession Management Plan, Fiscal Year 2006-2009, (Washington, D.C.: September 2006). recommended that FHA develop workforce and succession plans for the Office of Single Family Housing. FHA agreed, stating that it would develop a formal workforce plan and had efforts under way to develop a succession plan. For example, FHA indicated that it would conduct a comprehensive workforce analysis by the end of January 2012 to determine mission-critical positions, analyze skill gaps, and assess retirement eligibilities and probabilities. Ginnie Mae has undertaken efforts to improve risk management, but as many of these efforts remain in planning or under development, they merit continued commitment and follow through from senior management. Ginnie Mae faces operational risk related to limited staffing and reliance on contractors in the context of increased market share and volume. And, while Ginnie Mae’s revenues exceeded its costs, and it has accumulated a capital reserve of about $14.6 billion, its modeling of estimated cost and revenues could be improved by incorporating certain practices, such as using the best available data, that we believe represent sound internal controls for models. Ginnie Mae has taken steps to better manage operational and counterparty risks and has several initiatives planned or under way. GAO and others have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as risks that Ginnie Mae may face. Ginnie Mae’s counterparty risk would stem from the failure of issuers of Ginnie Mae-guaranteed MBS to provide investors with monthly principal and interest payments. Although Ginnie Mae’s market share and volume of MBS has increased in recent years, its (noncontractor) staff levels have been relatively constant during this time. In recent years, its actual staff levels have been below its authorized staff levels. Ginnie Mae’s internal control reviews for 2009 and 2010 identified a control deficiency due to employee vacancies, including multiple vacancies in certain positions relevant to internal controls. The 2011 internal control review had no findings related to employee vacancies. As part of a broad effort to address and mitigate its operational risks related to staffing levels, Ginnie Mae has incorporated some principles consistent with our internal control and management tool. Consistent with this guidance, Ginnie Mae has identified skill gaps in staff resources, developed a plan to hire additional staff, and made changes to its organizational structure. The President’s budget for 2012 requested $30 million for administrative expenses at Ginnie Mae, which included supporting 137 full-time equivalent positions (FTE). Ginnie Mae officials told us that, if this request was not approved, the agency would be forced to use its limited resources across its many risk-management efforts and would leave it with little capacity to conduct preventative or forward-looking analyses. The enacted 2012 budget provides $19.5 million for these administrative expenses and up to an additional $3 million, depending on the volume of Ginnie Mae’s guarantees. Between 2005 and 2010, as Ginnie Mae’s volume and issuer activity increased, and staff levels remained largely the same, the agency increasingly relied on contractors. Contract obligations in 2010 were more than 14 times the contract obligations in 2005. According to Ginnie Mae officials, they have contracted out many functions because the agency has flexibility to use agency revenues to procure contractors. That is, statutorily Ginnie Mae has flexibility to spend funds for contracting expenses because these expenses can be funded from agency revenues without annual appropriations. Ginnie Mae depends on contractors to provide a variety of services, including those related to guaranteeing MBS, such as collecting data from issuers and processing monthly principal and interest payments to investors. In addition, Ginnie Mae relies on several contractors to take over the servicing responsibilities on pooled loans when issuers default. Ginnie Mae has used its own staff as well as third-party assessments of contracts, to oversee its contractors but plans to provide additional staff resources to supplement the third- party assessments. However, officials said that implementation of this plan has been put on hold due to changes in the Ginnie Mae budget. Additionally, Ginnie Mae has conducted risk assessments of its contracts and potential operational risks, and it plans to review the proposed recommendations and determine how to implement them. Ginnie Mae has been working on an ongoing initiative to improve its information technology systems. According to officials, Ginnie Mae has been working on the first phase of its business process improvement initiative for the last few years based on a plan developed in conjunction with the Office of Management and Budget. The main goal of the initiative is to modernize the agency’s technology by consolidating processes and eliminating redundant systems. Some of the weaknesses included outdated data systems, a reliance on paper-based processes, and a lack of integrated data systems. According to Ginnie Mae, the first phase of the initiative resulted in the creation of nine new information technology system initiatives such as a system that allows Ginnie Mae to receive enhanced reporting and provide status information to issuers. Ginnie Mae has been drafting a strategy document for its ongoing initiative to look for additional improvement opportunities in its information technology systems. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement and has revised its approval and monitoring procedures. For example, in 2010, Ginnie Mae increased the minimum net worth requirement for issuers of Ginnie Mae-guaranteed MBS to $2.5 million. But, planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, have not been fully implemented. These initiatives include a plan to develop a database for tracking the resolution and timing of findings from reviews of issuers. It will be important for Ginnie Mae to complete its initiatives related to operational and counterparty risk as soon as practicable. Our November 2011 report includes an appendix that contains a listing of Ginnie Mae’s planned and proposed initiatives and their expected completion dates. In developing inputs and procedures for the model used to forecast costs and revenues, Ginnie Mae did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing practices in FASAB guidance that we believe represent sound internal controls for models, Ginnie Mae’s model may not be using critical data that could affect the agency’s ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae’s ability to accurately report to Congress the extent to which its programs represent a financial exposure to the government. We recommended in our November 2011 report on Ginnie Mae that the HUD Secretary direct Ginnie Mae to take steps to ensure its model more closely follows certain practices identified in FASAB guidance for estimating subsidy costs of credit programs. More specifically, Ginnie Mae should (1) assess and document that it is using the best available data in its model and most appropriate modeling approach; (2) conduct and document sensitivity analyses to determine which cash flow assumptions have the greatest impact on the model; (3) document how management assumptions are determined, such as those for issuer defaults and mortgage buyout rates; and (4) assess the extent to which management assumptions, such as those for issuer defaults and mortgage buyout rates, can be replaced with quantitative estimates. Ginnie Mae has indicated that it plans to implement all of our recommendations but has not provided a specific timeline. In addition, Ginnie Mae agreed with our observation about the importance of completing ongoing and planned initiatives for enhancing its risk- management processes, as soon as practicable, to improve operations. Mr. Chairman, Ranking Member Olver, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact me at 202- 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paige Smith, Assistant Director; Andrew Pauline, Assistant Director; Steve Westley, Assistant Director; Dan Alspaugh; Nadine Garrick Raidbard; John McGrail; Marc Molino; José R. Peña; Beth Reed Fritts; Paul Revesz; and Barbara Roesmann. 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 recent years, two components of HUD—FHA and Ginnie Mae—have played a major role in the single-family mortgage market. FHA insures lenders against losses from mortgage defaults. Ginnie Mae guarantees the timely payment of principal and interest for securities backed by federally insured or guaranteed mortgages. Due partly to the contraction of other mortgage market segments, FHA's and Ginnie Mae's business volumes have risen sharply. This growth highlights the need for these entities to properly manage financial risks while meeting the housing needs of borrowers. This testimony discusses (1) changes in the financial condition of FHA's insurance fund, the budgetary implications of these changes, and how FHA evaluates the fund's financial condition; (2) steps FHA has taken to assess and manage risks; and (3) steps Ginnie Mae has taken to manage risks and estimate costs and revenues. This testimony draws from GAO reports on FHA's oversight capacity (GAO-12-15), the financial condition of FHA's insurance fund (GAO-10-827R), and Ginnie Mae's risk management (GAO-12-49). GAO also reviewed updated information on the fund's condition as of September 30, 2011. For the third consecutive year, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) reported that the capital ratio for the Mutual Mortgage Insurance Fund—the ratio of the fund's economic value to insurance obligations—has not met the 2 percent statutory minimum. FHA cites declines in the fund's economic value due to higher-than-expected defaults, claims, and losses. At the same time, the other component of the ratio, insurance obligations, grew rapidly. The fund's condition also worsened from a budgetary perspective, with balances in the fund's capital reserve account reaching new lows. If the account were depleted, FHA would require more funds to help cover costs on insurance issued to date. FHA has indicated that it will narrowly avoid this scenario in fiscal year 2012. FHA enhanced methods for assessing the fund's financial condition but has not fully addressed GAO's 2010 recommendation for improving the reliability of its estimates. It relies on a single economic forecast, which does not fully account for variability in future house prices and interest rates. The approach GAO recommended would simulate numerous economic paths for house prices and interest rates would improve the reliability of its capital ratio estimates. FHA has taken or plans steps to better assess and manage risk. It created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to establish committees to evaluate risks at enterprise-wide and programmatic levels. It began a quality control initiative for single-family housing, in which program and field offices assess and report on risks, and enhanced lender and appraiser reviews. While FHA's consultant recommended integrating risk assessments, the quality control and risk office activities currently remain separate efforts. Also, since 2009, the Office of Single Family Housing has not updated assessments annually in accordance with HUD guidance. Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks. GAO recommended integrating quality control and risk office activities and updating assessments annually. GAO and others have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as risks that the Government National Mortgage Association (Ginnie Mae) may face. Ginnie Mae has several planned initiatives to enhance its risk-management processes related to gaps in resources, contracts, and issuers, but these plans have not been fully implemented. It will be important for Ginnie Mae to complete these initiatives as soon as practicable to enhance its operations. Also, in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing certain practices, which GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data that could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. GAO recommended that Ginnie Mae adopt these practices. GAO previously recommended that FHA and Ginnie Mae take additional steps to improve their risk management. FHA and Ginnie Mae agreed with these recommendations and said they had efforts under way to implement them. |
Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs—known as credit subsidy costs—of their loan insurance or guarantee programs and include the costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs. When estimated cash inflows exceed expected cash outflows, a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite is true, the program is said to have a positive credit subsidy rate—and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates—reestimates— on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and provides permanent and indefinite budget authority for reestimates that reflect increased program costs. Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. The Omnibus Budget Reconciliation Act of 1990 required the Secretary of the Department of Housing and Urban Development (HUD) to take steps to ensure that the Fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least a 2 percent ratio at all times thereafter. It also required an annual independent actuarial review of the economic net worth and soundness of the Fund. The annual actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires that the Secretary of HUD annually report to Congress on the results of the review. Federal agencies face a number of risks. In the case of agencies with loan guarantee or insurance programs, they can face credit risks that include borrower default risk, which arises as borrowers become unable to make payments on insured mortgages. Agencies with these programs also face counterparty risk. That is, an agency may suffer losses due to weaknesses or uncertainties in the work of its counterparties—in this example, lenders and appraisers. And all agencies face operational risks, the risk of loss resulting from inadequate or failed internal processes or people (in terms of staff numbers, training, and skills), or external events. For this statement, we focus on operational risks related to FHA’s staffing and contractor capacity to process increasing workloads. The Fund’s capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the Fund’s economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio).the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and 0.5 percent in 2009 (see fig. 1). For 2010 and 2011, the ratios were 0.5 and 0.24 percent, respectively. As we reported in September 2010, FHA and its actuarial review contractor enhanced their methods for assessing the Fund’s financial condition but still were addressing other methodological issues that could affect the reliability of estimates of the capital ratio. Annual actuarial reviews of the Fund use statistical models to estimate the probability that loans will prepay or result in insurance claims on the basis of certain loan and borrower characteristics (such as loan-to-value ratios and borrower credit scores) and key economic variables (such as house prices and interest rates). FHA and its contractor have enhanced these models in recent years, by incorporating additional variables related to loan performance and developed an additional model to predict loss rates on insurance claims. Also, consistent with recommendations we made in a prior report, in 2003 the actuarial reviews began to analyze the impact of more pessimistic economic scenarios—for example, nationwide declines in home prices—than they did previously. However, the current methodology is significantly limited by its reliance on a single economic forecast to produce the estimate of the capital ratio that is used to determine if the Fund is meeting the 2 percent capital reserve requirement. This approach does not fully account for the variability in future house prices and interest rates that the Fund may face. As a result, baseline estimates of the capital ratio may tend to underestimate insurance claims and mortgage prepayments and therefore may tend to overestimate the Fund’s economic value. In a November 2003 report, the Congressional Budget Office concluded that FHA could project the Fund’s cash flows more accurately by using an approach (stochastic modeling) that involves running simulations of hundreds of different economic paths to produce a distribution of capital ratio estimates. Given the uncertainty that always surrounds estimates of future economic activity, the report we issued last year recommended that HUD require the actuarial review contractor to use stochastic simulation of future economic conditions, including house prices and interest rates, to estimate the Fund’s capital ratio and include the results of this analysis in FHA’s annual report to Congress on the financial status of the Fund. However, the most recent annual report does not include an estimate of the Fund’s capital ratio using this technique. In response to our 2010 report, FHA officials told us that they were planning to require the actuarial review contractor to use a stochastic simulation model for the 2011 actuarial review. But, these officials said that the model would be used to examine the implications of extreme economic scenarios on the Fund and decisions about using the model to estimate the Fund’s capital ratio had not been made. FHA faces risks resulting from its operations. FHA’s loan volume grew significantly from 2006 to 2010. In 2006, FHA insured almost half a million loans, totaling $70 billion in mortgage insurance. By 2010, it insured 1.7 million loans, or about $319 billion in mortgage insurance. During the same time period, FHA’s single-family staff increased 8 percent, from 932 employees in 2006 to 1,011 employees in 2010, while increases in key workload areas often surpassed 100 percent: Staff in the homeownership centers’ Processing and Underwriting Division grew at a slower rate (22 percent) than key workload items, particularly volume-driven loan reviews (which increased by more than 100 percent). Increases in contractor staff and workload related to management of foreclosed or real estate-owned properties were substantial, but noncontractor staff levels increased at more modest levels. Loss mitigation actions more than doubled from 2006 to 2010, while loss mitigation staff levels remained relatively constant. Although FHA has taken steps to assess credit and operational risks facing its single-family insurance programs, its current risk-assessment strategy is not comprehensive because it is not integrated across the agency and lacks annual assessments and mechanisms to anticipate changing conditions. To address credit risk and help improve the financial condition of the Fund (which is supported by borrower premiums), FHA raised premiums and made or proposed policy or underwriting changes. For example, in April 2011 FHA increased its annual insurance premiums from 0.85 percent to 1.10 percent for borrowers with 30-year loans with initial loan-to-value ratios of 95 percent or less and from 0.90 percent to 1.15 percent for borrowers with 30-year loans with initial loan-to-value ratios greater than 95 percent. Additionally, FHA increased down- payment requirements for borrowers with lower credit scores. FHA also has proposed reducing allowable seller contributions at closing, thereby helping to ensure that buyers put more of their own funds into the home purchase. In addition, FHA is in the process of revising its mortgage scorecard algorithm, to recognize the effect of various risk elements not currently discerned by the scorecard and determine what cases warrant manual underwriting. According to FHA, these revisions are in the early stages, and no completion date has been set. To address operational risks and improve its risk-assessment strategy, in 2010 FHA received congressional approval to establish the Office of Risk Management and Regulatory Affairs and create the position of Deputy Assistant Secretary for Risk Management and Regulatory Affairs, which reports directly to the Assistant Secretary for Housing-FHA Commissioner. To provide assistance to the Office of Risk Management (one of the offices within the Office of Risk Management and Regulatory Affairs) in developing a risk-management strategy and organizational structure and establishing risk-management policies and processes, FHA hired a consultant to produce a comprehensive report and recommend best practices for its operation. adopt the consultant’s recommendation to establish an enterprise risk committee to address overall risk to the organization and a second tier of committees to address program and operational risks. In addition, in 2009 the Office of Single Family Housing implemented an internal quality control initiative at headquarters and the four homeownership centers. For the areas identified as high-risk, headquarters and the homeownership center divisions developed plans to document control objectives and established a monitoring strategy in which each homeownership center submits quarterly reports to headquarters on the effectiveness of the controls, including the status of any mitigation efforts. McKinsey & Company, Building the ORM Organization, Close-out Materials, a report prepared at the request of the Department of Housing and Urban Development, December 2010. the consultant would not be possible. In the meantime, they stated that every effort was being made to help ensure that the Office of Risk Management’s activities complemented program office activities. Second, contrary to HUD guidance, Single Family Housing has not conducted an annual, systematic review of risks to its program and administrative functions. According to an official in the Office of Single Family Housing, although management intended to conduct an annual assessment, the dates slipped because of changes in senior leadership in Single Family Housing and few staff were available to perform assessments (because of attrition and increased workload). Finally, Single Family Housing’s current risk-assessment efforts do not include procedures for anticipating potential risks presented by changing conditions. The consultant’s report proposes a reporting process and templates for identifying emerging risks and provides specific examples. Office of Risk Management officials told us that once they are operational the risk committees eventually would determine the exact design and content of the reports and templates. Moreover, implementation and integration of the new risk-assessment strategy and planned tools has been slow because of delays in defining the Office of Risk Management’s authority, difficulty filling new staff positions in the Office of Risk Management, and changes in FHA leadership. All these factors limit FHA’s effectiveness in identifying, planning for, and addressing risk. More specifically, without an integrated risk-assessment strategy, certain risks may not be fully addressed at the operational level in a way that minimizes risk to the insurance programs; without annual reassessments of its risks, Single Family Housing lacks assurance that its quality control efforts address all its risks; and without ongoing mechanisms in place to anticipate and address new or emerging risks, FHA lacks a systematic approach to help the agency identify, analyze, and formulate timely plans to respond most effectively to changed conditions and risks. Therefore, we recommended that FHA (1) integrate the internal quality control initiative of the Office of Single Family Housing into the operational risk processes of the Office of Risk Management, (2) conduct an annual risk assessment, and (3) establish ongoing mechanisms—such as use of the report templates from the 2010 consultant’s report—to anticipate and address risks that might be caused by changing conditions. FHA agreed with the recommendations and stated that it either was working toward achieving the recommendations or had plans to do so in the very near future. For example, FHA said it would leverage or integrate existing risk management efforts as soon as the Office of Risk Management’s final governance structure and risk management strategies were in place. The agency also stated that the Office of Risk Management would conduct an annual risk assessment as a component of its overall risk management strategy. It stressed that ongoing mechanisms to anticipate and address risks related to changing conditions would be part of the office’s strategy. With growth in loan volume, the number of lenders and appraisers (or counterparties) participating in FHA’s single-family programs also has grown. The total number of FHA-approved lenders increased 24 percent, from 10,370 in 2006 to 12,844 in 2010. The number of FHA-approved appraisers increased approximately 67 percent from 33,553 in 2006 to 56,192 in 2010. However, FHA has made recent changes to address risks posed by its lenders and appraisers. For example, on May 20, 2010, FHA stopped approving new loan correspondents. As of January 1, 2011, existing loan correspondents could no longer participate in FHA programs. Former loan correspondents now can participate only as third-party originators through sponsorship by FHA-approved lenders. As a result, as of September 2011, FHA had almost 3,700 approved lenders. Furthermore, the agency has increased the net worth requirement for approved lenders. On May 20, 2011, FHA increased the requirement for existing lenders to $1 million, except for lenders classified as small under the Small Business Administration’s size standards (their requirement increased to $500,000). As of May 20, 2013, FHA will require a net worth of $1 million for all lenders, plus 1 percent of the total loan volume in excess of $25 million, to a maximum required net worth of $2.5 million. To help ensure that lenders and appraisers follow its policies and procedures, FHA also has enhanced the criteria used to select loans for technical reviews. Specifically, since May 3, 2010, the agency has considered high-risk loan or borrower characteristics, such as certain types of refinanced loans and loans to borrowers with low credit scores. Additionally, FHA increased the number of risk factors used to target lenders for review. FHA also has revised its approach for overseeing appraisers. FHA has addressed staffing and training needs and succession planning to some extent, but it lacks plans that strategically address future workforce needs, including replacing retiring staff. Although workforce planning practices used by leading organizations include defining critical skills and skill gaps, FHA’s current approach does not have mechanisms for doing so. FHA previously had a multiyear workforce plan that identified the critical competencies; analyzed skills and competencies, including gaps; and proposed comprehensive strategies to address these gaps, but has not created another such plan. Instead, FHA has relied on occasional Resource Estimation and Allocation Process studies and annual managerial assessments of staffing and training needs. FHA also currently does not have a succession plan, although a HUD plan for 2006–2009 identified mission-critical positions, analyzed existing staff competencies, assessed the number of retirement-eligible employees, and determined the probability of near-term retirements. Succession planning is particularly important because almost 50 percent of Single Family Housing headquarters staff are eligible to retire in the next 3 years. The percentage of staff eligible to retire at the homeownership centers is even higher—63 percent. While FHA has taken some steps to address succession planning, they have been limited. FHA implemented two initiatives focused on succession planning. The first, begun in 2010, was intended to help ensure that, at any given time, at least two additional supervisors, managers, or executives could perform the work of each supervisor, manager, or executive. However, this does not apply to staff positions beyond management. The second initiative also began in 2010. Its goal is to train and develop staff. Neither initiative assesses the number of retirement-eligible employees in critical positions as required by HUD guidance. According to FHA officials, as resources have dwindled, they have considered all their positions to be critical. According to FHA officials, plans to update their workforce and succession plans were suspended. In 2007–2009, FHA had a workforce planning process designed to identify critical skill gaps and a strategy for addressing these gaps. According to the officials, HUD told FHA to stop this initiative in 2009 because HUD was going to implement a workforce planning process for the entire department. However, the effort never came to fruition because of funding shortages. Without a more comprehensive workforce planning process that includes succession planning, FHA’s ability to systematically identify the workforce needed for the future and plan for upcoming retirements is limited. Therefore, we recommended that FHA develop workforce and succession plans for the Office of Single Family Housing. FHA agreed, stating that it would develop a formal workforce plan and had efforts underway to develop a succession plan. We released a report today about Ginnie Mae, which has experienced a substantial increase in the volume of its business since 2007 as the volume of federally insured or guaranteed mortgages increased. Ginnie Mae is a wholly owned government corporation in HUD, which guarantees the timely payment of principal and interest on mortgage- backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans, such as FHA loans. As of 2010, Ginnie Mae guaranteed more than $1 trillion in outstanding MBS composed primarily of FHA-insured mortgages. The growth in outstanding Ginnie Mae- guaranteed MBS resulted in an increased financial exposure for the federal government. Nonetheless, Ginnie Mae’s revenues exceeded its costs, and it has accumulated a capital reserve of about $14.6 billion. Ginnie Mae has taken steps to better manage operational and counterparty risks and has several initiatives planned or underway. The operational risks the agency may face include limited staff, substantial reliance on contractors, and the need for modernized information systems. Ginnie Mae plans to increase its staff levels, complete a reorganization, and implement recommendations related to contracting. For Ginnie Mae, counterparty risk is the risk that issuers of Ginnie Mae MBS fail to provide investors with monthly principal and interest payments. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement and has revised its approval and monitoring procedures. For example, in 2010 Ginnie Mae increased the minimum net worth requirement for issuers of Ginnie Mae-guaranteed MBS to $2.5 million. But, planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, have not been fully implemented. It will be important for Ginnie Mae to complete its initiatives related to operational and counterparty risk as soon as practicable. In developing inputs and procedures for the model used to forecast costs and revenues, Ginnie Mae did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing practices in FASAB guidance that GAO believes represent sound internal controls for models, Ginnie Mae’s model may not use critical data that could affect the agency’s ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae’s ability to accurately report to Congress the extent to which its programs represent a financial exposure to the government. We recommended that the Secretary of Housing and Urban Development direct Ginnie Mae to take steps to ensure its model more closely follows certain practices identified in Federal Accounting Standards Advisory Board guidance for estimating subsidy costs of credit programs. More specifically, Ginnie Mae should (1) assess and document that it is using the best available data in its model and most appropriate modeling approach, (2) conduct and document sensitivity analyses to determine which cash flow assumptions have the greatest impact on the model, (3) document how management assumptions are determined, such as those for issuer defaults and mortgage buyout rates, and (4) assess the extent to which management assumptions, such as those for issuer defaults and mortgage buyout rates, can be replaced with quantitative estimates. The President of Ginnie Mae wrote that Ginnie Mae is working towards implementing our recommendation for conducting sensitivity analyses relating to issuer risk and behavior, but neither agreed nor disagreed with our other specific recommendations. In addition, Ginnie Mae agreed with our observation about the importance of completing ongoing and planned initiatives for enhancing its risk-management processes, as soon as practicable, to improve operations. Mr. Chairman, Ranking Member Frank, and Members of the Committee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact Mathew J. Scirè, Director, at 202-512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paige Smith (Assistant Director), Andy Pauline (Assistant Director), Steve Westley (Assistant Director), Dan Alspaugh, Nadine Garrick Raidbard, John McGrail, Marc Molino, José R. Peña, Beth Reed Fritts, Paul G. Revesz, and Barbara Roesmann. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Federal Housing Administration (FHA) has helped millions purchase homes by insuring private lenders against losses from defaults on single-family mortgages. In recent years, FHA has experienced a dramatic increase in its market role due, in part, to the contraction of other mortgage market segments. The increased reliance on FHA mortgage insurance highlights the need for FHA to ensure that it has the proper controls in place to minimize financial risks while meeting the housing needs of borrowers. This statement discusses (1) changes in the financial condition of FHA's fund used to insure mortgages--the Mutual Mortgage Insurance Fund (Fund)--and the budgetary implications of these changes; (2) how FHA evaluates the financial condition of the Fund; and (3) steps FHA has taken to assess and manage risks. This statement is drawn from a recent report on FHA's oversight capacity (GAO-12-15) as well as a report issued in September 2010 on the financial condition of the Fund (GAO-10-827R). GAO also obtained updated information on the status of the Fund from the recently issued actuarial report on the Fund. For the third consecutive year, FHA reported that the Fund's capital ratio (the ratio of economic value to insurance-in-force) has not met the 2 percent statutory minimum (see below). FHA cites declines in the Fund's economic value due to higher-than-expected defaults, claims, and losses. At the same time, the other component of the ratio, FHA's insurance-in-force, has grown rapidly. The Fund's condition also worsened from a budgetary perspective, with balances in the Fund's capital reserve account reaching new lows. If the account were depleted, FHA would require more funds to help cover costs on insurance issued to date. FHA enhanced methods for assessing the Fund's financial condition but has not yet addressed GAO's 2010 recommendation for improving the reliability of its estimates. It relies on a single economic forecast, which does not fully account for variability in future house prices and interest rates. An approach that would simulate hundreds of economic paths for house prices and interest rates would improve the reliability of its capital ratio estimates. FHA has taken or plans a number of steps to better assess and manage risk. It created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to charter committees to evaluate risks at enterprise-wide and programmatic levels. It began a quality control initiative in the Office of Single Family Housing, in which program and field offices assess and report on risks. FHA also enhanced lender and appraiser reviews. While FHA's consultant recommended integrating risk assessments, the quality control and risk office activities currently remain separate efforts. Also, the Office of Single Family Housing has not annually updated assessments since 2009 as required. Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks. GAO previously made recommendations on modeling the Fund's financial condition, risk assessments, and human capital. FHA agreed with these recommendations and told GAO they have efforts underway to implement them. |
The popularity of on-line trading and growth in the number of broker- dealers with on-line channels has significantly changed the way many investors trade and manage their savings and investments. Last year alone, broker-dealers handled an average of about one million on-line trades per day from individual investors. In regulating the activities of all broker- dealers, NASD and NYSE have a different role from SEC, as SEC’s general role is to maintain the integrity of the securities markets. NASD and NYSE are membership-based SROs, and their general role has been to oversee their members’ activities. Among other things, NYSE and NASD, (through NASDR) regulate market facilities, write rules governing member conduct (with SEC approval), examine members for violations of securities laws and SRO rules, and discipline members that fail to follow such laws and rules. SEC, among other things, supervises the SROs to ensure that they use their regulatory powers effectively and responsibly. SEC conducts this oversight by reviewing SRO rules, disciplinary actions, and other activities. It also inspects SROs to ensure compliance with the Securities Exchange Act of 1934 (the Exchange Act). Both SEC and the SROs conduct examinations of broker-dealers. A primary objective of the SEC’s broker- dealer examination program is to provide oversight of the SROs that are responsible for routinely examining their member firms. SEC and the SROs maintain examination procedures that provide guidelines for their respective staff in conducting examinations of broker-dealers. In our previous report, we noted that on-line trading is sometimes confused with day trading. We noted that a significant difference between on-line trading and day trading is access to the markets. On-line investors access the markets through Internet service providers and brokers’ order routing systems, a process that can take several seconds or minutes, while day traders have virtually direct access to the markets. At the time we issued our report, the differences between on-line trading and day trading were diminishing as these industries developed. For example, some on- line broker-dealers now offer their active traders services similar to those already provided to day traders, including news, price quotes, and customized software. Since we issued our previous report, NASD and NYSE have adopted rules that include definitions of day trading that are broader than the definition used in our previous report. For example, one definition describes day trading as overall trading characterized by the regular transmission by a customer of intraday orders to effect both the purchase and the sale of the same security or securities in the same day. Thus, some active on-line traders also meet the definition of a day trader. According to an SEC official, a small number of on-line account holders are likely to be responsible for the majority of trades made on-line. To assess the extent to which the on-line trading market has changed since our previous report, we gathered industry data from 1999 and 2000 on on- line trading accounts and market volume and analyzed those trends for changes in activity. We used industry data from J.P. Morgan H&Q for this purpose. We also collected data from SEC, NYSE, and NASDR on complaints related to on-line trading. We analyzed these data to identify trends in the volume and nature of complaints in 1999 to 2000. During this period, NYSE began using an on-line trading complaint category. SEC began categorizing on-line trading complaints in 1997. To better understand the data and their reliability, we determined how the data are gathered and analyzed and collected regulators’ opinions as to the limitations of the data. To understand regulators’ efforts to respond to our previous recommendations, we reviewed the rules, OCIE recommendations, and other guidance created since our May 2000 report. We examined these documents for specific criteria and determined the extent to which we believed the actions taken were consistent with both the substance and form of the recommendations in our previous report. We met with officials from SEC, NYSE, NASDR, the Securities Industry Association (SIA), and three larger firms to discuss their perspectives on the newly issued rules, guidance, and recommendations. We also reviewed the public Web sites of a limited number of small, medium, and large broker-dealers that offer on- line trading services to determine what these firms were doing in terms of providing disclosure to on-line investors. To assess the extent to which the regulators’ actions are enforceable and the likelihood that the regulators will identify instances of noncompliance, we determined the legal force behind the newly created rules, guidance, and recommendations and the other means regulators use to encourage cooperation from broker-dealers. We also determined the extent to which the regulators considered the newly created criteria in their examination procedures and modules. To make this determination, we reviewed NASDR’s, NYSE’s, and SEC’s examination modules for procedures that address the disclosure of margin risk, order routing or trade execution, privacy policies, trading concepts and risks, and risk of systems outages and actual outages, or operational capability. We met with officials from SEC, NASDR, and NYSE to discuss these issues and understand how they are considered in examinations and otherwise enforced. We conducted our work in New York, NY and Washington D.C. between November 2000 and June 2001 in accordance with generally accepted government auditing standards. According to industry data, the on-line trading industry has changed significantly during 1999 and 2000, with rapid growth in both accounts and trading activity giving way to a period of diminishing growth in the number of accounts and declining trading activity. The volume of complaints involving on-line trading generally followed a similar pattern during these 2 years, peaking in the first half of 2000 and then decreasing. The nature of these complaints has also changed, with complaints about access to accounts falling relative to complaints about margin position sellouts. In our earlier report, we reported that the number of firms offering on-line trading had grown from 37 in January 1997 to 160 in July 1999 and that many traditional brokers were planning to offer an on-line option to their customers. In its January 2001 report on on-line trading, SEC reported that over 200 broker-dealers were providing retail investors with the ability to trade on-line. During 1999 and 2000 the number of on-line brokerage accounts continued to grow, nearly doubling from 8.6 million in the first quarter of 1999 to 17.4 million in the second quarter of 2000, or more than 10 percent each quarter. Since then, the quarterly rate of increase has slowed to less than 6 percent (see fig. 1). On-line trading activity followed a somewhat different pattern, rising dramatically and then declining. The average volume of on-line trades grew from about 455,000 per day in the first quarter of 1999 to more than 1.24 million per day in the first quarter of 2000—an increase of 173 percent. However, after the first quarter of 2000 the average volume of on- line trades fell. Investors made an average of about 900,000 trades per day in the last quarter of 2000, a drop of about 28 percent. Despite the decline in 2000, on-line trading remained well above 1999 levels (see fig. 2). The growth of on-line trading activity outpaced the growth of overall retail trading activity from the first quarter of 1999 to the first quarter of 2000 but then began to decline, falling more than conventional trading through brokers. On-line retail stock trading increased from around 29 percent in the first quarter of 1999 to around 40 percent in the first quarter of 2000, and by the end of the year around 30 percent of all retail stock trades were being performed on-line. One measure of investors’ dissatisfaction with on-line broker-dealers is the number of complaints investors file with SEC and other regulatory authorities. During the past 2 years, the number of complaints SEC has received have followed a pattern somewhat similar to that of trading volume, reaching a peak in the first half of 2000 and then declining. In fact, the surge in such complaints in the first half of 2000 outpaced the increase in trading volume from the previous 6-month period. For 2000, SEC received 27,920 complaints, of which 4,271—or 15 percent—were classified as on-line complaints. While the total number of on-line complaints for 2000 increased over those of 1999, these complaints declined dramatically during the second half of the year, falling to 42 percent of their January to June levels. In the last quarter of 2000, SEC received approximately the same number of on-line complaints it received during the last quarter of 1999 (see fig. 3). Overall, the number of complaints NASDR received that involved on-line trading firms followed a similar pattern. According to NASDR, although it does not specifically track complaints as on-line issues, the number of complaints NASDR received involving on-line firms peaked in the first quarter of 2000. During that quarter, 950 complaints, or 44 percent of the total complaints it received, involved on-line trading firms. By the fourth quarter of 2000, the number of on-line complaints received had fallen to 427, or 33 percent of the 1,275 total it received. In addition to compiling complaint data, NASDR also compiles statistics on arbitration disputes between broker-dealers and customers, including disputes arising from on- line trading. The number of such disputes increased from 55 to 214 from 1999 to 2000 but it is expected to decline this year. NYSE saw the same trend in complaints. During the first quarter of 2000, NYSE member firms reported 7,625 on-line trading complaints, or 27 percent of the total complaints received. By the fourth quarter of 2000, the number of complaints had fallen to 1,737, or 11 percent of the 15,371 total it received. Some of the growth in complaints about on-line trading during the first half of 2000 may be attributed to growth in the volume of on-line trading. We took these factors into account by comparing the volume of complaints involving on-line trading with the volume of on-line trading (see fig. 4). While the volume of daily on-line trades almost doubled between the first quarter of 1999 and the last quarter of 2000, the number of complaints to SEC fell by almost one half. In the first quarter of 1999, there were about 4 times as many complaints per 100,000 on-line trades as there had been in the last quarter of 2000. On-line investors who are dissatisfied with the processing of an order or the handling of their account have several options for filing a complaint. They can file a complaint directly with their broker-dealer, with SEC, NASDR, or NYSE (if their brokerage firm is a member). SEC and SROs have their own procedures for compiling complaints. For example, SEC sorts on-line trading complaints into 1 of 26 categories. Many brokerage firms now have a link to the SEC’s investor education Web site, which provides a convenient form for filing a complaint on-line. Investors can also file a complaint through the NASDR Web site. NASD and NYSE rules require member firms to report complaints to regulators, and NYSE added an on-line complaint category during 1999. While the pattern of complaints over this period may be instructive in understanding the quality of service broker-dealers provided, these data should be viewed with some caution, for several reasons. First, complaints are not necessarily violations. For example, regulators told us that a lack of understanding of margin agreements leads some customers to complain that stocks have been sold without their permission—even though investors had agreed to such a condition by signing a margin agreement when opening the account. Second, the number of complaints depends to some degree on how easily investors can file them. Some brokerage firms now have direct links to the recently revised SEC Web page with its on- line complaint form. Thus the increased ease with which investors may submit complaints may result in more complaints being filed than would have been the case otherwise. Third, the way data are categorized can affect the number and composition of complaints counted. Each complaint is assigned a single code, even if the complaint involves multiple allegations of rule and regulation violations. The composition of complaints to SEC involving on-line trading was somewhat different in 2000 than it was in 1999. In both years, complaints involving failure or delay in processing orders and difficulty accessing accounts were among the most common; but in 2000, complaints involving margin position sellouts and transfer of accounts increased dramatically. Table 1 compares the 10 most common on-line complaints filed with SEC in 2000 with complaints filed in 1999. The single most frequent complaint to SEC involving on-line trades during 2000 was failure or delays in processing orders—typically a buy or sell order was either not executed by a broker or was not executed in a timely fashion. Changes in the composition of complaints reflect, to some extent, changes in market and industry conditions. In 1999, when security prices were rising, margin calls were not as common as they were in 2000, when security prices fell. This fact helps explain why complaints about margin position sellouts increased by 200 percent in 2000. The 50-percent decline in complaints about accessing accounts that occurred even though the number of accounts was growing could be due to the increased reliability of Internet service providers and on-line trading technology or to declining trading volume. Similarly, complaints involving the transfer and opening of accounts could have grown in part because the number of accounts continued to grow. In our earlier report, we noted that many firms were experiencing recurrent delays and outages in their on-line trading systems. Industry representatives reported that they have invested heavily to improve performance, and broker-dealers told us that delays and outages are less frequent. These factors may explain the decline in complaints involving access. While many brokerage firms reported having made substantial investments to enhance system performance in the last year, it is too early to say whether these investments will prevent delays and outages during sustained periods of high trading volume. The extent to which regulators’ actions have addressed the recommendations in our earlier report varies by recommendation in terms of substance, form, and completeness (see table 2). Regulators have initiated action that address the substance of almost all of our recommendations by creating rules, recommended practices, and other forms of guidance. For example, SEC has adopted rules that are consistent with our recommendations on privacy and best execution. Regulation S-P, adopted as a result of requirements in the Gramm-Leach-Bliley Act (GLBA), is consistent with our recommendation on privacy considerations, while SEC Rules 11Ac1-6 and 11Ac1-5 promulgated under the Exchange Act address trade execution disclosure. In addition, NASDR has adopted Rule 2341, which requires broker-dealers to disclose the risk of trading on margin. OCIE staff also issued a report in January 2001— ”Examinations of Broker-Dealers Offering Online Trading: Summary of Findings and Recommendations”—that makes recommendations in each of the areas in which we made recommendations. Some of the actions regulators have taken are fairly comprehensive, covering all the criteria that we recommended. However, in the areas of trading risk and operational capability, regulators have not fully met the substance of our recommendations. That is, neither SEC nor the SROs require broker-dealers to disclose trading risk to all of their on-line trading customers. In addition, while SEC staff is considering recordkeeping requirements in the area of operational capability, at present OCIE only recommends that broker-dealers consider maintaining such records. In most cases where regulators have taken action, broker-dealers are not required to disclose information on their Web site as we recommended and sometimes have the option of disclosing information either electronically or through paper delivery. Generally, SEC’s position is that until electronic media becomes more universally accessible, market intermediaries with delivery obligations are required to continue delivering paper copies of certain documents. However, individuals who trade on-line may prefer to review information given to them on-line and therefore benefit from disclosures made on Web sites. Where appropriate, such Web site disclosure would be most useful where its delivery is tailored to individual investors. In our previous report, we recommended that SEC take action on the issue of protecting investors’ privacy because of the increased emphasis given to these issues under GLBA. We reported that SEC’s examinations found that many firms had implemented measures to address customer privacy and confidentiality, but some firms’ privacy policies did not disclose that they might share information with affiliated vendors offering related financial services. We also noted SEC’s finding that only a limited number of firms used a second layer of password protection or required customers to periodically change their password. At the time that we made these recommendations, SEC had already published for notice and comment proposed Regulation S-P, a privacy regulation that requires broker-dealers to provide investors with a notice of their privacy policies and practices. Regulation S-P was required by Section 504 of GLBA, which limited the instances in which a broker-dealer could disclose nonpublic personal information about a consumer to nonaffiliated third parties and required SEC with certain other regulators to adopt consistent and comparable regulations requiring the institutions that they regulate to disclose their privacy policies. Since our report was issued, Regulation S-P has become effective. It requires brokerage firms to adopt policies and procedures that address administrative, technical, and physical safeguards for the protection of customer information. The OCIE report includes recommended security practices that firms should consider in adopting such policies and procedures. Regulation S-P requires broker-dealers to protect their customers’ privacy by prohibiting firms from disclosing nonpublic personal information to a nonaffiliated third party without first providing customers with a “clear and conspicuous” notice that states the broker’s privacy policies and practices and gives the customer the chance to “opt out.” It allows broker- dealers to provide privacy notices either in writing or if the customer agrees, electronically. For customers who conduct transactions electronically, Regulation S-P states that an appropriate way of notifying customers is to post the notice on the firm’s electronic site; in turn, customers must acknowledge receiving the notice before buying a particular financial product or service. However, on-line traders may not necessarily receive disclosure on Web sites. Regulation S-P does not require the broker-dealers to post the disclosure notice on their Web sites. According to an SEC official, Regulation S-P was adopted to conform with the requirements mandated by GLBA and had to be consistent with the regulations adopted by the other agencies. Regulation S-P also requires brokers to adopt policies and procedures that create administrative, technical, and physical safeguards to protect customers’ records and nonpublic information. While the rule sets no specific criteria for these safeguards, it does state that these policies and procedures must be reasonably designed to ensure security and confidentiality, guard against any anticipated threats or hazards to the security or integrity of customer information, and restrict unauthorized access to customer information. Regulation S-P allows firms to adopt the policies and procedures that are best suited to the broker-dealers’ actual operations. The OCIE report provides recommendations for adopting security policies and procedures in the areas of encryption technology, firewalls, passwords and the use of cookies. For example, in its recommendation on encryption, OCIE encouraged firms to evaluate the security of their Web site and E-mail systems and consider developing procedures to reduce the likelihood that personal information will be sent through unsecured transmissions. Regarding firewalls, OCIE encouraged firms to consider implementing a periodic review of their security in light of changes in technology and the introduction of new security methods. Further, OCIE recommended that firms provide guidelines and training to employees that explain and provide examples of what is and is not permissible in the areas of the home use of the computer, E-mail, chat rooms, bulletin boards and Web sites. In our previous report, we recommended that broker-dealers be required to include accurate and complete information on the quality of trade execution on their Web sites. In making this recommendation, we cited SEC’s finding that some broker-dealers were not meeting their best execution requirements—that is, they were not seeking the most advantageous terms for their customers (i.e., price, speed, and the likelihood of execution). We also noted that the Chairman of SEC had stated that investors would benefit greatly from more information about execution quality. Since our report was published, SEC has adopted two rules designed to improve the way trade execution and routing practices are disclosed. Rule 11Ac1-6 requires that by October 2001, broker-dealers publicly disclose quarterly the identity of the market centers to which they route a significant percentage of their orders. Broker-dealers must also reveal the nature of their relationships with these market centers, including any internalization or payment for order flow arrangements that could create a conflict of interest between the broker-dealer and its customers. Broker- dealers are also required to post reports disclosing where they route orders on a Web site that is free and readily accessible to the public, give customers a written copy of this information on request, and notify customers annually that a written copy is available on request. SEC has interpreted the disclosure requirements to state that the information must appear on a broker-dealer’s Web site or be accessible via a hyperlink to the Web site. Finally, the new rule requires that brokers tell customers who ask where individual orders were routed for execution. Companion Rule 11Ac1-5 requires that market centers make monthly electronic disclosures of information about the quality of their executions on a stock-by-stock basis. This disclosure is designed to provide information about the way market orders of various sizes are executed relative to public quotes and about effective spreads. Together, Rules 11Ac1-6 and 11Ac1-5 provide improved information for investors to determine where their orders are being sent and how well their trades are being executed at such locations. OCIE’s report not only provides guidance but also reminds broker-dealers of existing legal requirements regarding best execution. The report states, for instance, that “a broker-dealer must regularly and rigorously examine execution quality likely to be obtained from the different markets or market makers trading a security.” In addition, firms are also advised to document the steps they take to comply with best execution obligations. In April 2001, NASD also issued Notice 01-22 to its members reiterating their best execution obligations and providing guidance to members concerning existing best execution requirements. A broker-dealer must evaluate whether opportunities exist for obtaining improved executions of customer orders. The Notice also discusses how SEC Rules 11Ac1-5 and 11Ac1-6 will assist members in meeting their regular and rigorous examination obligation. According to SEC, creating a transparent process for determining the quality of trade execution in the securities market should spur more vigorous competition and provide the best possible prices for investors. The Acting SEC Chairman recently stated that optimally the increased disclosure these rules require, could motivate brokers and order execution centers to continually improve both services and prices for investors, leading to a marketwide improvement in execution quality. In our previous report, we recommended that regulators ensure that broker-dealers with on-line trading systems include accurate and complete information on their Web sites about margin requirements. We noted that SEC had determined from customer complaints that many investors trading on-line did not understand their broker-dealer’s margin requirements. We also found that many broker-dealers did not provide margin information for investors on their Web sites. Investors might not know, for instance, that they can lose more money than they deposit in a margin account if the securities purchased on margin decline in value. They also might not be aware that brokers have the right to force the sale of securities if the value of the cash and securities in the investor’s account falls below the amount required as collateral for the margin loan (usually 30—50 percent for on-line accounts). “It is important that you fully understand the risks involved in trading securities on margin. These risks include the following: You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities in your account(s). The firm can force the sale of securities or other assets in your account(s). If the equity in your account falls below the maintenance margin requirements or the firm’s higher “house” requirements, the firm can sell your securities or other assets in any of your accounts held at the firm to cover the margin deficiency….without contacting you….Most firms will attempt to notify their customers of margin calls, but they are not required to do so…. You are not entitled to choose which securities …in your account(s) are liquidated or sold to meet a margin call….The firm can increase its “house” maintenance margin requirements at any time…. you are not entitled to an extension of time on a margin call.” Broker-dealers can develop their own disclosure statements, provided that they are substantially similar to the sample and incorporate all the relevant concepts. OCIE’s report describes the NASD margin rule and recommends that broker-dealers also inform investors that some securities have higher margin requirements and provide an explanation of how the actual interest rate for margin loans is calculated. The new NASD Rule 2341 and OCIE report give broker-dealers the option of providing the disclosure either in writing or electronically. Although we believe that these margin disclosures provide substantial information to investors regarding the risks of trading on margin, they do not fully meet our recommendation that the information be available on broker-dealer’s Web sites. If broker-dealers choose to provide these disclosures in paper form only, on-line traders may not have this information readily accessible when they trade on-line. For customers trading on margin, such Web site disclosure would be most useful where its delivery is tailored to individual investors. In addition, general Web site disclosure would make such information more readily available to other on-line investors who are considering trading on margin. In a review that occurred prior to the effective date of NASD’s margin rule, SEC’s OCIE staff found that approximately one-third of the broker-dealers it examined did not provide customers with any information on margin requirements other than the margin agreement itself. Our review of a small number of broker-dealers’ Web sites (also done prior to the rules’ effective date) showed that some broker-dealers do not disclose margin risks on their sites. We noted, however, that other broker-dealers posted disclosures with language very similar to that required by the NASD rule prior to the rule’s compliance date of June 2001. We recommended that broker-dealers include accurate and complete information on trading risks on their Web site. In making our recommendation last year, we considered SEC complaints suggesting that many on-line investors may not understand the risks they are taking or the rules and procedures for trading. These include the risks of potential losses to on-line traders who do not understand the differences between market and limit orders and the effect of these different orders and trading volume on trade execution. In addition, we noted in our May 2000 report that SEC had received many complaints from on-line traders concerning access to shares of initial public offerings (IPO). Customers wanted more information on how on-line firms allocated IPO shares and methods of distributing IPO shares on-line. To date, however, neither SEC nor the SROs have required on-line broker- dealers to post information on trading risks on their Web sites. OCIE’s report, however, does make several recommendations in the area of investor education and disclosure. For example, it recommends that broker-dealers consider enhancing their Web sites to provide a basic explanation of securities trading, including definitions of each of the terms used on the order entry page that can be accessed from the trading screen. The report also states that the most helpful on-line brokerage Web sites provide a glossary that defines investment terms and explains that a market order may be executed at a higher or lower price than the one displayed on the Web site at the time the order is placed. SEC officials informed us that it has urged on-line broker-dealers to create links from their Web sites to the SEC’s investor education site, which provides information about the risks of on-line trading. According to an SEC official, a series of examinations showed that many broker-dealers voluntarily followed this advice, and we confirmed this finding during our review of a small number of broker-dealer sites. We also noted that while some firms offer a substantial amount of information on their Web sites, including definitions of key terms, the quality of this information varies. In addition, OCIE found in its review that some firms did not provide their customers with any information on trading risks. NASD issued Rule 2361, effective October 2000, requiring broker-dealers that promote a day-trading strategy to provide their noninstitutional customers a day-trading risk disclosure statement before opening a new account. As mentioned earlier, some on-line traders also meet the definition of a day trader and could benefit from this disclosure. The disclosure statement can be provided in writing or electronically and essentially describes the risks involved in day trading. For example, the statement explains that day trading is not appropriate for someone with limited resources and investment experience. It further explains that day trading requires in-depth knowledge of the securities markets and trading techniques and strategies and warns that a day trader should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution system and procedures. However, because these disclosures do not apply to all on-line traders and may be provided in writing or electronically, the rule does not fully address the substance of our recommendation. In April 2000, SEC issued guidance to on-line broker-dealers conducting IPOs. In that release, SEC noted its concern that investors may not have access to all the information they need to fully understand the on-line public offering process. In its report, OCIE suggested that firms review the SEC release and provide customers with a full and accurate description of their on-line IPO allocation and distribution methods and the probability of receiving shares. In our previous report, we recommended that SEC require broker-dealers with on-line trading systems to maintain consistent records on systems delays and outages and their related causes and to disclose on their Web sites the potential for service disruptions. We also recommended that SEC monitor these records to ensure those firms have adequate capacity to serve their customers. We made these recommendations in part because on-line investors were experiencing problems with trading system outages and delays. At that time, officials from several large broker-dealers told us they anticipated more disruptions as firms expanded or upgraded their systems. Currently, neither SEC, NASD, nor NYSE has a specific rule requiring broker-dealers to maintain records of system delays and outages and their related causes and to disclose the potential for service disruptions on their Web sites, nor is there currently a definition of delays and outages. OCIE’s report does state that broker-dealers should consider maintaining records of capacity evaluations and systems slowdowns and outages, including details of the cause and impact. In addition, OCIE suggests that firms make every reasonable effort to inform customers of operational difficulties and provide all new customers with information in plain English on the risks of systems delays or outages. Although the OCIE report provides some useful guidance on operational capability issues, SEC has not yet defined what constitutes an outage or delay. According to an SEC official, SEC staff is currently considering proposing a rule that would implement operational capability standards for broker- dealers and address the problem of defining the term outage. That is, SEC staff is reconsidering a rule it had first proposed in March 1999. That proposed rule would have required, as a condition of conducting securities business, that broker-dealers have sufficient operational capacity to enter, execute, clear and settle orders, and deliver funds and securities promptly and accurately. In response to the March proposal, SEC received numerous comment letters generally stating that the proposed rule was “overly vague.” An SEC official recently stated that the new rule the staff is considering recommending to the Commission is more narrowly tailored than the March 1999 proposed rule. In addition, the rule that SEC staff is considering recommending will establish requirements for recordkeeping and disclosure of operational difficulties for all broker-dealers, not just on- line broker-dealers. SEC staff said other alternatives could include a requirement that broker-dealers maintain written policies and procedures showing that they plan for, test, and review their operational capabilities on an ongoing basis. The process of developing the rule is complicated by several factors. First, rapid technological changes make it difficult to develop rules for reporting capacity and performance issues that are flexible enough to keep pace with future technological changes without being overly vague and ineffective. Second, while standard measures of outages or delays might allow for consistent measurement by broker-dealers, as a matter of course, many firms have outages or delays that do not affect customers. Thus, it is important to have a meaningful definition that takes into account customers’ ability to place and execute orders. For example, the same amount of outage time for the same system component on two separate occasions could have very different impact on customer service, depending on how that system component affects the entire system. Industry representatives have told us that broker-dealers believe that such a rule governing operational capability is unnecessary. According to the Securities Industry Association, enormous market pressures, the current regulatory structure, which includes existing guidance on operational capabilities, and the “obligation to do better” for the customer provide sufficient protections for investors against spikes in volume. While existing guidelines do provide some guidance, they do not provide clear criteria that broker-dealers can use to measure systems slowdowns and outages. We understand that operational capability problems may not be as significant as they were in 1999 to 2000 because of a decline in trading volume and upgraded technology. According to NYSE officials, recent on- line trading volume has not experienced the same level of activity as it did during the first quarter of 2000; and therefore, upgraded systems may not have yet operated under those same market conditions. OCIE found that many of the firms they examined did not provide a plain English disclosure about the risks of system outages or slowdowns. They also found that about one-quarter of the firms examined either did not conduct assessments of their operational capabilities or had difficulty responding to questions about capacity. Thus, we continue to believe that broker-dealers maintaining consistent records about delays and outages could better inform investors about the potential for and the adverse effects of delays and outages. It could also assist securities regulators in assessing whether broker-dealers are complying with SEC guidance on systems capacity. Finally, having such a definition would assist broker- dealers adhere to OCIE recommendations about maintaining records of systems slowdowns and outages. Although we did not make a recommendation that broker-dealers provide clarification on the issue of suitability, we noted in our previous report that as firms begin to tailor advice to individual on-line investors, suitability issues might arise. We also reported that because more full- service broker-dealers were offering on-line channels, suitability was becoming an increasingly important issue. Under NASD rules, suitability becomes an issue when broker-dealers or registered representatives recommend securities to investors. NYSE rules establish certain responsibilities for broker-dealers that have been interpreted as imposing upon them suitability requirements. In its recently issued Notice to Members 01-23, NASDR provided guidance to help broker-dealers understand when suitability can become a concern in an electronic environment. The notice discusses some of the issues that may arise when an electronic communication from a broker-dealer to a customer results in a recommendation as defined by NASD’s suitability rule. It also provides guidelines to assist members in evaluating whether a particular communication could be viewed as a recommendation. NASDR noted that the more closely a broker tailors a communication to an individual, the more likely that communication will be viewed as a recommendation. The enforceability of the actions that have been taken since our last report, as well as the regulators’ likelihood of identifying weaknesses or deficiencies in broker-dealers’ behavior, depends on whether the actions are rules, guidance, or recommendations. Where the regulator has established rules, the regulator has the legal authority to take action if it finds that broker-dealers have violated them. Regulators may use other means to influence broker-dealers to follow OCIE recommended practices or other guidance. For example, in reporting the results of examinations, NASDR and SEC can cite broker-dealers for a “weakness” that is technically not a rule violation and ask the firm to take corrective action if a firm fails to adopt guidance or recommendations. NASDR and SEC officials stated that when firms are cited for a weakness, they typically correct the weakness in a timely manner. In addition, NASDR and the NYSE—self regulatory organizations (SRO)—have umbrella rules that allow them to take action against their members, even if no other specific rule is violated. NYSE officials stated that they can take action using these rules if one of its members consistently and pervasively fails to follow generally accepted business practices, and NASDR officials stated that they can take action if one of their members does not adhere to high standards of business conduct. The likelihood that regulators’ would identify weaknesses or deficiencies also depends in part on whether the actions they took were in the form of rules, guidance, or recommendation. Regulators plan to include means of identifying violations of the recently created rules in their examination procedures. However, examination procedures do not currently include steps to address all of the recommended practices from the January 2001 OCIE report, although SEC and NYSE plan to include such steps in future procedures. Examiners are routinely provided guidance affecting broker- dealers, such as the OCIE report. However, until OCIE recommended practices become the subject of examination procedures, regulators may be less likely to identify weaknesses in the areas addressed in this report. Where securities regulators have adopted rules that address our recommendations, SEC and SROs can take actions to compel broker- dealers to correct violations. If an SEC or SRO examination reveals that a broker-dealer is violating a rule, SEC and SROs may issue the broker- dealer a “deficiency letter” identifying the rule violation and outlining mandatory remedial steps. The regulators then ask for a written response and the broker-dealer must show that the deficiencies have been corrected. In other cases, if the violations are serious—for instance, if investor funds or securities are at risk—the examination staff at SEC or the SROs may refer the matter to the enforcement division at the appropriate agency. If a matter is referred to the SEC’s division of enforcement, the division determines whether to investigate the matter further, and whether, after a complete investigation, to recommend an enforcement action. Both SEC and SROs have the authority to bring a proceeding if a broker-dealer has violated the regulator’s rule. Thus, where SEC has promulgated rules and regulations addressing our recommendations, it can conduct investigations into possible violations and prosecute broker-dealers in civil suits in the federal courts and in administrative proceedings. In civil suits, SEC can seek an injunction prohibiting the broker from violating the SEC rule again. In addition, SEC can seek civil money penalties and the return of illegal profits, or disgorgement. Regarding brokers, dealers, and their employees, SEC may also institute administrative proceedings to revoke or suspend registration of broker-dealers or bar or suspend broker-dealer employees. If a matter is referred to an SRO’s division of enforcement, that division determines whether to investigate and bring an action against a broker- dealer. SROs can sanction their members for violating SEC’s rules as well as those of SROs. Thus, if NASDR responded to our recommendation with a rule, NASDR can take disciplinary actions against brokerage firms and its employees for violations. NASDR can also take disciplinary action for violations of many of SEC rules and regulations. Similarly, if NYSE promulgated rules in response to our recommendations, it can discipline violators (both brokerage firms and their employees). Both NASDR and NYSE can impose fines, censure, suspend, or expel violators and limit their activities, functions and operations, but only after an appropriate hearing. NASDR can also order restitution to injured customers. SEC and SROs can influence broker-dealers to follow recommendations or other guidance. While SEC may not generally bring enforcement proceedings if a broker-dealer fails to adopt an OCIE recommendation or follow guidance, it may raise such “weaknesses” as a result of the examination process. Specifically, SEC staff told us that if it learns during an examination that a broker-dealer has failed to adopt a recommended practice or guidance, SEC will generally provide the firm with a letter identifying the failure to adopt the practice or guidance as a “weakness” and request the broker-dealer to take remedial steps. In addition, if a broker-dealer fails to disclose a material fact to a customer or engages in other fraudulent conduct, including accepting orders without adequate facilities, SEC has the authority to bring an action against the broker for violating section 10 of the Exchange Act and Rule 10b-5 thereunder. NASDR may also send a letter to broker-dealers that fail to adopt a recommended practice or guidance. SEC and NASDR staff informed us that when a firm is asked to take remedial steps, the firm usually will do so in a timely manner. In fact, SEC staff provided us with copies of deficiency letters, including one in which it cited a broker-dealer for weaknesses in the areas of privacy, operational capability, and suitability—areas covered in the OCIE report. SEC also provided us with the firm’s response, which demonstrated how the broker-dealer corrected the identified weaknesses. NASDR and NYSE may also rely upon their “umbrella rules” to take action against their members. NYSE relies on these rules to take action when broker-dealers consistently and pervasively fail to follow generally accepted business practices. NASDR officials stated that they use these rules to take action when broker-dealers fail to adhere to high standards of commercial conduct. These rules allow an SRO to take action if one of its members or someone associated with its members fails to follow certain business practices. NASD Rule 2110 requires NASD members to observe high standards of commercial honor and just and equitable principles of trade in conducting brokerage business. Similarly, NYSE Rule 401 requires all members to adhere at all times to the principles of good business practice in the conduct of their business affairs. Additionally, NYSE Rule 476(a)(6) requires its members to conduct themselves consistently with just and equitable principles of trade. Further, NYSE Rule 342 and NASD Rule 3010 require that member organizations and employees be reasonably supervised to ensure compliance with securities laws and regulations. Both NYSE and NASDR officials explained that they routinely use these “umbrella rules” to bring actions against member firms that fail to adhere to good business practices. NYSE told us that they recently brought enforcement action against a large broker-dealer for consistently lacking the ability to process customer orders on-line while continuing to advertise its on-line services. In this NYSE panel decision, the broker-dealer consented to the findings that it engaged in conduct inconsistent with just and equitable principles of trade—NYSE Rule 476 and failed to maintain appropriate procedures for supervision and control of its Internet trading business—NYSE Rule 342. NYSE officials explained that although NYSE and SEC do not have specific operational capability rules, the repetitive and pervasive nature of the broker-dealer’s conduct rose to a level of failing to follow generally accepted business practices. Regulators plan to include in their examination procedures means of identifying violations of the rules that address our recommendations. Specifically, regulators plan to include in their examination procedures steps for testing compliance with the new rules covering disclosures of margin risk, best execution, and privacy, that were recently adopted but have compliance dates that have either recently or not yet occurred. In addition, NYSE is in the process of developing an on-line trading examination module that will cover not only the new rules, but also OCIE recommendations in its procedures. Similarly, according to OCIE staff, OCIE’s examination modules are being revised to reflect OCIE recommendations made in its January 2001 report in addition to recent rule changes. However, according to an OCIE official, examination procedures targeted to identifying instances where broker-dealers are not following OCIE recommendations are not expected to be as comprehensive as procedures intended to identify rule violations. While OCIE recommendations, including those for disclosing trading risks and risks of system outages, are part of current examination procedures, including SEC’s and NASDR’s on-line trading examination modules, examination procedures do not currently cover OCIE recommended practices in the areas of disclosure of privacy, margin risks, and best execution. As part of their examination procedures, examiners from NASDR and SEC review broker-dealers’ Web sites to determine the types of disclosures firms are providing. The examiners are guided by their agencies’ on-line trading examination modules, which have sections on disclosure. For example, we found procedures explaining how to look for disclosure of trading risks and operational capacity. One procedure asked the examiners to determine whether the firm explains in detail the difference between market and limit orders and stop limit orders, and the benefits and risks of each. Another asked them to determine whether the firm discloses the possibility of delayed executions and market losses owing to system capacity limitations during periods of market volatility. In addition, we found procedures related to SEC’s 1998 Staff Legal Bulletin 8 guidance emphasizing that broker-dealers should have adequate capacity to handle high volume or high volatility trading days. At the time of our review, none of the regulators’ examination modules contained procedures to cover OCIE’s recommendations for margin, best execution, and privacy disclosures. However, rules have recently been approved in all three areas. Since the dates for complying with those rules have either recently or not yet occurred, regulators have not completed the written examination procedures for them. Once broker-dealers are required to comply with these rules, regulators told us that they plan to include steps in their procedures to examine for such compliance. Also, SEC plans to include steps in their examination procedures covering OCIE recommendations. Until these steps are made a part of the examination procedures, examiners would be less likely to identify instances where broker-dealers choose not to implement OCIE recommended practices. Further, according to an OCIE official, steps for assessing broker-dealers’ use of recommended practices may not be as comprehensive as steps intended to uncover rule violations. OCIE staff issued its report summarizing its on-line trading examination findings and recommendations in January 2001 in order to broadly heighten awareness of issues involving on-line trading, execution of investor transactions, capacity for handling trading volumes, and other matters. OCIE staff also chose to publish the January 2001 report, in part, because of the dramatic increase in both on-line trading and complaints by investors. By doing so, OCIE staff intended to assist broker-dealers in evaluating their own on-line trading systems. In addition, while SEC’s Market Regulation Division is considering recommending an operational capability rule, the task has been complicated by the difficulty of crafting a rule that is flexible enough to keep apace of technological change while providing for meaningful measures for outages and delays. Given the relative newness of the rules and recommendations developed by SEC and NASDR, it is too soon to judge their overall effectiveness. On-line trading continues to be an important segment of the securities trading market. The industry reports investing greater resources toward improving performance of their systems, and regulators have made substantial progress in ensuring that investors receive better information in key investor protection areas. However, investors trading on-line continue to file a substantial number of complaints that indicate concern about failures and delays in processing orders, and according to OCIE, a lack of knowledge about trading and investing. OCIE’s findings in its January 2001 report confirmed those we reported 1 year ago and provide further support for our conclusion that providing complete information on the Web sites of on-line broker-dealers would provide greater opportunities for investors to make more informed investment decisions. With rules on privacy, trading execution, and margin becoming effective this year, investors should have more information with which to make informed judgments and weigh risks. Also, while our recommendations involving trading risk and operational capability were not the subject of rulemaking, OCIE made recommendations addressing these issues, which could encourage greater disclosure of trading risks and the risks of outages and delays. In addition, NASDR adopted a rule on risks of day trading. However, the ultimate influence of these OCIE recommended practices has yet to be measured and may be diminished where regulators are limited in their ability to enforce such guidance or are less likely to identify instances in which broker-dealers choose not to follow such guidance. In addition, there is still no agreement on a meaningful and consistent measure of outages and delays that would aid broker-dealers in following OCIE’s recommendations and assist regulators in judging the operational capability of broker-dealers. Furthermore, rules governing the disclosure of privacy issues, margin risk, and day-trading risk and OCIE recommendations for disclosure of trading risk allow written or electronic disclosure, limiting the likelihood that investors who exclusively use an on-line channel would have readily accessible information on these issues. To address the continuing concerns that investors have about failures and delays in processing orders, and to improve regulators’ ability to assess broker-dealers’ compliance with SEC capacity guidance, we recommend that the Acting Chairman, SEC work with the industry to establish consistent and meaningful measures for outages and delays and to ensure that broker-dealers maintain consistent records of system slowdowns and outages that impact their customers. Such information could be used by broker-dealers to better inform investors about the potential for and adverse effects of delays and outages. Furthermore, we recommend the Acting Chairman, SEC take steps to ensure that the conspicuous plain English disclosure of margin risk and the risk of systems outages or delays, and disclosure of trading risk be made on Web sites of broker-dealers that offer on-line trading. Where appropriate, such Web site disclosure would be most useful where its delivery is tailored to individual investors. Finally, given the uncertainty over the ultimate impact of OCIE’s recommendations to broker dealers, we recommend that the Acting Chairman, SEC monitor the extent to which broker-dealers embrace OCIE’s recommendations and other guidance on disclosing trading risk and the risk of systems outages or failures, and on protecting investor records and information. On the basis of this assessment, the Acting Chairman, SEC should determine the need for further rule making in these areas. We requested comments on a draft of this report from the Acting Chairman, SEC; President, NASDR; and the Chairman and CEO, NYSE. SEC and NASDR provided written comments (see app. I and II), and the Senior Vice-President, Member Firm Regulation, NYSE provided oral comments on June 29, 2001. NYSE officials told us that they generally concur with the findings of the report and stated that it represents an accurate presentation of the on-line industry. NYSE officials provided technical suggestions that we incorporated into the report where appropriate. SEC officials stated that they agreed with the report’s recommendations and provided technical comments that have been incorporated. The NASDR, commented on the meaning of Web site disclosure. Specifically, NASDR commented that individual delivery of the disclosures, whether done on-line or in paper format, is a more effective means of ensuring that communications are made to customers than a general Web posting. We believe that information would be more easily accessible to on-line investors if it is made available to them on broker- dealer Web sites. When disclosing such information on Web sites, it should be tailored to the individual investor where appropriate. In response, we modified the language in the report to make clear our intent that in some instances it is preferable that Web site disclosure of investor protection information be tailored for individual delivery. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from its issuance date. At that time, we will send copies of the report to the Chairman and Ranking Minority Members of the House Committee on Financial Services; the Chairmen of the House Energy and Commerce Committee and its Subcommittees on Telecommunications and the Internet, and Commerce, Trade, and Consumer Protection; the Chairman and Ranking Minority Members of the Senate Committee on Banking, Housing and Urban Affairs and other congressional committees. We will also send copies to the Acting Chairman of SEC, the Chairman and CEO of NYSE and the President of NASDR. Copies will also be made available to others upon request. If you or your staff have any questions regarding this report, please contact me at (202) 512-8678, [email protected], or Mathew J. Scirè at (202) 512-6794, [email protected]. Key contributors to this report were Nima Patel Edwards, William Lew, Robert F. Pollard, Karen C. Tremba and Sindy R. Udell. Appendix II: Comments From the National Association of Securities Dealers Regulation, Inc. | On-line trading continues to be an important part of the securities trading market. The industry reports investing greater resources to improve the performance of their systems, and regulators have made substantial progress in ensuring that investors receive better information in key investor protection areas. However, investors trading on-line continue to file many complaints about failures and delays in processing orders. GAO believes that providing complete information on the websites of on-line broker-dealers would allow investors to make more informed investment decisions. |
The destruction, looting, and trafficking of cultural property, especially during times of political instability and armed conflict, is a longstanding international concern. Destruction of cultural property entails intentional or unintentional bombing and damage to sites and objects. Looting involves the illegal removal of undocumented objects from a site or structure not already excavated. Objects documented as part of a collection may also be stolen from individuals, museums and similar institutions, and other places of origin. Looted and stolen objects may be trafficked, or illicitly traded, sometimes outside the location in which the objects were looted or stolen. The United States has a history of protecting cultural property during times of conflict. For example, when the Nazi regime made a practice of looting art and other cultural property during World War II, the Allied Armies established the Monuments, Fine Arts, and Archives Section, known as the Monuments Men, who restored and returned to their rightful owners more than 5 million works of art, though many thousands of pieces of art were never recovered by their rightful owners (see fig. 1). Although cultural property has been destroyed throughout history, the civil war in Syria, which began in 2011, and the rise of ISIS in portions of Iraq, has resulted in what members of the UN have called the worst cultural heritage crisis since World War II. Several parties to the Syrian conflict have contributed to the destruction of Iraqi and Syrian cultural property. According to a State-funded research project on cultural property, terrorist organizations; Iraqi, Russian, and Syrian airstrikes; Kurdish groups; Syrian opposition groups; and individual actors have damaged cultural sites and property. Damages include the shelling of medieval cities and looting of museums containing items that date back more than 6 millennia. By around July 2014, ISIS had destroyed hundreds of religious sites throughout the territory it controlled, including Christian statues of the Virgin Mary and the tomb of the Prophet Jonah in Mosul. Furthermore, according to a United Nations Educational, Scientific and Cultural Organization (UNESCO) official, ISIS bombed two temples in Palmyra, Syria, and brutally murdered a Syrian archaeologist in August 2015, after reportedly questioning him about the location of valuable artifacts in the city. Iraq and Syria have 10 World Heritage sites that UNESCO has determined to be of cultural or natural significance. See figure 2 for a map of reported damage and looting at these culturally and naturally significant sites. In addition to the destruction of cultural property, State officials reported that looters, including people affiliated with ISIS and other terrorist organizations, other parties to the conflict, as well as opportunistic individuals, have illegally excavated areas in Iraq and Syria, presumably in search of antiquities to sell. The proceeds of these sales could be linked to financing terrorism, according to a Deputy Assistant Secretary of State. For example, ISIS manages and profits from industrial-scale looting at sites it controls in Iraq and Syria. Moreover, satellite imagery shows the archaeological site Dura Europos in Syria in 2012, before extensive looting, and after extensive looting in 2014, as depicted in the visible looting pits in figure 3. A Deputy Assistant Secretary of State reported that ISIS has encouraged the looting of archeological sites as a means of both erasing the cultural heritage of Iraq and Syria and raising money. The State official noted that the U.S. raid to capture ISIS leader Abu Sayyaf resulted in the finding of documents that demonstrated that ISIS had established an Antiquities Division with units dedicated to researching known archaeological sites, exploring new ones, and marketing antiquities. According to these documents, the Antiquities Division collects a 20 percent tax on the proceeds of antiquities looting and issues permits authorizing certain individuals to excavate and supervise excavations of artifacts. Documents found during the raid also indicate ISIS made statements prohibiting others from excavating or giving permits not authorized by ISIS. Sales receipts indicated the terrorist group had earned more than $265,000 in taxes on the sale of antiquities over a 4-month period in late 2014 and early 2015. However, the director of the State-funded project on cultural property reported that there are no reliable and publicly available estimates of the revenue ISIS earns from trade in stolen cultural property overall. Nonetheless, State officials also noted that although trafficking is difficult to quantify, ISIS has increasingly turned to the antiquities trade as access to revenue from other sources, such as oil, has been restricted. According to the International Council of Museums (ICOM), the categories of Iraqi and Syrian cultural property most vulnerable to trafficking range from written objects, figural sculpture, stamps, and seals such as cylinder seals, to coins and clay tablets with cuneiform writing (see figs. 4 and 5). According to experts, cultural property looted from Iraq and Syria is at risk of being trafficked to the United States and Europe. A State-funded research project reported that traffickers are likely smuggling cultural property out of Iraq and Syria, through Turkey and Lebanon, and on to Europe; art market experts believe that some material may also be destined for the Middle East and Asia. According to art market experts, the United States and the United Kingdom have historically had the two largest markets for legal antiquities, particularly in New York City and London. Some art market experts have speculated that illicitly obtained Iraqi and Syrian items may end up in these markets, often after having gone through intermediaries. Many art market experts we interviewed told us that they had not seen suspicious Iraqi and Syrian cultural property for sale in the United States, particularly newly circulated objects that could have been looted or stolen recently. The art market experts who reported an absence of antiquities on the market noted that media attention may be deterring buyers from acquiring objects, causing traffickers to find clients in markets other than the United States and Europe, or delaying the sale of items, as happened with items looted from the Iraq National Museum in Baghdad during the Second Gulf War in Iraq. However, other art market experts noted they had seen some cultural property they suspected of having been looted from Iraq or Syria for sale on the internet and in galleries. Further, according to State officials, antiquities dealers and auction houses may never see suspicious items because these items may remain entirely in the illicit market or surface only on internet sales websites. In addressing destruction, looting, and trafficking of cultural property, UNESCO adopted conventions in 1954 and 1970 to protect cultural property. The 1954 convention addresses cultural property protection during armed conflict, and the 1970 convention addresses the protection of cultural property against illicit import, export, and transfer of ownership. Ratified by the United States in 2009, the 1954 Convention for the Protection of Cultural Property in the Event of Armed Conflict (1954 Hague Convention), in part, calls on parties to refrain from any act of hostilities against their own or other parties’ cultural property, to refrain from using such property for purposes that are likely to expose it to destruction or damage in the event of armed conflict, and prohibit theft and acts of vandalism against such cultural property. If one party occupies the territory of another party in whole or in part, the occupying party, as far as possible, is to support the competent national authorities of the occupied country in safeguarding the occupied party’s cultural property. Additionally, should it prove necessary to take measures to preserve cultural property situated in occupied territory and damaged by military operations, the occupying party shall, as far as possible, and in close cooperation with the authorities of the occupied party, take the most necessary measures to preserve cultural property damaged during the conflict should the competent national authorities be unable to do so. Iraq and Syria are signatories to the 1954 Hague Convention. The United States enacted the Convention on Cultural Property Implementation Act (CPIA) into law in 1983, thereby implementing provisions of the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property (1970 UNESCO Convention). Through the CPIA, the United States has restricted the importation of certain cultural property. For example, as it relates to cultural property from Iraq and Syria, this restriction covers cultural property documented as belonging to the inventory of a museum or a religious or secular public monument or similar institution, which was stolen from such museum, monument, or institution after April 12, 1983. In addition to the 1983 CPIA import restriction on stolen documented property, the United States has implemented other restrictions related to a wider range of cultural property from Iraq and Syria. In response to Iraq’s invasion of Kuwait on August 2, 1990, the United States imposed comprehensive sanctions against Iraq. After the fall of Saddam Hussein in 2003, the Iraq National Museum in Baghdad was looted, resulting in the loss of approximately 15,000 items, including ancient amulets, sculptures, ivories, and cylinder seals. Some of these items, such as the one shown in figure 6, were returned to the museum. In 2007, pursuant to the Emergency Protection for Iraqi Cultural Antiquities Act of 2004, State determined the existence of an emergency condition under the CPIA, and import restrictions for cultural property illegally removed from locations in Iraq other than museums and monuments since 1990 were also put in place. In February 2015, the United Nations Security Council unanimously adopted resolution 2199, which notes, in part, that all member states shall take appropriate steps to prevent the trade in Iraqi and Syrian cultural property illegally removed from Iraq since August 6, 1990, and from Syria since March 15, 2011. In May 2016, the United States passed the Protect and Preserve International Cultural Property Act, which requires the President to restrict the importation of Syrian archaeological and ethnological material beginning no later than August 2016. While the CPIA restricts the importation of documented cultural property that is stolen from state parties to the 1970 UNESCO Convention— including Iraq and Syria—some imports, regardless of their country of origin, are exempt from the CPIA. For example, the CPIA does not apply to some items that are imported into the United States for temporary exhibition or display. Additionally, CPIA restrictions do not apply to some imported items if certain documentation is provided verifying its history of ownership. See appendix II for more details on these exemptions and on specific restrictions codified in regulations that apply to Iraqi and Syrian cultural property. While the CPIA is specific to cultural property, agency officials reported that other legal authorities have been used to prosecute cultural property cases. According to art market experts we interviewed, since the passage of the CPIA, and given media attention to legal cases regarding stolen antiquities, art market participants have focused on documenting certain aspects of their transactions to protect against allegations of illicit activity. To do so, art market participants often conduct “due diligence,” or research to verify the identity, authenticity, and value of an object and to have assurance that an object of cultural property was not illicitly traded. Art market experts we interviewed told us that they use their own discretion and professional judgment to conduct due diligence for antiquities they purchase and sell. To avoid the purchase of cultural property that may have been looted or otherwise stolen, experts noted that due diligence should include—but not be limited to—three steps: (1) researching the item’s history, or provenance; (2) checking databases that may have a catalogue of stolen items; and (3) following additional guidelines established by professional and commercial antiquities market associations. Provenance. According to the Smithsonian, provenance is the history of ownership of an artwork or other artifact and provides important information about the attribution, or determination of authorship, of the object. The Smithsonian officials and art market experts we interviewed noted that provenance can be challenging to establish, and the level of provenance that art market participants obtain may vary. For example, in a public description of provenance research challenges, the Smithsonian noted that provenance researchers may sometimes find that no records of transfer for an object were created or retained; collectors wish to remain anonymous when selling artworks through galleries and auction houses; or records are unclear, inaccurate, or give inadequate or conflicting information. Some museum curators outside of the Smithsonian told us that they do not accept items that came into the United States after a certain year, while other experts noted that any reference to an item that establishes its location during a certain time frame, such as a picture or a letter that made reference to the item, may be accepted as provenance. Some art market experts reported that items with provenance that appears unquestionable are likely to sell for a higher price, and that those without provenance may not be accepted in the market. Databases. To help vet antiquities for sale, art market experts also informed us that databases exist for tracking stolen art and antiquities. For example, art market dealers often check with the databases maintained by Art Loss Register and Art Recovery International. Both organizations are private companies that, according to their representatives, include some information from the Federal Bureau of Investigation (FBI) and other law enforcement agencies in their databases, in addition to registering stolen items on behalf of individuals. State officials and art market experts noted that these databases only contain items for which ownership information and descriptions have been documented, whereas items looters have excavated from the ground or items otherwise undocumented prior to being looted would not be registered in the databases. Association Guidelines. Professional and commercial associations related to museums, antiquities, and ancient coins have developed guidance for their members to follow, such as codes of ethics, guidelines for conducting due diligence, and affidavits for buyers and sellers. For example, the Association of Art Museum Directors (AAMD) has guidelines regarding the definition of “antiquity” to help inform due diligence required for transactions of such items. AAMD updated its guidance for acquiring archaeological material and ancient art in 2013, including a statement deploring illicit excavation of archaeological materials and ancient art; the destruction or defacing of ancient monuments; and the theft of art from museums, individuals, and other repositories. In addition, the International Association of Dealers in Ancient Art established a code of ethics and practice that states its members should not purchase or sell objects until they have established, to the best of their ability, that such objects were not stolen from excavations, can guarantee the authenticity of all objects they offer to the best of their professional knowledge and belief, and check items in excess of a certain dollar value with stolen art registers recognized by the association’s board. Furthermore, the International Association of Professional Numismatists established a code of ethics that lists five responsibilities for its members, including a statement calling on members to never knowingly deal in any item stolen from a public or private coin collection or reasonably suspected to be the direct product of an illicit excavation, and to conduct transactions in accordance with the laws of the countries in which they do business. U.S. agencies, including the Departments of State, Homeland Security (DHS), Justice (DOJ), the Treasury (Treasury), and Defense (DOD), as well as the Smithsonian, reported having roles and responsibilities related to protecting cultural property worldwide, as shown in table 1. U.S. agencies and the Smithsonian have undertaken five categories of activities intended to protect Iraqi and Syrian cultural property, including awareness raising, information sharing, law enforcement efforts, overseas capacity building, and preventing destruction, as shown in figure 7. Agency officials noted that some of these activities are done in conjunction with international organizations and foreign governments and that those partners also conduct efforts to protect Iraqi and Syrian cultural property that fall into the same five categories. Examples of international partners’ activities are provided in appendix III. Awareness raising. According to agency officials, raising awareness of the destruction, looting, and trafficking of Iraqi and Syrian cultural property can be important in promoting its protection. For instance, awareness raising can help alert the art market and law enforcement to the possibility of illicit items appearing in the United States. Further, publicizing U.S. law enforcement efforts may deter looters. Since 2011, U.S. agencies have undertaken a number of awareness- raising activities related to Iraq and Syria, such as funding the development and circulation of Emergency Red Lists, which describe the types of items that would likely be looted, hosting public events, and promoting due diligence. State’s Cultural Heritage Center (CHC) provided support to ICOM to create an Emergency Red List of Syrian Cultural Objects at Risk in 2013 and to update its Emergency Red List of Iraqi Cultural Objects at Risk in 2015 (see fig. 8). The lists illustrate and describe the types of items likely to have been found in illegal excavations in the two countries. According to officials, the illustrations in the Red Lists can serve as a resource to help the art market and law enforcement determine whether items they encounter may have been looted. U.S. agencies have also hosted public events and ceremonies to raise awareness about Iraqi and Syrian cultural property protection. For example, State’s CHC officials reported having worked with the Metropolitan Museum of Art, UNESCO, and others to bring together U.S. government officials, international organizations, and other stakeholders to discuss how they can cooperate to curb the looting and trafficking of Iraqi and Syrian antiquities. Moreover, DHS and the FBI, working with State and the government of Iraq, have conducted public ceremonies of the repatriation of Iraqi cultural property seized for investigations. In addition, U.S. agencies have promoted due diligence in the art market. For instance, State and the FBI have issued policies and alerts encouraging individuals to conduct due diligence to avoid purchasing items that may have been looted or stolen. For example, State issued a policy on its website noting that all U.S. citizens should exercise care when purchasing cultural property items abroad to ensure that objects were not stolen or looted and that their export does not violate host- country law. Similarly, the FBI publicly announced a list of issues that buyers should address as part of due diligence, including reviewing import and export documents, the history of ownership, and information about the buyer or seller. Furthermore, U.S. agencies alerted the art and antiquities market to the potential connection between terrorism financing and purchasing Iraqi and Syrian cultural property. State’s Bureau of Diplomatic Security announced in September 2015 that its Rewards for Justice program would offer awards of up to $5 million for information leading to the significant disruption of the sale or trade of antiquities by, for, on behalf of, or to benefit, ISIS. Moreover, the FBI issued an alert on the agency’s website to the art and antiquities market—specifically individuals and institutions in the trade and their clients, and professional and academic communities—in August 2015, noting that purchasing an object looted or sold by ISIS may provide financial support to a terrorist organization, which could be subject to prosecution. The FBI has also held teleconferences with members of the art market, such as dealers and auction houses, related to the looting and trafficking of Iraqi and Syrian cultural property. Additionally, DOD officials reported that DOD had produced training products to raise awareness among U.S. military personnel and DOD contractors in Iraq regarding the importance and value of preserving and protecting cultural property. Information sharing. Agency officials reported that sharing information among agencies and with stakeholders is a key activity for protecting Iraqi and Syrian cultural property. Agencies sought to share information among U.S. agencies and with international organizations and foreign governments. Specifically, State, DHS, DOJ, and others participate in an interagency task force, called the Cultural Antiquities Task Force, which has funded activities for law enforcement efforts to combat theft, looting, and trafficking of historically and culturally significant objects from Iraq. Additionally, State, Treasury, DOD, and others have interagency efforts to prevent ISIS from financing its activities, which may include trafficking of antiquities in Iraq and Syria. State has supported international information sharing by working through the UN on resolutions related to Iraqi and Syrian cultural property protection and has met with groups representing religious minorities from Iraq and Syria to share information about resources that U.S. agencies can offer to assist in protecting cultural property. State also funded an NGO to document looting and destruction of cultural heritage sites in Iraq and Syria to assess future restoration, preservation, and protection needs. Law enforcement efforts. Law enforcement efforts to counter smuggling and deter looting of Iraqi and Syrian cultural property include investigating suspicious imports, repatriating items, and providing cultural property training and guidance to law enforcement personnel. For instance, DHS’s U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE) reported having coordinated with each other, the FBI, and other agencies to open 17 cases related to Iraqi cultural property and 1 related to Syrian cultural property between 2011 and February 2016. The cases were opened at 13 DHS offices in the United States, including Boston, New York, New Orleans, Chicago, Los Angeles, Phoenix, and San Antonio. Among these cases, those that have been closed included an investigation identifying a transnational criminal organization dealing in illicit cultural property and shipping to major museums, galleries, and art houses in New York; individuals smuggling and transporting stolen property; and individuals selling cultural property on Craigslist without import documentation. ICE estimated it had repatriated 1,350 items of Iraqi cultural property since 2008. Figure 9 depicts an example of a repatriated item. The FBI’s Art Crime Team has also recovered and repatriated Iraqi cultural property items. For example, in 2005, the FBI recovered eight cylinder seals looted in Iraq; in 2006, the FBI investigated a case involving terracotta plaques and other artifacts taken from Iraq by defense contractors; and in 2013, the FBI repatriated four Iraqi cylinder seals. Additionally, agencies provided guidance and training to law enforcement personnel and attorneys regarding Iraqi and Syrian cultural property. For example, CBP and ICE issued guidance to their officers, and to agents from other departments, alerting them to attempts to smuggle recently looted items into the United States. The guidance included resources, such as the State-funded ICOM Emergency Red Lists; contact information for specialists in ICE’s Cultural Property, Art and Antiquities office; and a link to State’s description of cultural property items restricted from import. CBP’s general guidance and training for personnel includes information on cultural property. According to CBP officials, in May 2016, CBP created a Cultural Property Integrated Project Team comprised of law enforcement, legal, and policy personnel to address issues relating to CBP’s enforcement of cultural property laws. Similarly, according to agency officials, DOJ’s Executive Office for United States Attorneys (EOUSA) has worked with others to develop voluntary, web-based cultural property training for its assistant U.S. attorneys nationwide, funded by State. Overseas capacity building. U.S. officials highlighted the importance of building the capacity of governments and individuals overseas to protect cultural property, such as by providing training on conservation and repair. For example, State has funded activities to train Iraqi art conservators and museum curators on topics such as creating museum inventories and techniques for conservation and repair of cultural property. These projects have included work with the Iraqi State Board of Antiquities and Heritage to develop policies and practices to help protect and manage sites in the future. For one of these projects, working with museums and conservation specialists, State established and funded an archaeological site protection and collection management training facility in Erbil, Iraq, which State officials said had trained approximately 350 Iraqi professionals between 2009 and June 2016 using public and private U.S. funds. In February 2016, State added the Smithsonian to the project, and the Smithsonian began teaching an 18-week course. Separately, in 2016, the Smithsonian worked with UNESCO, the International Centre for the Study of the Preservation and Restoration of Cultural Property, and others on another project to provide training to cultural property protection professionals, including some from Iraq and Syria, on protecting cultural property during times of crisis. Preventing destruction. U.S. officials also reported activities related to preventing the physical destruction of cultural property. For example, DOD takes information from lists of cultural property sites in Iraq and Syria into consideration when planning military action. Further, the Smithsonian officials reported they had worked with universities and NGOs to train Syrian antiquities professionals to protect museum collections against bombs, looting, and other threats to art in conflict areas. For instance, their training on the use of sandbags and other materials to protect ancient mosaics at a Syrian museum resulted in the reportedly successful protection of immovable mosaics at the Ma’arra Museum in Idlib Province. Art market experts we interviewed suggested 25 ways in which the U.S. government could improve its cultural property protection activities. The 26 art market experts who responded to our questionnaire identified 7 of these 25 suggestions, as shown in table 2, as being of the highest importance (one case had a tied ranking) for protecting cultural property by U.S. agencies. See appendix IV for a table of all 25 suggestions and their average ratings. Art market experts provided comments on their suggestions to improve U.S. cultural property protection activities, and U.S. officials provided comments on the suggestions rated as most important by art market experts, as summarized below. Improve information sharing among U.S. agencies Many art market experts expressed the view that it would be helpful if U.S. agencies shared more information with each other more regularly, including information that law enforcement agencies have on cultural property cases. These art market experts also recommended improved interagency coordination in conjunction with increased information sharing. Some stated that increased information sharing among U.S. law enforcement agencies could help leverage expertise and increase the likelihood of resolving cases. For instance, some art market experts discussed their perception that DHS entities and the FBI appear to have overlapping law enforcement responsibilities, and they could improve communication with each other. U.S. officials recognized that more information sharing could be helpful, but most, including State and DOJ’s FBI and EOUSA, noted that information is already regularly shared among U.S. agencies. FBI officials noted that it regularly and proactively shares information, as appropriate, with law enforcement partners and that the FBI is an active member of the State-led Cultural Antiquities Task Force, which furthers these efforts. These officials further explained to us that art market experts’ suggestions on the issue may be the result of their not being fully informed about interagency communication, as it may not be appropriate for law enforcement agencies to alert the public about such communication. EOUSA officials noted that although longstanding DOJ practice prevents them from commenting to the public regarding prosecutorial processes, EOUSA takes all allegations of criminal conduct very seriously and carefully reviews investigative evidence presented to support such allegations in light of the Principles of Federal Prosecution. State officials responded to the comment made by art market experts about overlapping law enforcement responsibilities, stating that different agencies have their own sources and contacts; thus, the alleged duplicate responsibilities to investigate and prosecute cases are not necessarily a problem. Further, according to EOUSA officials, limited resources in this particular field make all cultural property law enforcement more difficult than necessary, and periodic, possibly quarterly, meetings among the agencies might be helpful, mainly to facilitate awareness of contacts in other agencies. DHS officials commented that information sharing allows agencies to make use of limited resources and develop a broader, more comprehensive view of the transnational criminal organizations that are trafficking cultural property. DHS officials added that agencies are given the opportunity to question and learn from each other’s experience in cultural property and that through domestic training and international workshops, law enforcement agencies can learn firsthand about cultural property cases, including the investigations and prosecutions processes, as well as the challenges and best practices stemming from those cases. DHS officials emphasized that existing training, workshops, and meetings of the Cultural Antiquities Task Force provide information sharing opportunities and further noted that some redundancy among law enforcement agencies allows for the agency most readily available to assist in an investigation. According to DHS officials, agencies may also have different areas of expertise, different missions, and different legal authorities, as well as different systems and processes in place. These differences could be advantageous when one agency does not have the authority to pursue a lead but another does, though these differences could also complicate information sharing among agencies. Increase support of public-private partnerships and collaboration with foreign countries on data management Art market experts highlighted a need for the U.S. government to increase support for and work with the private sector and foreign countries to improve the management of foreign countries’ cultural property data, such as museum inventories. For example, art market experts reported that looters may steal items from museums and from storage sites or artifacts from archaeological excavations in Iraq and Syria. Museums and archaeologists sometimes maintain catalogues and documentation of their collections and findings; however, according to experts, this information is not widely shared. Art market experts also noted that some archaeologists who worked in Iraq and Syria have begun to collect and share their information for the purposes of tracking down potentially looted items, but some said this information is not yet accessible. Some art market experts said an inventory of items could be helpful to include in a registry or database and to share with the art market and law enforcement to help verify whether items are being sold that have been previously documented as stolen. They also emphasized the importance of collecting and sharing such information carefully, as it could identify items that have not been looted. Moreover, some suggested the need for the U.S. government to encourage foreign countries to share information and work together to maintain a centralized database. U.S. officials generally agreed with this suggestion and emphasized their ongoing work in this area. State officials noted that the U.S. government can, and already does, assist countries with their museum inventories within the proper frameworks, assuming the foreign country desires it. For example, State officials explained that the United States almost always uses its bilateral cultural property agreements concluded pursuant to the CPIA with foreign countries to promote efforts to maintain inventories of heritage sites, collections at museums, and other cultural institutions. Additionally, State’s Ambassadors Fund for Cultural Preservation supports several projects around the world annually to develop museum and site inventories, including in countries where collections, archaeological sites, and other forms of cultural heritage are at risk. Finally, such measures are a usual component of State’s Cultural Antiquities Task Force international workshops on cultural heritage site protection and promotion of bilateral and regional cooperation to prevent looting, theft, and trafficking. DHS officials also supported the idea of institutions or countries developing their own registries of goods that are reported lost or stolen, noting that such registries could help bring looters and thieves to justice. According to DHS officials, there are several existing international registries that include similar information. DHS officials further stated that they encourage any and all private entities and foreign governments to share information pertaining to potential U.S. Customs violations involving cultural property. They commented, however, that the U.S. government may encourage, but cannot force, countries to share information. Smithsonian officials noted they viewed this suggestion as being helpful. They emphasized that the Smithsonian is working on an agreement with the World Customs Organization, which relates to international cultural property data and training, according to Smithsonian officials. They also stated that the Smithsonian is conducting research regarding threats to collections data and threats to cultural property. Increase collaboration with foreign countries to share law enforcement information internationally Art market experts rated increasing U.S. government collaboration with foreign countries to share law enforcement information internationally as highly important. Some art market experts noted that countries such as Italy have effective cultural property management and law enforcement systems that the United States could benefit from. However, some stated that U.S. agencies do not appear to be able to obtain such information from foreign countries. Others suggested the need for an international organization, such as UNESCO or the International Criminal Police Organization (INTERPOL), to centralize various countries’ law enforcement information on looting and trafficking of cultural property items and encourage countries to share more information than they currently do. Many U.S. agency officials generally did not agree with art market experts’ comments that U.S. law enforcement agencies are systematically unable to obtain information from foreign law enforcement partners for investigations and provided many examples of ways in which agencies share information with foreign partners and INTERPOL. For example, State officials said that, contrary to the experts’ perception, U.S. law enforcement has effective, existing bilateral mechanisms in place, such as regular meetings and workshops that allow for information sharing. With regard to collaboration with foreign countries, FBI officials noted that their agency’s extensive network of overseas staff regularly shares and receives investigative information from foreign partners. DHS officials commented that DHS also has an extensive overseas footprint, with ICE agents in 62 locations around the world, which supports information sharing with foreign partners in law enforcement. According to EOUSA officials, collaboration varies from country to country, and countries that have effective cultural property management and law enforcement programs generally receive cooperation more easily from the United States. EOUSA officials noted that an effective domestic cultural property management and law enforcement system comparable to that of Italy would be a very useful goal for the United States, whose own cultural property, including Native American artifacts, is the subject of overseas trafficking. Regarding U.S. agencies’ collaboration with international organizations, State and DOJ’s FBI and EOUSA officials all clarified that they are already connected with INTERPOL, and DHS officials noted that INTERPOL already supports the function of collaboration with foreign countries to share law enforcement information. FBI officials reported that they leverage the information capability of INTERPOL, while State officials commented that the Cultural Antiquities Task Force holds workshops to include ICE, FBI, and INTERPOL participants for promoting bilateral and regional cooperation. State officials added that INTERPOL’s Database of Stolen Works of Art is steadily being improved and that the reporting and appropriate diffusion of cultural property crime data is an important INTERPOL responsibility. DHS officials also mentioned UNESCO’s searchable database of cultural property laws, funded by State, and reiterated their comments that information sharing among U.S. agencies and collaboration with foreign countries on cultural property allows for fuller use of limited resources. Finally, State officials noted that State stands ready to assist law enforcement agencies in obtaining information relevant to individual cases and trafficking as a whole. Improve CBP guidance on importing cultural property Many art market experts suggested that CBP could improve its guidance on importing cultural property, such as clarifying information required in Customs declaration forms for imported goods. Art market experts commented that CBP’s May 2006 guide to the trade community on cultural property, What Every Member of the Trade Community Should Know About: Works of Art, Collector’s Pieces, Antiques, and Other Cultural Property, is the most recent guidance on CBP’s website and should be updated. The document discusses requirements for the importation of cultural property, including special rules that apply to certain types of cultural property because of international agreements, treaties, or other requirements. For cultural property in particular, many art market experts emphasized the difficulty they have encountered in determining the “country of origin,” which some thought CBP generally defines as the place of manufacture. However, they noted that ancient borders do not align with modern state boundaries, which complicates attempts to determine the origin of antiquities. For example, a Roman artifact may have been manufactured in one part of ancient Rome and found in Italy, Iraq, Syria, or any of the countries once included in the shifting borders of the ancient Roman Empire. According to some art market experts, tracing the origins of items that were made to be circulated, such as coins, is even more complicated. Moreover, many art market experts we spoke to provided examples of cases in which the importer would declare a European country to be an antiquity’s country of origin because it had been held in that country for some time. According to UK art dealers we spoke to, requirements for export documents from the country an item leaves before coming to the United States have changed over the years. They sought new guidance from CBP regarding what to do with items with older export documents that may not match newer requirements. Within DHS, CBP officials agreed with the suggestion for updating the May 2006 trade guide, and ICE officials noted that they support CBP in its ongoing efforts to streamline and clarify guidance provided to individuals and companies wishing to import goods to the United States. DOJ’s EOUSA officials agreed that guidance and clarification, including definitions, should be updated. State officials commented that there may be confusion about the issue of country of origin of archaeological material being considered for importation, and that it could be worthwhile for State and CBP to consult on a definition of the country of origin for archaeological materials that could be adopted and used by CBP and others. Increase training of law enforcement officers Art market experts noted the importance of improved and increased training on cultural property investigations for law enforcement agencies, including ICE, CBP, and the FBI. Some art market experts said that they thought that training for CBP officers and ICE agents may not be adequate. As a result, according to art market experts, these officials may not recognize looted material or know how to handle delicate cultural property. Some art market experts discussed the need for training as part of agencies’ need for increased resources dedicated to cultural property protection. For example, some art market experts commented that the FBI’s 16-person Art Crime Team appears to have well-trained agents but may not have enough resources and that CBP and ICE do not seem to have a sufficient number of agents with expertise to investigate cultural property cases. Some art market experts said that ICE agents have received training provided by State and the Smithsonian but CBP officers did not appear to have similar training. Agency officials had mixed responses to this suggestion, noting that increased training is tied to additional agency resources. DHS officials commented that they continue to work with State and the Smithsonian to enhance the training provided to ICE, CBP, U.S. prosecutors, and foreign law enforcement. According to DHS officials, the agency participates in State-funded international workshops with representatives of foreign cultural and law enforcement agencies to share challenges and best practices related to the trafficking of cultural property. DHS’s CBP officials pointed out that, unlike ICE, CBP does not have agents working on cases but employs officers to work at ports of entry where they may encounter cultural property. CBP officials commented that CBP is actively involved in attending cultural property training provided by State and the Smithsonian. Officials representing EOUSA received the idea of increased training for assistant U.S. attorneys positively, especially if done in conjunction with training for FBI and DHS agents. FBI officials confirmed that the agency’s Art Crime Team includes well-trained agents that manage cultural property cases, but FBI officials disagreed that resources were insufficient. Other agencies’ officials commented that existing cultural property training for law enforcement officers could be expanded, particularly for CBP officials, but that doing so would require more resources. For example, State, ICE, and the Smithsonian created a training course entitled “Preventing Illicit Trafficking; Protecting Cultural Heritage,” which 265 law enforcement officials have attended since 2009, including some CBP officers. According to State officials, this training was funded by State under its Congressional mandate for administering the Cultural Antiquities Task Force. Smithsonian officials stated that in the January 2016 course, 4 of 28 training participants were from CBP and that, if the Smithsonian had additional resources, it would be able to provide more training for CBP and ICE. State officials reported that State is in consultation with DHS to explore ways to enhance CBP training. DHS commented that funding for training is limited and reallocating funds for that purpose diverts funds from other mission-critical areas; according to DHS officials, DHS currently does not have a budget for cultural property training. In particular, CBP officials stated that the agency has not received funding for cultural property training. State officials noted that, having expertise in providing specialized cultural property training, they have had discussions about how State’s training efforts could best be extended to much larger numbers of CBP personnel, an effort that would require additional human and budgetary resources. EOUSA officials also reported that there is periodic training for assistant U.S. attorneys, annual Art Crime Team training, and annual training provided by ICE and the Smithsonian but that these training courses need to be expanded. Regarding art market experts’ comments related to agency resources, the FBI officials explained that cultural property cases are investigated out of 1 or more of the FBI’s 56 field offices across the country. Therefore, the FBI’s capacity to investigate federal crimes related to cultural property crimes is not limited to the Art Crime Team in headquarters. EOUSA officials added that increased resources and prioritization are required to address the breadth of cultural property crime. Furthermore, State officials commented that to be effective in reducing pillage, law enforcement efforts should go beyond importation decisions, including prosecutions of traffickers and buyers of illicit cultural property, when appropriate. According to DHS officials, DHS seeks to bring criminals to justice wherever possible and believes that prosecutions both remove criminals from the street and serve as deterrents to other individuals and organizations seeking to profit from trafficking of cultural property. Art market experts suggested that an overarching strategy on cultural property protection would communicate and emphasize U.S. priorities on the issue of cultural property protection and that it should include diplomatic and law enforcement elements. In addition, a strategy focused on cultural property should clearly define agency roles and priorities. Many art market experts we spoke with commented that U.S. agencies currently do not appear to have clearly delineated roles, and these art market experts were unclear which agency would be responsible for addressing certain cultural property issues. For example, some art market experts that we spoke with noted that they did not understand the different roles that DHS and FBI play and that it sometimes appears as though their responsibilities overlap. Also, art market experts expressed concern that, although State leads a law enforcement task force, agencies participating in the task force may not be sharing information effectively, and not all agencies may know to attend. In addition, many art market experts we spoke to suggested that creating a government-wide strategy would complement the suggestion to establish a single point of contact for cultural property in the U.S. government. Agency officials expressed mixed views regarding art market experts’ suggestion for a government-wide strategy, but some agency officials said that the Protect and Preserve International Cultural Property Act enacted in May 2016 reinforces interagency coordination. Specifically, State officials noted that a strategy on cultural property protection could potentially increase coordination between different agencies but could also be difficult to implement, potentially restrict agency flexibility in meeting new challenges, and might not achieve any new goals. State officials also reported that art market experts are not likely to know the full range of cooperation and information sharing that currently takes place. Similarly, the FBI officials disagreed with the suggestion that the agency may not be sharing information effectively, commenting that the FBI has clearly defined roles and priorities and works to deconflict investigations with other federal law enforcement agencies. State officials noted that State has an ongoing interagency leadership and coordination role on cultural heritage protection and preservation. Participation in State’s Cultural Antiquities Task Force is by invitation only, and State is always open to suggestions concerning inclusion of additional agencies, although State cannot always accept the suggestions. DHS officials added that the agency supports the role of State’s Cultural Heritage Center and the Cultural Antiquities Task Force in efforts to coordinate U.S. government strategy on cultural property. In contrast, officials from EOUSA noted that there is sometimes an overlap of agency roles that occurs with investigations of all crime and that information sharing is an important action. They commented that the FBI and ICE have art market outreach efforts, but these could be improved. State officials commented that the overlapping roles of ICE and FBI are probably unavoidable but not problematic. Finally, Smithsonian officials said that they expect an interagency coordination committee to be established under the Protect and Preserve International Cultural Property Act, which will include the Smithsonian and others, and anticipate that the committee will have a role in developing a government-wide strategy. Establish DOD point of contact Many art market experts we spoke to noted that they were not aware of a central point of contact at DOD for cultural property protection issues overseas. Some experts thought a central point of contact would be particularly important if DOD is to be the lead U.S. agency implementing the 1954 Hague Convention, which, in part, calls on countries to prohibit the theft and acts of vandalism against cultural property. Some art market experts stated that DOD should take a leadership role in implementing these requirements; however, according to these art market experts, it does not appear to have done so, nor is it clear to these experts the extent to which DOD has undertaken cultural property protection work overseas. They believe that DOD efforts appeared to be disjointed among different combatant commands and suggested that the primary point of contact to coordinate all of DOD’s cultural property protection work could potentially be in the Office of the Secretary of Defense. One art market expert noted that DOD does not appear to have an approach to cultural property protection globally. For example, the expert said that when DOD builds an airstrip or helicopter pad overseas, it is unclear if DOD has a plan to protect cultural property. Such a plan, art market experts suggested, could prevent another incident such as the one in which coalition forces unintentionally damaged an archaeological site in Babylon, Iraq, by using the site for a large-scale military base and as a landing area for helicopters. DOD officials responded that the Office of the Under Secretary of Defense for Policy’s Office of Stability and Humanitarian Affairs is available as a point of contact within DOD to respond to inquiries on DOD policy on cultural property protection overseas. DOD officials also stated that ensuring the protection of cultural property involves the responsibilities of many DOD components. In certain cases, inquiries regarding cultural property may relate to a DOD component’s implementation of DOD policies and may be more appropriately addressed to that DOD component. Thus, DOD officials concluded that they are not certain that a central point of contact through which all inquiries about cultural property must be routed is necessary or would result in greater efficiencies. DOD officials also stated that DOD is, and has long been, effectively implementing the requirements of the 1954 Hague Convention, despite art market experts’ apparent misperception that DOD is not effectively implementing the convention or does not otherwise have an effective and coordinated approach to the protection of cultural property. DOD officials noted that requirements of the 1954 Hague Convention are included in DOD’s longstanding policy to comply with the law of war during all armed conflicts and in all other military operations. DOD directives, instructions, and guidance documents further provide information to assist DOD components in the implementation of the 1954 Hague Convention. DOD officials explained that one such document provides directions for the management of contingency locations to ensure compliance with environmental standards and best management practices, including those that avoid or mitigate adverse effects to cultural, historic, and natural resources to the extent practicable, given mission requirements. DOD officials stated that another document provides standards for historic and cultural resource protection in countries where DOD has a long-term presence. According to DOD officials, in particular military operations, DOD components have requirements to protect cultural property established by an annex of an operation order or operation plan, which may contain provisions for identifying historic and cultural areas, liaising with host-nation authorities and local experts during the planning for the construction or leasing of base camps or sites to be used by U.S. forces, and developing guidance and practices to minimize disturbance of historically and culturally significant areas. In addition to these policies and practices, DOD components have provided specific guidance to help ensure the protection of cultural property within each component’s area of responsibility, including guidance issued by U.S. Central Command, U.S. Southern Command, U.S. Africa Command, U.S. Strategic Command, the Secretary of the Navy, the Marine Corps, the Army, and the Air Force, among others. Smithsonian officials noted that they would welcome greater coordination with DOD. We are not making any recommendations in this report. We provided a draft copy of this report to State, DHS, DOJ, Treasury, DOD, Interior, and the Smithsonian for their review and comments. State, DHS, Treasury, DOD, and the Smithsonian provided technical comments, which we incorporated as appropriate. DOJ and Interior had no comments. We are sending copies of this report to the appropriate congressional committees; the Secretaries of State, Homeland Security, Treasury, Defense, Interior, and the Smithsonian Institution; the Attorney General of the United States; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-9601, or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. This report describes (1) activities undertaken by U.S. agencies and the Smithsonian Institution (Smithsonian) to protect Iraqi and Syrian cultural property since 2011, and (2) art market experts’ suggestions for improving U.S. government activities. To determine the activities undertaken by U.S. agencies and the Smithsonian to protect Iraqi and Syrian cultural property, we reviewed documents and data related to cultural property provided by the Smithsonian and U.S. agencies, including the Departments of State (State), Homeland Security (DHS), Justice (DOJ), the Treasury, Defense (DOD), the Interior (Interior); and the U.S. Agency for International Development (USAID). We also interviewed officials representing these agencies and the Smithsonian to obtain an understanding about their roles and responsibilities as well as cultural property protection activities they conduct. In addition, we interviewed representatives of international organizations and foreign governments, including the United Kingdom (UK), Italy, and Jordan; and collected and reviewed international organizations’ documents. We chose the UK because agency officials and art market experts reported that it represents the second-largest legal antiquities market after the United States; we chose Italy and Jordan because the U.S. Mission to the United Nations (UN) reported the two countries’ UN missions were leading an effort to protect Iraqi and Syrian cultural property. Furthermore, we reviewed laws governing cultural property and authorities used by U.S. agencies and international organizations to address cultural property issues. Although we examined U.S. government and international efforts taken to protect cultural property globally, we focused on efforts to address Iraqi and Syrian cultural property protection since 2011, the beginning of the Syrian civil war. Our description of U.S. government and international activities is intended to be illustrative of the types of activities these actors conduct to protect Iraqi and Syrian cultural property and is not exhaustive of all activities undertaken by these entities. To obtain art market experts’ suggestions to improve U.S. government activities to protect Iraqi and Syrian cultural property, we conducted interviews with a nongeneralizable sample of 35 U.S.-based art market experts knowledgeable in cultural property protection issues, including antiquities. We selected these experts based on, among other factors, a varied selection of experts representing different categories of the art market. These art market experts, who have knowledge of U.S. government activities to protect cultural property, including some who have worked as government employees, range from those representing art and antiquities dealers, auction houses, appraisers, archaeologists, museums, academic institutions, and nongovernmental organizations (NGO) to lawyers who specialize in cultural property cases. However, these experts may not have access to nonpublic information regarding efforts by U.S. agencies to protect cultural property. Additionally, because our sample includes individuals covering a broad range of expertise in the art market, not all individuals have expertise in all areas of cultural property protection. For instance, individuals in our sample with expertise in one area, such as archaeology or other academic topics, may not necessarily have expertise in other areas, such as legal or law enforcement issues. During our interviews, we asked these 35 art market experts to identify suggestions for U.S. government improvement to cultural property protection activities. We consolidated interview responses to create a comprehensive list of 25 suggestions. As a follow-up to our initial interviews, we compiled this list of 25 suggestions into a questionnaire, which we sent to a nongeneralizeable sample of 29 art market experts requesting them to rate the importance of the suggestions based on a four-point scale. Of these 29 art market experts, 26 responded to the questionnaire. A complete list of all the suggestions we included in the questionnaire and the average scores of respondents’ ratings of each suggestion can be found in appendix IV. Based on the average score of these 26 art market experts’ ratings of suggestions in the questionnaire, we identified seven suggestions experts rated as of highest importance and asked U.S. officials representing State, DHS, DOJ, Treasury, DOD, and the Smithsonian to provide their views about these suggestions. While we report the views of art market experts and U.S. officials related to these suggestions, we are not expressing an opinion on them. Based on documents we reviewed and interviews we held with U.S. agencies and the Smithsonian, international organizations, and foreign government officials, as well as art market experts, we also obtained an understanding of the art market’s general practices for addressing cultural property issues. To gather information for both objectives, we interviewed government officials and experts in Washington, D.C.; New York, New York; and London, UK. We conducted this performance audit from August 2015 to August 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The United States has implemented a number of laws that restrict the importation of certain types of Iraqi and Syrian cultural property, with some exemptions. In addition, the United States has made exceptions to export restrictions to allow some cultural property protection activities to take place in Syria. Some of these restrictions and exemptions apply to both countries, while others are specific to each country, as detailed below. Since 1983, through the Convention on Cultural Property Implementation Act (CPIA), the United States has restricted the importation of certain cultural property from state parties to the 1970 United Nations Educational, Scientific and Cultural Organization (UNESCO) Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property (1970 UNESCO Convention). For example, as it relates to stolen cultural property from Iraq and Syria, the import restriction covers cultural property documented as belonging to the inventory of a museum or religious or secular public monument or similar institution that was stolen from such museum, monument, or institution after April 12, 1983. Moreover, through the CPIA, the United States has imposed import restrictions on archaeological or ethnological materials of state parties designated pursuant to international agreements with such state parties and by emergency action taken by the administration under the CPIA. According to Department of State (State) officials, the import restrictions were intended to reduce the incentive for pillage by discouraging the trade in undocumented cultural property and encouraging a legal trade in documented property. Iraq and Syria have no bilateral or multilateral agreements with the United States to apply import restrictions under the CPIA. However, additional legislation has authorized the President with respect to Iraq, and mandated the President with respect to Syria, to exercise an emergency implementation of import restrictions under the CPIA. Moreover, other U.S. import restrictions apply to cultural property from the two countries, as described below. Certain cultural property from Iraq is covered by two additional authorities that allow the imposition of import restrictions under the Emergency Protection for Iraqi Cultural Antiquities Act of 2004 (Iraqi Cultural Antiquities Act) and Executive Order 13350. The Iraqi Cultural Antiquities Act authorized the President to exercise his authority under the CPIA to apply import restrictions to any archaeological or ethnological material of Iraq if the President determines that an emergency condition applies to such material. The authority granted by the Iraqi Cultural Antiquities Act to impose the import restrictions was assigned to State and, on July 2, 2007, State made the necessary determination that an emergency condition applies with respect to archaeological and ethnological materials of Iraq to impose import restrictions on those materials. The Department of Homeland Security’s (DHS) U.S. Customs and Border Protection (CBP) then issued a regulation on April 30, 2008, to “reflect the imposition of the import restrictions.” Consistent with the Iraqi Cultural Antiquities Act, the regulation defines “archaeological or ethnological material of Iraq” as cultural property of Iraq and other items of archeological, historical, cultural, rare scientific, or religious importance illegally removed from the Iraq National Museum, the National Library of Iraq, and other locations in Iraq since August 6, 1990. In issuing the regulation, to provide general guidance, CBP also issued the Designated List of Archaeological and Ethnological Material of Iraq that describes the types of articles to which the import restrictions apply. Similarly, the regulation implementing Executive Order 13350 covers any cultural property of Iraq and other items of archeological, historical, cultural, rare scientific, or religious importance that were illegally removed from the Iraq National Museum, the National Library of Iraq, and other locations in Iraq since August 6, 1990. However, this regulation also covers items for which a reasonable suspicion exists that they were illegally removed from the same list of institutions. Furthermore, the regulation implementing the executive order states that questions concerning whether particular Iraqi cultural property or other items are subject to this regulation should be directed to the Cultural Heritage Center of the State Department. On May 9, 2016, the President signed into law an act that provides emergency protection for Syrian cultural property by requiring the President to impose import restrictions on certain Syrian archaeological and ethnological material. The act is entitled the Protect and Preserve International Cultural Property Act and, like the 2004 Iraqi Cultural Antiquities Act, it cites a provision in the CPIA that authorizes the President to apply import restrictions on archeological or ethnological material upon determining that an emergency condition applies to such material. Under the CPIA, an emergency condition means, among other things, that certain types of archeological or ethnological material are in jeopardy from pillage, dismantling, or fragmentation. In addition to import restrictions under the CPIA, the U.S. Treasury authorizes certain services in support of cultural property protection activities for Syria that would otherwise be prohibited by Syria sanctions regulations. Specifically, it authorizes the export or reexport of services to Syria in support of nongovernmental organizations’ (NGO) activities for the preservation and protection of cultural heritage sites in Syria, including, but not limited to, museums, historic buildings, and archaeological sites. Some imports, regardless of their country of origin, are exempt from the CPIA. For example, any archaeological or ethnological material or any article of cultural property which is (1) imported into the United States for temporary exhibition or display and is immune from seizure under specific judicial process, or (2) purchased in good faith by certain institutions and where other enumerated conditions apply such as if the acquisition of the material or article has been reported in specific types of publications. In addition to these exemptions, there are a number of designated archeological or ethnological material that may be permissibly imported under the CPIA. For example, regarding Iraqi material, an import will be permitted if the importer (1) files documentation from the government of Iraq certifying that exportation of such material was not in violation of the laws of that country, or (2) presents satisfactory evidence (as defined by the CPIA) that the material (A) was exported from Iraq at least 10 years prior to being imported into the United States and that neither the person for whose account the material is imported (or any related person) contracted for or acquired an interest, directly or indirectly, in such material more than 1 year before that date of entry, or (B) the item was exported from Iraq prior to the date on which such material was designated as prohibited from importation. Regarding Syrian material, under the Protect and Preserve International Cultural Property Act, the President may waive the import restrictions if he certifies to the appropriate congressional committees that certain conditions are met. First, if the owner or lawful custodian of the specified archaeological or ethnological material of Syria has requested that such material be temporarily located in the United States for protection purposes or, if no owner or lawful custodian can reasonably be identified, if the President determines that, for purposes of protecting and preserving such material, the material should be temporarily located in the United States. Second, the material must be returned to the owner or lawful custodian when requested by such owner or lawful custodian. Third, there is no credible evidence that granting such waiver will contribute to illegal trafficking in archaeological or ethnological material of Syria or financing of criminal or terrorist activities. Agency officials and experts mentioned a number of international organizations and foreign governments as having key activities to protect cultural property for Iraq and Syria. These activities include efforts that fall into the same five categories that apply to U.S. efforts. Examples of these five types of activities are described below. Awareness Raising. The United Nations (UN) established a monitoring team in 2014 to report on threats posed by the Islamic State of Iraq and Syria (ISIS) and other terrorist groups and produced three reports on Iraqi and Syrian cultural property protection efforts, and challenges to these efforts, particularly regarding the implementation of UN Security Council Resolution 2199. Furthermore, officials representing the Italian and Jordanian missions to the UN described to us their efforts in cosponsoring a series of events regarding the destruction and trafficking of antiquities by ISIS. Information Sharing. The International Committee for the Blue Shield, an organization that promotes cultural property protection related to the 1954 Hague Convention regarding armed conflict, worked with others and produced lists of cultural sites and repositories in Iraq and Syria. The committee submitted these lists to the Department of Defense (DOD), defense agencies in other nations, and the North Atlantic Treaty Organization for use during military planning, according to the committee. Law Enforcement Efforts. To counter smuggling and deter looting, the International Criminal Police Organization (INTERPOL) maintains a database of over 45,000 cultural property thefts reported by law enforcement agencies and worked with the World Customs Organization, the United Nations Educational, Scientific and Cultural Organization (UNESCO), and the International Council of Museums (ICOM) to exchange information about the illicit trade in cultural property. In 2012, the World Customs Organization issued a press release calling on customs administrations worldwide to increase their vigilance at borders on cultural artifacts that may be smuggled or exported illegally from Syria. Further, an official from the United Kingdom (UK) customs authority reported that the UK made six seizures between 2015 and early 2016 of shipments containing 10 to 20 kilos each of ancient Roman, medieval, and Islamic coins suspected of coming from Syria, with dirt still on them. Overseas Capacity Building. UK officials reported that the Minister of Culture issued a £3 million grant in October 2015 to the British Museum to train conservators from Iraq as part of a new £30 million foreign assistance Cultural Protection Fund created in part as a reaction to ISIS’s destruction and looting in Iraq and Syria. Preventing Destruction. According to UNESCO, many museums in Syria have taken measures to reduce the risk of theft of moveable heritage since the beginning of the conflict. In particular, UNESCO reported that some Syrian museums have moved their archaeological artifacts to safe and secure areas and enhanced security by installing additional burglar alarms and increasing the number of security guards and patrols of the perimeters. We asked a nongeneralizeable sample of 35 art market experts to suggest ways the U.S. government could improve efforts to protect Iraqi and Syrian cultural property. These art market experts, who have knowledge of U.S. government activities to protect cultural property, including some who have worked as government employees, range from those representing art and antiquities dealers, auction houses, appraisers, archaeologists, museums, academic institutions, and nongovernmental organizations (NGO) to lawyers who specialize in cultural property cases. However, these experts may not have access to nonpublic information regarding efforts by U.S. agencies to protect cultural property. Additionally, because our sample includes individuals covering a broad range of expertise in the art market, not all individuals have expertise in all areas of cultural property protection. For instance, individuals in our sample with expertise in one area, such as archaeology or other academic topics, may not necessarily have expertise in other areas, such as legal or law enforcement issues. We compiled art market experts’ suggestions into a questionnaire listing 25 suggestions, which we sent to a nongeneralizeable sample of 29 art market experts and asked them to rate the importance of each suggestion. We received responses from 26 of the 29 experts. Table 3 below lists all 25 suggestions, beginning with the suggestion rated as the most important on average by respondents and ending with the suggestion rated least important on average. In addition to the contact named above, Elizabeth Repko (Assistant Director), Katherine Forsyth, and Victoria Lin made key contributions to this report. The team benefited from the expert advice and assistance of Lynn Cothern, Justin Fisher, Grace Lui, and Oziel Trevino. | The Islamic State of Iraq and Syria (ISIS) and other groups have seized upon the conflicts in Iraq and Syria to destroy, loot, and traffic cultural property, including antiquities. According to the United Nations (UN), this destruction and looting has reached unprecedented levels. The UN has also reported that since the civil war in Syria began in 2011, ISIS has used the sale of looted Iraqi and Syrian cultural property to generate income to strengthen its capabilities to carry out attacks. Under the Convention on Cultural Property Implementation Act, signed into law in 1983, and other laws, the United States has restricted the importation of certain, but not all, Iraqi and Syrian cultural property. GAO was asked to examine the protection of Iraqi and Syrian cultural property, including views of art market experts. This report describes (1) activities undertaken by U.S. agencies and the Smithsonian Institution to protect Iraqi and Syrian cultural property since 2011, and (2) art market experts' suggestions for improving U.S. government activities. GAO reviewed documents and interviewed U.S., international, and foreign officials. GAO interviewed a nongeneralizable sample of U.S.-based art market experts representing different categories of the art market to obtain suggestions for potentially improving U.S. government activities. GAO then asked experts to rate the importance of these suggestions and obtained U.S. officials' views on experts' top-rated suggestions. GAO is not making recommendations in this report. U.S. agencies and the Smithsonian Institution (Smithsonian) have undertaken five types of activities to protect Iraqi and Syrian cultural property since 2011, which include awareness raising, information sharing, law enforcement, overseas capacity building, and destruction prevention. For example, the Department of Homeland Security reported coordinating with the Federal Bureau of Investigation and other agencies to open 18 Iraqi and Syrian cultural property cases—such as those regarding smuggling by individuals and international criminal organizations—between 2011 and February 2016. To enhance the capacity of partners overseas, the Department of State (State), the government of Iraq, and others established an archaeological and cultural management training facility in Erbil, Iraq. In addition, to prevent destruction, the Smithsonian and others trained Syrian antiquities professionals to use sandbags and other materials to protect ancient mosaics at a Syrian museum, reportedly resulting in the successful protection of the museum collection when it was bombed. Types of Iraqi and Syrian Items at Risk of Being Trafficked Art market experts identified suggestions related to improving information sharing, clarifying guidance, creating a strategy, and establishing a Department of Defense contact as most important to improving U.S. government activities for cultural property protection. For example, art market experts suggested U.S. agencies could work with nongovernmental entities, such as museums overseas and foreign countries, to improve data management. Specifically, they suggested the creation of a database including information, such as museum catalogues, that could help verify if art market items were stolen. U.S. officials GAO contacted generally agreed with this suggestion and reported some ongoing work in this area. For example, State officials noted that State provides funding to support several projects annually to inventory museum and archaeological sites, including in countries where cultural property may be at risk. Agency officials had various responses to other art market experts' suggestions. |
CBP is the lead federal agency in charge of securing the nation’s borders. When CBP was created, it represented a merger of components from three agencies—the U.S. Customs Service, the U.S. Immigration and Naturalization Service (INS), and the Animal and Plant Health Inspection Service. Under the Immigration and Nationality Act, its implementing regulations, and CBP policies and procedures, CBP officers are required to establish, at a minimum, the nationality of individuals and whether they are eligible to enter the country at ports of entry. All international travelers attempting to enter the country through ports of entry undergo primary inspection, which is a preliminary screening procedure to identify those legitimate international travelers who can readily be identified as admissible. Regarding land ports of entry, the United States shares over 5,000 miles of border with Canada to the north (including the state of Alaska), and 1,900 miles of border with Mexico to the south. Individuals attempting to legally enter the United States by land present themselves to a CBP officer at one of the 170 ports of entry located along these borders. During the period of our investigations, U.S. citizens could gain entry to the United States by establishing their citizenship to the satisfaction of U.S. officials at a land port of entry. While this frequently involved a citizen presenting their birth certificate, photo identification (e.g., a driver’s license), or baptismal records, the law did not require U.S. citizens to present any of these documents as proof of citizenship. Until recently, U.S. citizens could enter the country at land ports of entry based only on oral statements. However, as of January 31, 2008, U.S. citizens age 19 and older are required, under the Western Hemisphere Travel Initiative, to present both proof of identity and citizenship when attempting to enter the United States by land. Documents that would fulfill this requirement could include a passport, a military ID with travel orders, or an enhanced driver’s license. In the absence of a single document that establishes both proof of identity and citizenship, U.S. citizens require multiple documents, such as a driver’s license and a birth certificate, to enter the United States. Requirements for entering the United States by sea are similar to those for entering by land. Regarding air ports of entry, starting on January 23, 2007, U.S. citizens were required, under the Western Hemisphere Travel Initiative, to present a passport or secure travel document when entering the United States. Prior to the implementation of this initiative, U.S. citizens entering the country by air from such locations as the Bahamas, Mexico, and Jamaica could establish their citizenship by oral assertions and documents such as drivers’ licenses and birth certificates. It is illegal to enter the United States at any location other than a port of entry. The U.S. Border Patrol, a component of CBP, patrols and monitors areas between ports of entry. However, given limited resources and the wide expanse of the border, the U.S. Border Patrol is limited in its ability to monitor the border either through use of technology or with a consistent manned presence. Commensurate with its perception of the threat, CBP has distributed human resources differently on the northern border than it has on the southern border. According to CBP, as of May 2007, it had 972 U.S. Border Patrol agents assigned to the northern border and 11,986 agents assigned to the southern border. The number of agents actually providing border protection at any given time is far smaller than these figures suggest. As mentioned above, in the September 2007 hearing on border security before your Committee, a CBP official stated that roughly 250 U.S. Border Patrol agents were patrolling the U.S.–Canada border at any given time—about a quarter of all agents reportedly assigned to patrol the northern border during that period. We found two types of security vulnerabilities in our covert testing at ports of entry. First, we found that, in the majority of cases, the government inspectors who reviewed our undercover investigators’ counterfeit documentation did not know that they were bogus and allowed them to enter the country. Second, we found that government officials did not always ask for identification. Although it was not a requirement for government officials to ask for identification at the time we performed our tests, we concluded that this was a major vulnerability that could allow terrorists or other criminals to easily enter the country. In table 1 below, each individual instance of an investigator crossing the border is noted separately, although, in some cases, investigators crossed the border in groups of two or more. We consider our attempts to enter the country through sea and air ports of entry as different from our land crossings. For one thing, we did not perform the same amount of testing that we performed at land ports of entry. For another, the standard for admittance via air ports of entry continues to be stricter than via land and sea routes. In table 2 below, each individual instance of an investigator entering the United States via air or sea is noted separately. Selected details related to these covert tests are discussed below. For our 2003 testimony, investigators successfully entered the United States using counterfeit drivers’ licenses and other bogus documentation through a land port of entry in Washington. They also entered Florida via air from Jamaica using the same counterfeit documentation. Similar follow-up work was performed throughout 2003 and 2004, resulting in successful entry at locations in Washington, New York, California, Texas, and Virginia using counterfeit identification. In 2006, investigators successfully entered the United States using counterfeit drivers’ licenses and other bogus documentation through seven land ports of entry on the northern and southern borders, adding the states of Michigan, Idaho, and Arizona to the list of states they had entered. In the majority of cases, investigators entered the country by land using rental cars. When requested, they displayed counterfeit Virginia and West Virginia drivers’ licenses and birth certificates to the government officials at ports of entry. They also used bogus U.S. passports and, in one case, a fake employee identification card in the name of a major U.S. airline. Government officials typically inspected the documentation while inquiring whether our undercover investigators were U.S. citizens. On some occasions, the officials asked whether our investigators had purchased anything in Canada or Mexico. In several instances, CBP officials asked our investigators to leave their vehicles and inspected the vehicles; they appeared to be searching for evidence of smuggling. In only one case on the northern border, one of our undercover investigators was denied entry because a CBP officer became suspicious of the expired U.S. passport with substituted photo offered as proof of citizenship. For our 2003 testimony, we found that INS inspectors did not request identification at a sea port of entry in Washington and a land port of entry in California. Our investigators’ oral assertions that they were U.S. citizens satisfied the INS inspectors and they were allowed to enter the country. Later, while conducting our 2006 covert tests, we found that CBP officers did not request identification during several foot crossings from Mexico. For example, on February 23, 2006, two investigators crossed the border from Mexico into Texas on foot. When the first investigator arrived at the port of entry, he was waved through without being asked to show identification. At this point, the investigator asked the CBP officer whether he wished to see any identification. The officer replied, “OK, that would be good.” The investigator began to remove his counterfeit Virginia driver’s license from his wallet when the officer said “That’s fine, you can go.” The CBP officer never looked at the license. However, the CBP officer did request identification from the investigator who was walking behind the first investigator. In another test on March 15, 2006, two investigators entered Arizona from Mexico by foot. They had received a phone call in advance from another investigator who had crossed the border earlier using genuine identification. He said that the CBP officers on duty had swiped his driver’s license through a scanning machine. Because the counterfeit drivers’ licenses the other two investigators were carrying had fake magnetic strips, the investigators realized they could be questioned by CBP officers if their identification cards did not scan properly. When the two investigators arrived at the port of entry, they engaged one of the officers in conversation to distract him from scanning their drivers’ licenses. After a few moments, the CBP officer asked the investigators if they were both U.S. citizens. They said, “yes.” He then asked the investigators if they had purchased anything in Mexico, and they responded, “no.” The CBP officer then said, “Have a nice day” and allowed them to enter the United States. He did not ask for any identification. We first reported on potential security vulnerabilities at unmanned and unmonitored border areas in our 2003 testimony. While conducting testing at U.S.–Canada ports of entry, we found that one of our investigators was able to walk into the United States from Canada at a park straddling the border. The investigator was not stopped or questioned by law enforcement personnel from either Canada or the United States. In our September 2007 testimony, we reported on similar vulnerabilities at unmanned and unmonitored locations on the northern and southern borders. The unmanned and unmonitored border areas we visited were defined as locations where CBP does not maintain a manned presence 24 hours per day or where there was no apparent monitoring equipment in place. Safety considerations prevented our investigators from performing the same assessment work on the U.S.–Mexico border as performed on the northern border. We found three main vulnerabilities during this limited security assessment. First, we found state roads close to the border that appeared to be unmanned and unmonitored, allowing us to simulate the cross- border movement of radioactive materials or other contraband from Canada into the United States. Second, we also located several ports of entry that had posted daytime hours and which, although monitored, were unmanned overnight. Investigators observed that surveillance equipment was in operation but that the only observable preventive measure to stop a cross-border violator from entering the United States was a barrier across the road that could be driven around. Finally, investigators identified potential security vulnerabilities on federally managed lands adjacent to the U.S.–Mexico border. These areas did not appear to be monitored or have a noticeable law enforcement presence during the time our investigators visited the sites. See table 3 for a summary of the vulnerabilities we found and the activity of investigators at each location. Selected details related to these covert tests are discussed below. According to CBP, the ease and speed with which a cross-border violator can travel to the border, cross the border, and leave the location of the crossing are critical factors in determining whether an area of the border is vulnerable. We identified state roads close to the border that appeared to be unmanned and unmonitored, allowing us to simulate the cross- border movement of radioactive materials or other contraband from Canada into the United States. For example, on October 31, 2006, our investigators positioned themselves on opposite sides of the U.S.–Canada border in an unmanned location. Our investigators selected this location because roads on either side of the border would allow them to quickly and easily exchange simulated contraband. After receiving a signal by cell phone, the investigator in Canada left his vehicle and walked approximately 25 feet to the border carrying a red duffel bag. While investigators on the U.S. side took photographs and made a digital video recording, the individual with the duffel bag proceeded the remaining 50 feet, transferred the duffel bag to the investigators on the U.S. side, and returned to his vehicle on the Canadian side. The set up and exchange lasted approximately 10 minutes, during which time the investigators were in view of residents both on the Canadian and U.S. sides of the border. According to CBP records of this incident, an alert citizen notified the U.S. Border Patrol about the suspicious activities of our investigators. The U.S. Border Patrol subsequently attempted to search for a vehicle matching the description of the rental vehicle our investigators used. However, the U.S. Border Patrol was not able to locate the investigators with the duffel bag, even though they had parked nearby to observe traffic passing through the port of entry. See figure 1 for a photograph of our investigator crossing the northern border at another unmanned, unmonitored location on the northern border with simulated contraband. In contrast to our observations on the northern border, our investigators observed a large law enforcement and Army National Guard presence near a state road on the southern border, including unmanned aerial vehicles. On October 17, 2006, two of our investigators left a main U.S. route about a quarter mile from a U.S.–Mexico port of entry. Traveling on a dirt road that parallels the border, our investigators used a GPS system to get as close to the border as possible. Our investigators passed U.S. Border Patrol agents and U.S. Army National Guard units. In addition, our investigators spotted unmanned aerial vehicles and a helicopter flying parallel to the border. At the point where the dirt road ran closest to the U.S.–Mexico border, our investigators spotted additional U.S. Border Patrol vehicles parked in a covered position. About three-fourths of a mile from these vehicles, our investigators pulled off the road. One investigator exited the vehicle and proceeded on foot through several gulches and gullies toward the Mexican border. His intent was to find out whether he would be questioned by law enforcement agents about his activities. He returned to the vehicle after 15 minutes, at which time our investigators returned to the main road. Our investigators did not observe any public traffic on this road for the 1 hour that they were in the area, but none of the law enforcement units attempted to stop our investigators and find out what they were doing. According to CBP, because our investigators did not approach from the direction of Mexico, there would be no expectation for law enforcement units to question these activities. We also identified several ports of entry with posted daytime hours in one state on the northern border. During the daytime these ports of entry are staffed by CBP officers. During the night, CBP told us that it relies on surveillance systems to monitor, respond to, and attempt to interdict illegal border crossing activity. For example, on November 14, 2006, at about 11:00 p.m., our investigators arrived on the U.S. side of one port of entry that had closed for the night. Investigators observed that surveillance equipment was in operation but that the only visible preventive measure to stop an individual from entering the United States was a barrier across the road that could be driven around. CBP provided us with records that confirmed our observations about the barrier at this port of entry, indicating that on one occasion a cross-border violator drove around this type of barrier to illegally enter the United States. Although the violator was later caught by state law enforcement officers and arrested by the U.S. Border Patrol, we were concerned that these ports of entry were unmanned overnight. Investigators identified potential security vulnerabilities on federally managed land adjacent to the U.S.–Mexico border. These areas did not appear to be monitored or have a manned CBP presence during the time our investigators visited the sites. For example, on January 9, 2007, our investigators entered federally managed land adjacent to the U.S.–Mexico border. The investigators had identified a road running parallel to the border in this area. Our investigators were informed by an employee of a visitor center that because the U.S. government was building a fence, the road was closed to the public. However, our investigators proceeded to the road and found that it was not physically closed. While driving west along this road, our investigators did not observe any surveillance cameras or law enforcement vehicles. A 4-foot-high fence (appropriate to prevent the movement of a vehicle rather than a person) stood at the location of the border. Our investigators pulled over to the side of the road at one location. To determine whether he would activate any intrusion alarm systems, one investigator stepped over the fence, entered Mexico, and returned to the United States. The investigators remained in the location for approximately 15 minutes but there was no observed law enforcement response to their activities. In another example, on January 23, 2007, our investigators arrived on federally managed lands adjacent to the U.S.–Mexico border. In this area, the Rio Grande River forms the southern border between the United States and Mexico. After driving off-road in a 4x4 vehicle to the banks of the Rio Grande, our investigators observed, in two locations, evidence that frequent border crossings took place. In one location, the investigators observed well-worn footpaths and tire tracks on the Mexican side of the river. At another location, a boat ramp on the U.S. side of the Rio Grande was mirrored by a boat ramp on the Mexican side. Access to the boat ramp on the Mexican side of the border had well-worn footpaths and vehicle tracks. An individual who worked in this area told our investigators that at several times during the year, the water is so low that the river can easily be crossed on foot. Our investigators were in this area for 1 hour and 30 minutes and observed no surveillance equipment, intrusion alarm systems, or law enforcement presence. Our investigators were not challenged regarding their activities. After performing our limited security assessment of these locations, investigators learned that a memorandum of understanding exists between DHS (of which CBP is a component), the Department of the Interior, and the Department of Agriculture regarding the protection of federal lands adjacent to U.S. borders. Although CBP is ultimately responsible for protecting these areas, officials told us that certain legal, environmental, and cultural considerations limit options for enforcement—for example, environmental restrictions and tribal sovereignty rights. We held corrective action briefings with CBP in 2006 and 2007 to discuss the results of our prior work. CBP generally agreed with our August 2006 findings and acknowledged that its officers are not able to identify all forms of counterfeit identification presented at land border crossings. In addition, in response to our August 2006 work, CBP officials stated that they supported the Western Hemisphere Travel Initiative and were working to implement it. This initiative has several parts, the most recent of which went into effect on January 31, 2008. In response to our September 2007 report, CBP indicated that resource restrictions prevent U.S. Border Patrol agents from investigating all instances of suspicious activity. CBP stated that the northern border presents more of a challenge than the southern border for several reasons, including the wide expanse of the border and the existence of many antiquated ports of entry. In response to this report, DHS provided a written update on numerous border protection efforts it has taken to enhance border security since 2003. To directly address vulnerabilities related to bogus documentation, DHS stated that measures have been implemented to enhance CBP officers’ ability to detect fraudulent documents, such as providing updated fraudulent document training modules to the CBP Academy for inclusion in its curriculum, implementing mandatory refresher training in detecting fraudulent documents, and providing the 11 ports of entry that have the highest rate of fraudulent document interceptions with advanced equipment to assist with the examination and detection of fraudulent documents. DHS also pointed out that, effective January 31, 2008, it has ended verbal declarations of citizenship at border crossings and now requires documents for U.S. citizens. If implemented effectively, this would address some of the vulnerabilities we identified in our 2003 and 2006 testimonies. According to DHS, although the full implementation of its Western Hemisphere Travel Initiative has been delayed, the implementation will also address vulnerabilities cited in our testimonies. In addition, DHS indicated that it has taken a number of actions related to the security of the northern border. In particular, DHS states that, as of April 2008, there were 1,128 agents assigned to the Northern Border—a 16 percent increase from the 972 agents identified in our 2007 report. Furthermore, DHS plans to double personnel staffing levels over the next 2 years to over 2,000 agents by the end of fiscal year 2010. DHS also indicates that CBP has established a field testing division to perform covert tests that appear similar to our own tests, with a particular focus on detecting and preventing illicit radioactive material from entering the United States. We addressed DHS technical and sensitivity comments as appropriate. We did not attempt to verify the information provided by DHS, but have included its full response in appendix I. As agreed with your offices, unless you publicly announce the contents of this report earlier, we will plan no further distribution until 30 days from the report date. At that time, we will provide copies of this report to the Secretary of Homeland Security and interested congressional committees and members. 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://gao.gov. Please contact me at (202) 512-6722 or [email protected] if you or your staffs have any questions concerning this report. 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 included John Cooney, Assistant Director; Andy O’Connell, Assistant Director; Barbara Lewis, Andrew McIntosh, Sandra Moore, and Barry Shillito. | From January 2003 to September 2007, GAO testified before the Committee on three occasions to describe security vulnerabilities that terrorists could exploit to enter the country. GAO's first two testimonies focused on covert testing at ports of entry--the air, sea, and land locations where international travelers can legally enter the United States. In its third testimony, GAO focused on limited security assessments of unmanned and unmonitored border areas between land ports of entry. GAO was asked to summarize the results of covert testing and assessment work for these three testimonies. This report discusses the results of testing at land, sea, and air ports of entry; however, the majority of GAO's work was focused on land ports of entry. The unmanned and unmonitored border areas GAO assessed were defined as locations where the government does not maintain a manned presence 24 hours per day or where there was no apparent monitoring equipment in place. GAO assessed a nonrepresentative selection of these locations and did not attempt to evaluate all potential U.S. border security vulnerabilities. Further, GAO's work was limited in scope and cannot be projected to represent systemic weaknesses. In response to this report, DHS provided a written update on numerous border protection efforts it has taken to enhance border security since 2003. GAO did not attempt to verify the information provided by DHS, but has included the response in this report. GAO investigators identified numerous border security vulnerabilities, both at ports of entry and at unmanned and unmonitored land border locations between the ports of entry. In testing ports of entry, undercover investigators carried counterfeit drivers' licenses, birth certificates, employee identification cards, and other documents, presented themselves at ports of entry and sought admittance to the United States dozens of times. They arrived in rental cars, on foot, by boat, and by airplane. They attempted to enter in four states on the northern border (Washington, New York, Michigan, and Idaho), three states on the southern border (California, Arizona, and Texas), and two other states requiring international air travel (Florida and Virginia). In nearly every case, government inspectors accepted oral assertions and counterfeit identification provided by GAO investigators as proof of U.S. citizenship and allowed them to enter the country. In total, undercover investigators made 42 crossings with a 93 percent success rate. On several occasions, while entering by foot from Mexico and by boat from Canada, investigators were not even asked to show identification. For example, at one border crossing in Texas in 2006, an undercover investigator attempted to show a Customs and Border Protection (CBP) officer his counterfeit driver's license, but the officer said, "That's fine, you can go" without looking at it. As a result of these tests, GAO concluded that terrorists could use counterfeit identification to pass through most of the tested ports of entry with little chance of being detected. In its most recent work, GAO shifted its focus from ports of entry and primarily performed limited security assessments of unmanned and unmonitored areas between ports of entry. The names of the states GAO visited for this limited security assessment have been withheld at the request of CBP. In four states along the U.S.-Canada border, GAO found state roads that were very close to the border that CBP did not appear to monitor. In three states, the proximity of the road to the border allowed investigators to cross undetected, successfully simulating the cross-border movement of radioactive materials or other contraband into the United States from Canada. For example, in one apparently unmanned, unmonitored area on the northern border, the U.S. Border Patrol was alerted to GAO's activities through the tip of an alert citizen. However, the responding U.S. Border Patrol agents were not able to locate the investigators and their simulated contraband. Also on the northern border, GAO investigators located several ports of entry in one state on the northern border that had posted daytime hours and were unmanned overnight. Investigators observed that surveillance equipment was in operation, but that the only preventive measure to stop an individual from crossing the border into the United States was a barrier across the road that could be driven around. GAO also identified potential security vulnerabilities on federally managed lands adjacent to the U.S.-Mexico border. GAO concluded that CBP faces significant challenges on the northern border, and that a determined cross-border violator would likely be able to bring radioactive materials or other contraband undetected into the United States by crossing the U.S.-Canada border at any of the assessed locations. |
Both State and DOD recognize the need to improve stability and reconstruction capabilities of the United States, and the importance of coordinating military activities with those of other U.S. government agencies and international partners. Following the problems with reconstruction efforts in Iraq in the Fall of 2003, State noted that the U.S. government had no standing civilian capacity to plan, implement, or manage stabilization and reconstruction operations and had relied on ad hoc processes for planning and executing these efforts. State recommended that a new office be established to provide a centralized and permanent structure for planning and coordinating the civilian response to stabilization and reconstruction operations. In August 2004, the Secretary of State announced the creation of the Office of the Coordinator for Reconstruction and Stabilization (S/CRS) to coordinate U.S. efforts to prepare, plan, and resource responses to complex emergencies, failing and failed states, and post conflict environments. Such efforts could involve establishing security, building basic public services, and economic development. The Consolidated Appropriations Act of 2005 granted statutory authorization for S/CRS within the Office of the Secretary of State. In November 2005, DOD issued DOD Directive 3000.05, Military Support for Stability, Security, Transition, and Reconstruction (SSTR) Operations, which established the Department’s policy for stability operations. In its directive, DOD recognizes that stability operations is a core U.S. military mission, but that many stability operations are best performed by indigenous, foreign, or U.S. civilian professionals and that DOD’s participation may be in a supporting role. However, it also states that U.S. military forces shall be prepared to perform all tasks necessary to establish or maintain order when civilians cannot do so. In December 2005, President Bush issued NSPD-44 to promote the security of the United States through improved coordination, planning, and implementation of stabilization and reconstruction assistance. NSPD-44 assigned the Secretary of State the responsibility to coordinate and lead U.S. government efforts to plan for, prepare and conduct stabilization and reconstruction operations in countries and regions at risk of, in, or in transition from conflict or civil strife. The Secretary, in turn, delegated implementation of the directive to S/CRS. NSPD-44 identifies roles, responsibilities, and coordination requirements of U.S. government agencies that would likely participate in stabilization and reconstruction operations. It also requires that State lead the development of civilian response capability, including the capacity to ensure that the United States can respond quickly and effectively to overseas crises. Finally, NSPD-44 established the NSC Policy Coordination Committee for Reconstruction and Stabilization Operations to manage the development, implementation, and coordination of stabilization and reconstruction national security policies. S/CRS has led an interagency effort to develop a framework for planning and coordinating stabilization and reconstruction operations. The NSC has adopted two of three elements of the framework—the Interagency Management System (IMS) and procedures for initiating the framework’s use. One element—a guide for planning stabilization and reconstruction operations—has not been completed. As of October 2007, the framework has not been fully applied to any operation. In addition, NSPD-44, the Foreign Affairs Manual, and the framework provide unclear and inconsistent guidance on roles and responsibilities for S/CRS and other State bureaus and offices; the lack of a common definition for stability and reconstruction operations may pose an obstacle to interagency collaboration; and some partners have shown limited support for the framework and S/CRS. S/CRS is leading an NSC interagency group of 16 agencies to create a framework for developing specific stabilization and reconstruction plans under NSPD-44. The framework is intended to guide the development of U.S. planning for stabilization and reconstruction operations by facilitating coordination across federal agencies and aligning interagency efforts at the strategic, operational, and tactical levels. Key elements of the framework include an IMS, a guide for planning specific stabilization and reconstruction operations, and procedures for initiating governmentwide planning. The IMS, the first element of the framework, was created to manage high- priority and highly complex crises and operations. In March 2007, the NSC approved the IMS, which would guide coordination between Washington, D.C. policymakers, Chiefs of Mission, and civilian and military planners. If used, IMS would include three new interagency groups for responding to specific crises: a Country Reconstruction and Stabilization Group, an Integration Planning Cell, and an Advance Civilian Team. The Country Reconstruction and Stabilization Group would be responsible for developing U.S. government policies that integrate civilian and military plans and for mobilizing civilian responses to stabilization and reconstruction operations. The Integration Planning Cell would integrate U.S. civilian agencies’ plans with military operations. The Advance Civilian Team would be deployed to U.S. embassies to set up, coordinate, and conduct field operations and provide expertise on implementing civilian operations to the Chief of Mission and military field commanders. These teams would be supported by Field Advance Civilian Teams to assist reconstruction efforts at the local level. The second element of the framework, which the NSC approved in March 2007, establishes procedures for initiating the use of the framework for planning a U.S. response to an actual crisis or in longer-term scenario- based planning. Factors that may trigger the use of the framework include the potential for military action, actual or imminent state failure, the potential for regional instability, displacement of large numbers of people, and grave human rights violations. The use of the framework for planning crisis responses may be initiated by the NSC or by a direct request from the Secretary of State or the Secretary of Defense. The NSC, Chiefs of Mission, and Regional Assistant Secretaries of State may request the framework’s initiation for longer-term scenario planning for crises that may occur within 2 to 3 years. The third element, the planning guide, has not been approved by the NSC because State is rewriting the draft planning guide to address interagency concerns. Although NSC approval of the draft planning guide is not required, S/CRS officials stated that NSC approval would lend authority to the framework and strengthen its standing among interagency partners. The draft planning guide divides planning for stabilization and reconstruction operations into three levels: policy formulation, strategy development, and implementation planning. The guide states that the goals and objectives at each level should be achievable, be linked to planned activities, and include well-defined measures for determining progress. As of October 2007, the administration had not fully applied the framework to any stabilization and reconstruction operation. While IMS was approved by the NSC, the administration has not yet applied it to a current or potential crisis. The administration also applied earlier versions of one component of the framework—the planning guide—for efforts in Haiti, Sudan, and Kosovo. According to State officials, the administration has been using NSPD-1 processes to manage and plan U.S. operations in Iraq and Afghanistan in the absence of an approved framework. In completing the framework, State must resolve three key problems. First, NSPD-44, the Foreign Affairs Manual, and the framework provide unclear and inconsistent guidance on the roles and responsibilities of S/CRS and State’s bureaus and offices, resulting in confusion and disputes about who should lead policy development and control resources for stabilization and reconstruction operations. The Foreign Affairs Manual does not define S/CRS’s roles and responsibilities, but it does define responsibilities for State’s regional bureaus and Chiefs of Mission. Each regional bureau is responsible for providing direction, coordination, and supervision of U.S. activities in countries within the region, while each Chief of Mission has authority over all U.S. government staff and activities in the country. However, according to S/CRS’s initial interpretation of NSPD-44, it was responsible for leading, planning, and coordinating stabilization and reconstruction operations. Staff from one of State’s regional bureaus said that S/CRS had enlarged its role in a way that conflicted with the Regional Assistant Secretary’s responsibility for leading an operation and coordinating with interagency partners. More recently, according to S/CRS officials, S/CRS has taken a more facilitative role in implementing NSPD-44. Second, the lack of a common definition for stability and reconstruction operations may pose an obstacle to effective interagency collaboration under the framework. The framework does not define what constitutes stabilization or reconstruction operations, including what specific missions and activities would be involved. In addition, the framework does not explain how these operations differ from other types of military and civilian operations, such as counterinsurgency, counterterrorism, and development assistance. As a result, it is not clear when, where, or how the administration would apply the framework. In our October 2005 report, we found that collaborative efforts require agency staff to define and articulate a common outcome or purpose. Prior GAO work shows that the lack of a clear definition can pose an obstacle to improved planning and coordination of stabilization and reconstruction operations. Third, some interagency partners and State staff expressed concern over the framework’s importance and utility. For example, some interagency partners and staffs from various State offices said that senior officials did not communicate strong support for S/CRS or the expectation that State and interagency partners should use the framework. S/CRS has not been given key roles for operations that emerged after its creation, such as the ongoing efforts in Lebanon and Somalia, which several officials and experts stated are the types of operations S/CRS was created to address. In addition, USAID staff noted that some aspects of the planning framework were unrealistic, ineffective, and redundant because interagency teams had already devised planning processes for ongoing operations in accordance with NSPD-1. Further, some interagency partners believe the planning process, as outlined in the draft planning guide, is too cumbersome and time consuming for the results it produces. Although officials who participated in planning for Haiti stated that the process provided more systematic planning, some involved in the operations for Haiti and Sudan said that the framework was too focused on process. Staff also said that in some cases, the planning process did not improve outcomes or increase resources, particularly since S/CRS has few resources to offer. As a result, officials from some offices and agencies have expressed reluctance to work with S/CRS on future stabilization and reconstruction plans. DOD has taken several positive steps toward developing a new approach to stability operations but has encountered challenges in several areas. As discussed in our May 2007 report, since November 2005, the department issued a new policy, expanded its military planning guidance, and developed a joint operating concept to help guide DOD planning for stability operations. However, because DOD has not yet fully identified and prioritized stability operations capabilities as required by DOD’s new policy, the services are pursuing initiatives that may not provide the comprehensive set of capabilities that combatant commanders need to accomplish stability operations in the future. Also, DOD has made limited progress in developing measures of effectiveness as required by DOD Directive 3000.05, which may hinder the department’s ability to determine if its efforts to improve stability operations capabilities are achieving the desired results. Similarly, the combatant commanders are establishing working groups and other outreach efforts to include non-DOD organizations in the development of a wide range of military plans that combatant commanders routinely develop, but these efforts have had a limited effect because of inadequate guidance, practices that inhibit sharing of planning information, and differences in the planning capabilities and capacities of all organizations involved. Finally, although DOD collects lessons learned from past operations, DOD does not have a process to ensure that lessons learned are considered when plans are reviewed. As a result, DOD heightens its risk of either repeating past mistakes or being unable to build on its experiences from past operations as it plans for future operations. Among the many improvement efforts under way, DOD has taken three key steps that frame its approach to stability operations. First, in November 2005, DOD published DOD Directive 3000.05, which formalized a stability operations policy that elevated stability operations to a core mission, gave such operations priority comparable to combat operations, and stated that stability operations will be explicitly addressed and integrated across all DOD activities, including doctrine, training, education, exercises, and planning. The directive also states that many stability operations are best performed by indigenous, foreign, or U.S. civilian personnel, but that U.S. military forces shall be prepared to perform all tasks necessary to maintain order when civilians cannot do so. The directive assigned approximately 115 specific responsibilities to 18 DOD organizations. For example, the Under Secretary of Defense for Policy is responsible for, among other things, identifying DOD-wide stability operations capabilities, and recommending priorities to the Secretary of Defense, and submitting a semiannual stability operations report to the Secretary of Defense. A second step taken by DOD to improve stability operations was to broaden its military planning guidance beyond DOD’s traditional emphasis on combat operations for joint operations to include noncombat activities to stabilize countries or regions and prevent hostilities and postcombat activities that emphasize stabilization, reconstruction, and transition governance to civil authorities. Figure 1 illustrates the change in DOD planning guidance. As shown in figure 1, military planners in DOD’s combatant commands will now be required to plan for six phases of an operation, which include new phases focused on (1) shaping efforts to stabilize regions so that conflicts do not develop and (2) enabling civil authorities. These are also the phases of an operation that will require significant unity of effort and close coordination between DOD and other federal agencies. A third step taken by DOD that frames the approach to stability operations was the publication, by Joint Forces Command, of the Military Support to Stabilization, Security, Transition, and Reconstruction Operations Joint Operating Concept. This publication will serve as a basis for how the military will support stabilization, security, transition, and reconstruction operations in foreign countries in the next 15 to 20 years. The military services also have taken complementary actions to improve stability operations capabilities. For example, the Marine Corps has established a program to improve cultural awareness training, increased civil affairs planning in its operational headquarters, and established a Security Cooperation Training Center. Navy officials highlighted service efforts to (1) align its strategic plan and operations concept to support stability operations, (2) establish the Navy Expeditionary Combat Command, and (3) dedicate Foreign Area Officers to specific countries as their key efforts to improve stability operations capabilities. We have identified four specific challenges that if not addressed, may hinder DOD’s ability to develop the full range of capabilities needed for stability operations, or to facilitate interagency participation in the routine planning activities at the combatant commands. DOD has not identified and prioritized the full range of capabilities needed for stability operations. At the time of our review, DOD had made limited progress in fully identifying and prioritizing capabilities needed for stability operations, which was required by DOD Directive 3000.05. In the absence of DOD-wide guidance, a variety of approaches were being used by the combatant commands to identify stability operations capabilities and requirements. We identified two factors that limited DOD’s progress in carrying out the capability gap assessment process. First, at the time of our review, DOD had not issued its 2007 planning guidance to the combatant commanders that reflect the new 6-phase approach to planning previously discussed in this testimony. This planning guidance forms the basis on which combatant commanders develop operational plans and identify needed capabilities. Second, there was significant confusion over how to define stability operations. For example, Air Force officials stated in their May 22, 2006, Stability Operations Self-Assessment that the absence of a common lexicon for stability operations functions, tasks, and actions results in unnecessary confusion and uncertainty when addressing stability operations. This lack of a clear and consistent definition of stability operations has caused confusion across DOD about how to identify stability operations activities and the end state for which commanders need to plan. Because of the fragmented efforts being taken by combatant commands to identify requirements, and the different approaches taken by the services to develop capabilities, the potential exists that the department may not be identifying and prioritizing the most critical capabilities needed by the combatant commanders, and the Under Secretary of Defense for Policy has not been able to recommend capability priorities to the Secretary of Defense. The department recognizes the importance of successfully completing these capability assessments, and in the August 2006 report on stability operations to the Secretary of Defense, the Under Secretary stated that the department has not yet defined the magnitude of DOD’s stability operations capability deficiencies, and that clarifying the scope of these capability gaps continues to be a priority within the department. DOD has made limited progress in developing measures of effectiveness. DOD Directive 3000.05 required numerous organizations within DOD to develop measures of effectiveness that could be used to evaluate progress in meeting their respective goals outlined in the directive. Our past work on DOD transformation reported the advantages of using management tools, such as performance measures, to gauge performance in helping organizations successfully manage major transformation efforts. Performance measures are an important results-oriented management tool that can enable managers to determine the extent to which desired outcomes are being achieved. Performance measures should include a baseline and target; be objective, measurable, and quantifiable; and include specific time frames. Results-oriented measures further ensure that it is not the task itself being evaluated, but progress in achieving the intended outcome. Despite this emphasis on developing performance measures, however, as of March 2007, we found that DOD achieved limited progress in developing measures of effectiveness because of significant confusion over how this task should be accomplished and minimal guidance provided by the Office of Policy. For example, each of the services described to us alternative approaches it was taking to develop measures of effectiveness, and three services initially placed this task on hold pending guidance from DOD. Officials in the combatant commands we visited were either waiting for additional guidance or stated that that there were no actions taken to develop measures of effectiveness. Without clear departmentwide guidance on how to develop measures of effectiveness and milestones for completing them, confusion may continue to exist within the department, and progress on this important management tool may be significantly hindered. DOD has not fully established mechanisms that would help it achieve consistent interagency participation in the military planning process. The combatant commanders routinely develop a wide range of military plans for potential contingencies for which DOD may need to seek input from other agencies or organizations. Within the combatant commands where contingency plans are developed, the department is either beginning to establish working groups or is reaching out to U.S. embassies on an ad hoc basis to obtain interagency perspectives. But this approach to coordinate with embassies on an ad-hoc basis can be cumbersome, does not facilitate interagency participation in the actual planning process, and does not include all organizations that may be able to contribute to the operation being planned. Three factors hinder interagency participation in DOD’s routine planning activities at the combatant commands. First, DOD has not provided specific guidance to the commands on how to integrate planning with non- DOD organizations. Second, DOD does not have a process in place to facilitate the sharing of planning information with non-DOD agencies because department policy is to not share DOD contingency plans with agencies or offices outside of DOD unless directed by the Secretary of Defense. Third, DOD and non-DOD organizations, such as State and USAID, lack an understanding of each other’s planning processes and capabilities and have different planning cultures and capacities. DOD collects lessons learned from past operations, but planners are not consistently using this information as they develop future contingency plans. Lessons learned from current and past operations are being captured and incorporated into various databases, but our analysis shows that DOD planners are not using this information on a consistent basis as plans are revised or developed. Three factors contribute to this inconsistent use of lessons learned in planning: (1) DOD’s guidance for incorporating lessons learned into plans is outdated and does not specifically require planners to include lessons learned in the planning process, (2) accessing and searching lessons-learned databases is cumbersome, and (3) the planning review process does not evaluate the extent to which lessons learned are incorporated into specific plans. As a result, DOD is not fully utilizing the results of the lessons-learned systems and may repeat past mistakes. In our May 2007 report, we recommended that DOD provide comprehensive guidance to enhance their efforts to (1) identify and address capability gaps, (2) develop measures of effectiveness, and (3) facilitate interagency participation in the development of military plans. We also recommended that the Secretary of Defense in coordination with the Secretary of State develop a process to share planning information with interagency representatives early in the development of military contingency plans, and more fully incorporate stability operations- related lessons learned into the planning process. DOD partially agreed with our recommendations but did not state what specific steps, if any, it plans to take to implement them. Therefore, we included a matter for congressional consideration suggesting that Congress consider requiring the Secretary of Defense to develop an action plan and report annually on the specific steps being taken to address our recommendations and the current status of its efforts. Since 2005, State has been developing three civilian corps to deploy rapidly to international crises. State has established two internal units made up of State employees—the Active Response Corps (ARC) and the Standby Response Corps (SRC). In May 2007, State began an effort to establish the Civilian Reserve Corps (CRC), which would be made up of nonfederal civilians who would become full-time term federal employees. State and other agencies face difficulties in establishing positions and recruiting personnel for the ARC and training SRC volunteers; securing resources for international operations not viewed as part of the agencies’ domestic missions; and addressing the possibility that deployed volunteers could result in staff shortages for the home unit. For the CRC, State needs further congressional authorization to establish the Corps and provide compensation packages. Further, State is moving the civilian reserve concept forward without a common interagency definition of stabilization and reconstruction operations. To meet NSPD-44 requirements for establishing a strong civilian response capability, State and other U.S. agencies are developing three corps of civilians to support stabilization and reconstruction operations. Table 1 summarizes the three civilian corps. In 2006, State established the ARC within S/CRS, whose members would deploy during the initial stage of a U.S. stabilization and reconstruction operation. These first responders would deploy to unstable environments to assess countries’ or regions’ needs and help plan, coordinate, and monitor a U.S. government response. Since 2006, S/CRS has deployed ARC staff to Sudan, Eastern Chad, Lebanon, Kosovo, Liberia, Iraq, and Haiti. When not deployed, ARC members engage in training and other planning exercises and work with other S/CRS offices and State bureaus on related issues to gain relevant expertise. Members of the SRC would deploy during the second stage of a stabilization and reconstruction operation and would supplement ARC staff or provide specialized skills needed for the stabilization and reconstruction operation. When not deployed, SRC employees serve in other capacities throughout State. Through October 2007, S/CRS has deployed SRC members to Sudan in support of the Darfur Peace Agreement and to Chad to support Darfur refugees who had migrated into the country. S/CRS has worked to establish Active and Standby Response Corps in other U.S. agencies that could be drawn upon during the initial stage of a stabilization and reconstruction operation. Currently, only USAID and the Department of the Treasury have established units to respond rapidly to stability and reconstruction missions and have identified staff available for immediate deployment to a crisis. In July 2007, the NSC approved S/CRS plans to establish a governmentwide SRC with 500 volunteers by fiscal year 2008 and 2,000 volunteers by fiscal year 2009. In 2007, State received authority to make available funds to establish a CRC. This corps’ staff would be deployed to support stabilization and reconstruction operations for periods of time longer than the Active and Standby Response Corps. The CRC would be comprised of U.S. civilians from the private sector, state and local governments, and nongovernmental organizations who have skills not readily available within the U.S. government. These reservists would remain in their nonfederal jobs until called upon for service and, when deployed, would be classified as full-time term federal employees. They would have the authority to speak for the U.S. government and manage U.S. government contracts and employees. These personnel would receive training upon joining CRC and would be required to complete annual training. In addition, they would receive training specific and relevant to an operation immediately before deployment. Based on our work to date, State and other agencies face the following challenges in establishing and expanding their Active and Standby Response Corps. S/CRS has had difficulty establishing positions and recruiting personnel for ARC and training SRC volunteers. S/CRS plans to increase the number of authorized staff positions for ARC from 15 temporary positions to 33 permanent positions, which State included in its 2008 budget request. However, according to S/CRS staff, it is unlikely that State will receive authority to establish all 33 positions. Further, S/CRS has had trouble recruiting ARC personnel, and as shown in Table 1, S/CRS has only been able to recruit 11 of the 15 approved ARC positions. State also does not presently have the capacity to train the 1,500 new SRC volunteers that S/CRS plans to recruit in 2009. S/CRS is studying ways to correct the situation. Many agencies that operate overseas have limited numbers of staff available for rapid responses to overseas crises because their missions are domestic in nature. Officials from the Departments of Commerce, Homeland Security, and Justice said that their agencies or their appropriators do not view international programs as central to their missions. As a result, it is difficult for these agencies to secure funding for deployments to active stabilization and reconstruction operations, whether as part of a cadre of on-call first and second responders or for longer-term assistance programs. State and other agencies said that deploying volunteers can result in staff shortages in their home units; thus, they must weigh the value of deploying volunteers against the needs of these units. For example, according to State’s Office of the Inspector General, S/CRS has had difficulty getting State’s other units to release the SRC volunteers it wants to deploy in support of stabilization and reconstruction operations. Other agencies also reported a reluctance to deploy staff overseas or to establish on-call units because doing so would leave fewer workers available to complete the offices’ work requirements. State also faces several challenges in establishing the CRC. In 2007, Congress granted State the authority to make available up to $50 million of Diplomatic and Consular Programs funds in the fiscal year 2007 supplemental to support and maintain the CRC. However, the legislation specified that no money may be obligated without specific authorization for the CRC’s establishment in a subsequent act of Congress. Legislation that would authorize the CRC is pending in both the Senate and the House of Representatives, but as of October 2007, neither chamber had taken action on the bills. In addition, State needs congressional authority to provide key elements of a planned compensation package for CRC personnel. Proposed legislation would allow State to provide the same compensation and benefits to deployed CRC personnel as it does to members of the Foreign Service, including health, life, and death benefits; mission-specific awards and incentive pay; and overtime pay and compensatory time. However, the proposed legislation does not address whether deployed CRC personnel would have competitive hiring status for other positions within State or whether the time deployed would count toward government retirement benefits. In addition, deployed CRC personnel would not have reemployment rights similar to those for military reservists. Currently, military reservists who are voluntarily or involuntarily called into service have the right to return to their previous places of employment upon completion of their military service requirements. Further, S/CRS is moving the CRC concept forward without a common interagency definition of stabilization and reconstruction operations. According to S/CRS staff and pending legislation that would authorize CRC, reservists would deploy to nonhumanitarian stabilization and reconstruction missions. However, S/CRS has not defined what these missions would be and how they would differ from other foreign assistance operations. A common interagency definition of what constitutes a stabilization and reconstruction operation is needed to determine the corps’ structure, the missions it would support, and the skills and training its volunteers would need. State and DOD have begun to take steps to enhance and better coordinate stability and reconstruction activities, but several significant challenges may hinder their ability to successfully integrate planning for potential future operations and strengthen military and civilian capabilities to conduct them. Specifically, without an interagency planning framework and clearly defined roles and responsibilities, achieving unity of effort in stabilization and reconstruction operations, as envisioned by NSPD-44, may continue to be difficult to achieve. Also, unless DOD develops a better approach for including other agencies in the development of combatant commander military contingency plans, DOD’s plans may continue to reflect a DOD-centric view of how potential conflicts may unfold. Moreover, better guidance on how DOD should identify and prioritize capability gaps, measure progress, and incorporate lessons learned into future planning is needed to ensure that DOD is using its available resources to address the highest priority gaps in its stability operations capabilities. Finally, unless State develops and implements a sound plan to bolster civilian capabilities to support stability and reconstruction operations and establish a capable civilian reserve corps, DOD may continue to be heavily relied upon to provide needed stability and reconstruction capabilities, rather than leveraging expertise that resides more appropriately in civilian agencies. Mr. Chairman and Members of the Subcommittee, this concludes our prepared remarks. We would be happy to answer any questions you may have. For questions regarding this testimony, please call Janet A. St. Laurent at (202) 512-4402 or [email protected] or Joseph A. Christoff 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. Other key contributors to this statement were Robert L. Repasky, Assistant Director; Judith McCloskey, Assistant Director; Sam Bernet; Tim Burke; Leigh Caraher; Grace Coleman; Lynn Cothern; Marissa Jones; Sona Kalapura; Kate Lenane; and Amber Simco. 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 United States has become increasingly involved in stabilization and reconstruction operations as evidenced in the Balkans, Haiti, Somalia, Iraq, and Afghanistan. In December 2005, the President issued National Security Presidential Directive 44, establishing governmentwide policy for coordinating, planning, and implementing U.S. stabilization and reconstruction assistance to affected foreign entities. This testimony addresses stabilization and reconstruction issues related to (1) State Department (State) efforts to improve interagency planning and coordination, (2) Department of Defense (DOD) efforts to enhance its capabilities and planning, and (3) State efforts to develop civilian capabilities. GAO's statement is based on its May 2007 report on DOD stability operations and preliminary observations related to State's interagency planning framework and civilian response capabilities. State and DOD have begun to take steps to better coordinate stabilization and reconstruction activities, but several significant challenges may hinder their ability to integrate planning for potential operations and strengthen military and civilian capabilities to conduct them. State's Office of the Coordinator for Reconstruction and Stabilization is developing a framework for U.S. agencies to use when planning stabilization and reconstruction operations, but the framework has yet to be fully applied to any operation. The National Security Council has not approved the entire framework, guidance related to the framework is unclear, and some interagency partners have not accepted it. For example, some interagency partners stated that the framework's planning process is cumbersome and too time consuming for the results it produces. While steps have been taken to address concerns and strengthen the framework's effectiveness, differences in planning capacities and procedures among U.S. government agencies may pose obstacles to effective coordination. DOD has taken several positive steps to improve its ability to conduct stability operations but faces challenges in developing capabilities and measures of effectiveness, integrating the contributions of non-DOD agencies into military contingency plans, and incorporating lessons learned from past operations into future plans. These challenges, if not addressed, may hinder DOD's ability to fully coordinate and integrate stabilization and reconstruction activities with other agencies or to develop the full range of capabilities those operations may require. Among its many efforts, DOD has developed a new policy, planning construct and joint operating concept with a greater focus on stability operations, and each service is pursuing efforts to improve capabilities. However, inadequate guidance, practices that inhibit sharing of planning information with non-DOD organizations, and differences in the planning capabilities and capacities of DOD and non-DOD organizations hinder the effectiveness of these improvement efforts. Since 2005, State has been developing three civilian corps to deploy rapidly to international crises, but significant challenges must be addressed before they will be fully capable. State and other agencies face challenges in establishing two of these units--the Active Response Corps and Standby Response Corps--because of staffing and resource constraints and concerns that stabilization and reconstruction operations are not core missions for each parent organization. Congress has not yet enacted legislation necessary for State to obligate funds for the third unit, the Civilian Reserve Corps, staffed solely with non-federal volunteers. Further, State has not fully defined the types of missions these personnel would be deployed to support. |
In the 1980s, multilateral development bank-supported projects around the world were criticized for imposing unacceptable environmental and social costs on borrowing countries. The World Bank, the oldest and largest of the multilateral development banks, was the focal point for much of this criticism. Several World Bank projects became the targets of highly publicized international campaigns aimed at convincing officials to withdraw bank support. Two examples—both the subject of congressional inquiries—were the following: The Polonoroeste Project: This project, which received major World Bank support beginning in 1982, encouraged impoverished Brazilians to take up farming in a previously inaccessible area of the Amazon basin. In 1985, the Bank suspended payments to Brazil when it became clear that the region’s soils could not actually support farming and that, rather then alleviating poverty, the project was resulting in environmental destruction and maltreatment of local indigenous people. Bank support for development in the region was renewed after the adoption of measures to protect the environment and local peoples. The Sardar Sarovar Dam: In 1985, the World Bank committed to supporting this project—a portion of a larger Indian government plan for developing the Narmada River basin—even though a full assessment of the project’s likely environmental and social impacts had not been completed. The Bank ceased supporting the project in 1993, after years of controversy centering on the forced relocation of tens of thousands of people and the publication of an independent assessment that found substantial flaws in both project preparation and implementation. Concern about such projects prompted Congress to convene a series of hearings on the environmental impacts of bank-supported projects. One Senate report resulting from these hearings concluded that the banks had not “adequately considered the potential unacceptable environmental consequences of many of the projects that are selected for funding” before deciding to proceed. These inquiries and other critiques provided the impetus for the introduction of bank policies requiring environmental assessments (EA) on proposed projects. Figure 1.1 describes the EA process. Throughout most of their existence, the banks imposed few requirements on project sponsors (borrowing government agencies or private companies) regarding public consultation on proposed projects. The banks also made few provisions themselves to permit or elicit public involvement in bank decisions on whether to support sponsor proposals. The extent of public consultation in decision-making was regarded as lying within the discretion of individual borrowing governments. The banks themselves did not, as a rule, independently engage the public in dialogue on proposed projects. When working with private companies, the banks also cited the need to safeguard information submitted by these companies so as not to compromise their competitive positions as a reason for limiting public involvement in project development. Bank critics said that the relatively closed nature of the processes the banks used to develop projects was an important cause of unsatisfactory project results. While these processes differ in many details, the banks employ a broadly similar procedure for developing project plans. This process is outlined in figure 1.2. Bank critics raised two distinct but interrelated problems with the banks’ project development processes. These were inadequate consultation and a lack of transparency. Bank critics believed that greater public consultation was needed throughout project preparation. They argued that public consultation could improve the quality of the EA process, as well as decisions deriving from it, by helping to ensure that (1) all important issues raised by a proposal would be identified and examined from diverse points of view and (2) alternatives and possible mitigation measures would be fully explored. The critics’ main concern was that the measures employed by project sponsors to consult with local people—that is, those living in the vicinity of proposed projects—while preparing project proposals for bank consideration were inadequate. Bank critics noted that project sponsors often did not conduct meaningful consultations with those who would likely be directly affected by the proposed project and other concerned members of the public (for example, local nongovernmental organizations—NGO). The lack of consultation during the early phases of project development (including EA preparation) was of particular concern, as opportunities for the public to affect project designs are greater in these early phases, when alternative designs and approaches can still be explored at comparatively little cost. The banks critics’ main concern about bank transparency was that there was almost no access to EA reports for proposed projects. Critics believed that interested members of the public, both within borrowing countries and in the broader community, should have access to these documents in advance of final action by the banks’ boards of executive directors. This access would permit them to review the EA reports’ content and bring matters of concern to the attention of bank staff, project sponsors, and/or executive directors. Bank guidelines did not provide for making such information available for public review before projects were taken up by the executive directors. The banks did not require project sponsors to share information on such matters, nor did the banks themselves provide public access to EA reports or related documents through either their headquarters offices or their field offices in borrowing countries. Critics contended that this limited the banks’ accountability to the public. They said that because of this lack of transparency, neither citizens in borrowing countries, international NGOs with expertise on environmental and social issues, nor officials of the banks’ member countries were able to critique EA reports or raise concerns that may not have been adequately examined or addressed. While the United States cannot unilaterally mandate changes in bank policies and procedures, it has historically exercised considerable influence over bank operations. Within the executive branch, the Department of the Treasury has the lead role in working with the staffs of the U.S. members of the banks’ boards of executive directors to develop and implement U.S. policy regarding the banks. Since 1985, Congress has repeatedly called upon the Department and the U.S. executive directors to work for changes in bank policies and procedures that would improve the manner in which environmental impacts are taken into account during project development. Among other things, Congress instructed the U.S. executive directors to seek improvements in bank guidelines regarding (a) the steps that project sponsors take to engage in meaningful consultation with peoples whom the projects might affect and other concerned members of the public during project preparation and (b) the steps that the banks themselves take to improve transparency. In 1987, Congress enacted legislation calling upon U.S. executive directors to vigorously promote participation by borrowing country NGOs at all stages of preparation for loans that may have adverse environmental or sociocultural impacts. In 1989, the “Pelosi Amendment” instructed the Secretary of the Treasury to seek, through negotiations with other bank member countries and bank management, the adoption of policies and procedures within the banks that would (a) provide interested members of the public in all bank member countries with access to EA reports on proposed projects (or summaries thereof) at least 120 days prior to board action and (b) encourage public participation in reviewing project-specific environmental issues. The amendment’s legislative history emphasized the important role that international NGOs play in facilitating thorough public review of proposed bank projects. (See fig. 1.3.) In commenting on a draft of this report, the U.S. Agency for International Development pointed out that Congress has also mandated a substantial role for the Agency in identifying potential environmental and social problems associated with projects being prepared for consideration by the banks’ boards of executive directors. The Agency’s written comments, reproduced in appendix III, provide details on the legal provisions in question and the efforts that the Agency has undertaken in response. The Pelosi Amendment sought to bring U.S. influence to bear in favor of effective implementation of such policies by barring U.S. executive directors from voting in favor of certain proposed actions. U.S. executive directors were called upon to refrain from supporting projects that would have significant impacts on the environment unless project sponsors had prepared EA reports and made the reports—or summaries thereof—available for review by affected groups and local NGOs, as well as bank staff and executive directors, for at least 120 days before the executive directors vote on the proposed actions. It also required the Secretary of the Treasury, in his role as leader of the U.S. government’s interagency process for reviewing proposed loans, to take public comments on environmental matters into consideration in determining the position that the United States should take on proposed loans. In November 1997, Congress amended the International Financial Institutions Act to make clear that the Secretary of the Treasury should regard the Pelosi Amendment as applying to U.S. participation in the International Finance Corporation—a member of the World Bank Group that works exclusively with private sector partners—as well as to U.S. participation in the banks’ lending programs for developing country governments. The amendment also instructed U.S. executive directors to “strongly encourage” systematic consultation with local communities on proposed loans. In response to a request from Representatives Nancy Pelosi and Barney Frank, we reviewed the multilateral development banks’ record in ensuring that meaningful public consultation takes place on the projects they support. Our specific objectives were to describe the steps the banks have taken to ensure meaningful public consultation on the environmental implications of proposed projects and timely public access to project documents; evaluate the quality of consultation that occurs on bank-supported projects and the documentation on the consultation that is provided to executive directors; and determine the extent to which the banks provide broad, timely public access to project information on proposed projects, including environmental assessment reports. We also sought to identify factors that help to account for differences in the quality of the consultation practices employed in different types of projects. Our study included the World Bank, the Inter-American and Asian Development Banks, and the International Finance Corporation.Together, these four institutions receive approximately 90 percent of the amounts that Congress annually appropriates for the support of the multilateral development banks. As an agency of the United States, we have no direct authority to review the operations of the multilateral development banks. Through the Department of the Treasury and the staffs of the U.S. executive directors in each institution, however, we interviewed bank staff at all levels, including the presidents of the World and Inter-American Development Banks, and obtained official bank documents and reports. To describe the banks’ steps to ensure consultation and transparency, we reviewed bank documents and guidance and met with bank staff to gain an understanding of their guidance with regard to public consultation and the systems they have established to provide broad public access to bank documents. To evaluate the quality of public consultation, we developed rating criteria based on the banks’ guidance on public consultation and environmental assessment, as well as other relevant materials, such as bank studies on best practices. These criteria provided a framework for assessing project sponsor consultation practices, including the extent to which (a) concerned members of the public were informed about proposed projects, (b) public concerns were identified, and, subsequently (c) opportunities were provided for public comment on the manner in which public concerns had been addressed. The criteria also provided a framework for evaluating the measures that were adopted to respond to public concerns identified through the consultation process. We applied these criteria to a group of 44 out of 256 projects with significant environmental implications (generally referred to as category A and B projects) in Latin American and Asia that were submitted for approval by the banks’ boards of executive directors during calendar year 1996. (See fig. 1.4 for a description of project categories.) To evaluate the impact that the banks had on the consultation practices employed on these projects, we employed a computational matrix that took into consideration the extent to which these projects employed practices that were upgraded from local norms and the extent to which these improvements could be directly linked to bank involvement. Our findings from this portion of the review apply only to the projects included in the sample. To assess bank transparency during project development—that is, the extent to which the banks provide timely public access to information on proposed projects—we obtained data on access to (a) project profiles and (b) EA reports between mid-1996 and mid-1997 via the banks’ internet home pages. Although the banks have adopted policies and procedures that are intended to provide public access to project documents (in hard copy) through their headquarters and field offices, we did not assess document availability at these locations. Instead, we focused on the banks’ internet home pages to provide a single, unified overview of bank performance in providing worldwide access to information on proposed projects. The banks have each established their own requirements regarding timeliness for providing public access to EA reports. We report each bank’s performance against its own criteria. The Pelosi Amendment, a U.S. law, does not create a direct legal obligation for the banks but does instruct the Secretary of the Treasury to seek, through negotiation with other bank member countries and bank management, the adoption of policies and procedures that will result in interested members of the public in all bank member countries having access to EA reports at least 120 days before board consideration. Therefore, for comparative purposes, we also report on whether the banks’ internet home pages met this time frame. Our methodology is discussed in more detail in appendix I. We conducted our work from January 1997 to June 1998 in accordance with generally accepted government auditing standards. We received written comments on a draft of this report from the Department of the Treasury, the U.S. Agency for International Development, and the World Bank. These organizations generally concurred with the report. The Treasury stated that the report provided a fair presentation and that it would work with U.S. executive directors, bank management, and executive directors representing other bank member countries to seek implementation of our recommendations. The U.S. Agency for International Development expressed its full agreement with the report’s conclusions and recommendations. The President of the World Bank Group commented that his organization had benefited from both the positive comments and the criticisms contained in the report and described a number of actions that are being pursued, both at the World Bank and the International Finance Corporation, to improve consultation and transparency. Over the past decade, the operations of the multilateral development banks have been the object of a number of critical reviews, and bank management has responded by developing reform programs to improve project effectiveness. Public consultation and increased transparency in designing and implementing projects are acknowledged to be key elements in improving project effectiveness. With the World Bank taking the lead, the banks have taken steps in this direction. These steps have included (1) developing guidelines for consultation, including the preparation of environmental assessments; (2) hiring staff to improve the banks’ capacity to undertake consultation; (3) developing working relationships with NGOs; and (4) placing a priority on developing environmentally and socially sustainable projects. To provide transparency, the banks have developed guidelines for making key documents on proposed projects available to the public and have set up public information centers and internet home pages to make this information broadly accessible. Finally, the banks—with the exception of the International Finance Corporation—have created inspection panels to investigate complaints about violation of their policies. The banks recognize that their efforts are as yet incomplete, and they continue to take steps to further strengthen consultation and advance transparency. The International Finance Corporation, in particular, has recently adopted revised procedures designed to improve performance in both areas. Guided by various studies of the banks’ operations, the banks have adopted measures aimed at improving guidance on consultation, enhancing their capacity for ensuring adequate consultation, developing better working relationships with NGOs, and placing a higher priority on environmental and social sustainability in project design. The banks have devised policies, directives, and other guidance intended to ensure that project sponsors identify public concerns about the environmental impacts of proposed projects and take such concerns into account in completing project designs. The World Bank, which issued its initial EA policy in 1989, was the first to take steps in this direction. It required sponsors to complete EAs when appropriate (that is, when the nature and magnitude of a project’s potential impacts appear to require systematic examination) as part of their project proposals. In doing such assessments, and in implementing projects, the policy required project sponsors to “take the views of affected groups and local NGOs fully into account.” The other banks subsequently adopted similar policies and procedures. In 1990, the International Finance Corporation adopted its first environmental review procedure, which was intended to be consistent with World Bank procedures. Also in 1990, the Inter-American Development Bank adopted procedures calling for public consultation in preparing the terms of reference for project EAs (that is, specifying the assessment’s scope and objectives) and in reviewing the results of the EA process. The Inter-American Development Bank also issued guidance that established a policy framework for assessing the environmental and sociocultural impacts of proposed projects, including the need for public consultation on these issues. In 1997, the Inter-American Development Bank adopted new procedures for evaluating social and environmental impacts through an internal bank Committee on the Environment and Social Impact. In 1993, the Asian Development Bank adopted EA procedures and requirements for public consultation similar to those adopted by the World Bank. Each of the banks has added to these basic policy statements with additional clarification and advice for both staff and project sponsors. Bank guidance generally advises project sponsors to provide concerned members of the public with relevant information (for example, a description of the project and its likely beneficial and adverse impacts) before asking for comments. International Finance Corporation guidelines, for example, note that truly meaningful public consultation can only take place when project sponsors have first provided affected groups and other interested parties with substantive information on the proposed project. Finally, project sponsors are generally expected to provide feedback to those consulted—for example, through making draft EA reports available for local review prior to completing the report to be submitted to the bank. In addition to developing guidelines, the banks—especially the World Bank—have improved their capacity for ensuring that meaningful consultation takes place. As part of implementing the “Strategic Compact” announced in early 1997, the World Bank has relocated staff, functions, and authority to the field. By mid-1997, 20 of the World Bank’s 49 country directors were based in field missions. The World Bank also created an internal Environmentally and Socially Sustainable Development Network, including a corps of over 360 social development and environmental specialists, a number of whom are now stationed overseas. The Inter-American Development Bank has also taken some steps to augment its consultation capabilities, including increasing the number of staff dealing with these issues. As of September 1997, the Inter-American Development Bank’s environmental unit had 12 professional staff, the Indigenous Peoples and Community Development Unit had 4 staff, and the Modernization of the State and Civil Society Division had 24 staff. In 1995, the Asian Development Bank gave environmental and social issues increased stature within the Bank by combining previously separate units to create an Office of Environment and Social Development. The office employs 24 environmental and social specialists, all located in headquarters. Although its field presence is limited, the Asian Development Bank has also strengthened representation in donor countries and broadened access to its staff. In 1996, the Bank opened 2 representative offices and approved 2 new resident missions—bringing the Bank’s total field presence to 10 resident missions, 3 representative offices, and 1 regional mission. The International Finance Corporation has a very limited field presence but is working to better address environmental and social issues by adding to its staff. In fiscal year 1997, the Corporation increased the number of senior level staff in its Environment Division from 18 to 24 and added 1 social scientist. In fiscal year 1998, the Corporation plans to add six new senior level staff to its Environmental Review Unit, including three new environmental specialists and two social sector specialists. All of the institutions we examined are developing ways to incorporate social analysis and participatory approaches into projects and analytical work. For instance, the World Bank has established the Social Development Family—comprised of about 120 World Bank staff—to increase community-based participation in its projects and to link social and environmental assessments. The Asian Development Bank has issued staff guidelines on mainstreaming participation in bank operations and hosted seminars for its staff on participatory methods. It has also established a regional technical assistance grant fund to catalyze the implementation of participatory approaches to bank operations. In commenting on a draft of this report, the Department of the Treasury stated that the Asian Development Bank has also recently established internal networks for staff with expertise in environmental and social issues. Legislation passed by Congress in 1990 urged the World Bank to develop and implement mechanisms to substantially improve the ability of bank staff to interact with NGOs and other local groups that are affected by bank-supported projects. Among other things, Congress urged the World Bank to assign at least one professional staff member in each field office to be responsible for relations with local NGOs. In 1997, the World Bank completed appointing NGO liaison staff to all 72 World Bank resident missions. More than half of these are full-time NGO specialists working to strengthen communication and information-sharing between the World Bank and NGOs. According to World Bank documents, nearly half of the World Bank’s projects in fiscal year 1997 involved NGOs in some capacity. In addition, the World Bank (1) approved special programs to provide NGOs, as well as academics and others, with small grants (in the $10,000 to $15,000 range) for conferences, publications, networking activities, and other information-related activities; (2) recruited NGOs to help prepare the Bank’s economic and sector work, country assistance strategies, and poverty assessments; and (3) established partnerships with NGOs on a variety of operational issues, including a program to monitor stakeholder participation in bank projects. The other banks have also taken a number of steps in this direction. Beginning in 1995, for example, the Inter-American Development Bank sponsored a series of country focus groups for civil society organizations, government officials, and Bank staff. Through these groups, the Inter-American Development Bank encouraged and supported efforts to strengthen the capacity of civil society organizations in borrowing countries to become integrally involved in developing projects. The Asian Development Bank has updated its policy on cooperation with NGOs and is improving its outreach efforts, for example by inviting NGOs to comment on draft policy proposals. The Bank has also appointed NGO liaisons in each of its resident missions. In commenting on a draft of this report, the Treasury Department stated that the Asian Development Bank has also increased the number of projects with NGO involvement and is providing technical assistance to help borrowers improve their own capacity for performing environmental assessments. As part of their overall reform efforts, the banks have increased their emphasis on ensuring that project designs are environmentally and socially sustainable. This action has reinforced the heightened importance placed on public consultation during project development. For example, the members of the Inter-American Development Bank, on the occasion of the eighth replenishment of the Bank’s resources (August 1994), agreed on fundamental changes in the Bank’s operations. The members committed the Bank to strengthening environmental institutions and legal frameworks and fostering environmental awareness in borrowing member countries and to improving the environmental quality of bank-financed projects. The members also reaffirmed the Bank’s commitment to meaningful public consultation on the environmental impacts of proposed projects and greater transparency in Bank operations. Asian Development Bank policies on public consultation have changed in response to donor demands and internal evaluations and to accommodate changes in lending structure. Senior Bank staff, for example, stated that during recapitalization and replenishment of Asian Development Fundresources in the last few years, donor countries have mandated greater consultation on project design and more consideration for the impact of Bank activities on indigenous peoples. The Bank has also changed its lending structure to increase its focus on environment and social development projects, which often require participation of NGOs and local residents for project implementation. The banks have (a) adopted policies that provide for public disclosure of information on proposed projects and (b) created public information systems to provide access to key project documents. In August 1993, the World Bank approved an expanded disclosure policy, providing for an increased number of operational documents to be made available to the public. Among the documents the Bank determined should be made public were basic project profiles and project EA reports. The International Finance Corporation adopted its disclosure policy in 1994 and updated it in 1996 and 1998. The policy requires the Corporation to “operate with a presumption of disclosure.” However, the availability of timely information to the public is tailored to the requirements of the private sector, including the confidentiality of some information and the later disclosure of information. In January 1995, the Inter-American Development Bank’s Policy on Disclosure of Information became effective. Among other things, it requires that draft EA reports be made locally available before Bank staff conduct project analysis missions. According to the Department of the Treasury, these missions typically occur more than 120 days before board consideration. As for the Asian Development Bank, its Policy on Confidentiality and Disclosure of Information became effective January 1, 1995. The policy emphasizes a presumption in favor of disclosure where disclosure would not materially harm the interests of the Bank and its member countries, borrowers, and private sector clients. The banks have also required that information on EA efforts be made available for the executive directors’ consideration before they vote on project proposals. Since EA reports themselves are often very lengthy and difficult to readily understand, the banks generally require that summaries of the reports’ findings be made available for the executive directors’ consideration. Beginning with the World Bank in 1994, the banks have instituted systems for providing public access to key project documents in their possession, including EA reports. Generally speaking, these systems rely on public information centers in the banks’ headquarters cities to provide interested parties with copies of particular documents. The World Bank established its center in January 1994 to support its efforts to increase accountability and transparency in Bank operations. The center attempts to make a more extensive range of Bank information—including project documents, EA reports, and other studies—available to a wider audience. In 1994, the International Finance Corporation also began making certain information available through the World Bank center. In February 1995, the Inter-American Development Bank began making information available through its newly established headquarters center. The Asian Development Bank established a center within its existing Information Office in 1996. To extend these centers’ effective reach, the banks have established internet home pages, which provide direct access to some (relatively short) documents and list others that can be obtained by request. The banks have also made provisions for public access to documents through their field offices in developing countries, especially for those documents pertaining to bank programs in the country in question. The banks consider access through field offices to be important because many residents of developing countries do not have access to the internet. The World Bank and the Asian Development Bank also make documents available through depository libraries in developing countries. The World Bank center makes documents available through the Bank’s field offices in Paris, London, and Tokyo and maintains relations with about 240 depository libraries worldwide. As of December 31, 1996, the Asian Development Bank had 98 depository libraries in 38 member countries. Publications sent to the libraries monthly include annual reports, country and economic studies, and documents on loans and technical assistance projects, including EA reports. During this review, international and developing country NGOs expressed concern about uneven access to documents through bank field offices in developing countries, as well as through the banks’ headquarters public information centers. To ensure that bank operations adhere to each of the respective institution’s own policies and procedures regarding project design and implementation, three of the four banks we reviewed have established an inspection panel. Any group of individuals who may be directly or adversely affected by a bank-supported project can ask the panel to investigate complaints that the bank has failed to abide by its policies and procedures. The World Bank established its inspection panel in September 1993, and it became operational the following year. In 1994, the Inter-American Development Bank approved its Independent Investigation Mechanism, which received its first request for an investigation in 1996. The Asian Development Bank adopted its inspection policy in late 1995 and appointed an Inspection Committee as a standing committee of the board of executive directors in March 1996. The inspection policy and panel of experts became operational in October 1996. The International Finance Corporation has not established an inspection panel. Bank staff and officials of the U.S. executive directors’ offices in the banks acknowledged that the banks’ efforts to ensure meaningful consultation and public access to key documents are as yet incomplete. Despite the banks’ commitments in this regard, staff still sometimes find it difficult to ensure that sufficient time and resources are built into project schedules to develop project-specific strategies for obtaining and addressing comments. Bank staff, particularly those with responsibility for environmental and social matters, also commented that some bank staff, as well as project sponsor officials, had simply not yet fully appreciated the value and importance of public consultation and transparency. These views were confirmed at the World Bank and International Finance Corporation by a number of recent studies showing that these institutions’ consultation and transparency systems continued to produce mixed results. Since we initiated this review, the banks—particularly the International Finance Corporation—have taken additional steps toward improved consultation and transparency. In July 1998, the Corporation adopted revised EA and information disclosure policies and procedures. A primary objective of this revision was to eliminate confusion by bringing the Corporation’s policies into line with those applied by the World Bank, and to clearly delineate differences in policy when the Corporation’s private-sector orientation makes such differences appropriate. The revised policies strengthen the Corporation’s consultation and transparency provisions in a number of ways. Figure 2.1 provides an illustration. The International Finance Corporation has also prepared a “Good Practices Manual” to guide project sponsor consultation efforts. Among other things, the revised procedures bolster the Corporation’s local consultation provisions by mandating proactive dissemination of EA summaries for category A and B projects in local languages in borrowing countries at least 60 days and 30 days, respectively, before the board votes. They strengthen transparency provisions by eliminating management’s authority to waive public disclosure of EA reports on category A projects and specifying that the Corporation will suspend further consideration of a project if the sponsor does not agree to public release of EA reports. The revision also increases access to information on projects that the Corporation’s board has approved—for example, through the World Bank’s public information center making updated project environmental action plans publicly available for the first time. World Bank staff have also drafted revised EA policies and procedures, and the draft is being discussed by members of the board of executive directors. The draft strengthens existing policies and procedures regarding public consultation on projects with significant environmental impacts and eliminates ambiguity in the existing guidance by explicitly extending most provisions to include category B projects. Figure 2.2 provides an example of these changes. For category A projects, the draft also strengthens requirements regarding staff reporting to the board on consultation matters. In addition, to address shortcomings in making project profiles available, the Bank is developing a computerized document flow system directed at ensuring that project profiles, and updates to those profiles, are provided to the Bank’s public information center as soon as Bank staff create them. The Inter-American and Asian Development Banks also continue to refine their guidelines and practices. For example, to provide the Inter-American Development Bank public information center with a stronger mandate for obtaining copies of EA reports, the Bank has just recently adopted a new policy requiring staff to provide both the center and relevant bank field offices with copies of EA reports as soon as sponsors submit them. (Inter-American Development Bank staff informed us that they were not previously required to provide EA reports to the center.) The Inter-American Development Bank is also developing a policy on consultation and transparency designed specifically for private sector projects. Asian Development Bank staff are working with private sector sponsors to eliminate business-confidential information from the final reports of the President on project proposals so that these reports may be released to the public upon board approval and has issued several such public versions of final private sector project reports. The Asian Development Bank has also installed a new computer system which, according to Bank staff, should facilitate improved internet access to Bank documents. The banks have adopted guidelines and created systems to provide for meaningful public consultation during project development, complemented by efforts to enhance public access to relevant information through bank public information centers. All of the institutions, led by the World Bank, are taking steps to further improve their current procedures and systems. In commenting on this report, the President of the World Bank Group discussed the measures that the World Bank and the International Finance Corporation are pursuing to facilitate strengthened performance with regard to both consultation and transparency. These include the Corporation’s adoption of revised policies and procedures, and elements of the Bank’s operational policy reform initiative, such as enhanced training for staff and pursuit of comprehensive audits for environmentally sensitive projects at critical stages in the project cycle. As discussed in chapter 2, the banks have instituted a number of measures over the past several years to improve the public consultation process for environmentally sensitive projects. Using the rating criteria we developed based on the banks’ guidelines on public consultation—the details of which are explained in appendix I—we examined a sample of 44 of 256 projects in Latin America and Asia approved by the banks’ boards of executive directors during 1996 and tested whether the measures instituted by the banks had produced the consultation results they desired. We found that the quality of consultation was adequate or better on 75 percent (33 of 44) of the projects we examined, and project sponsors took positive steps to respond to public concerns, when raised. On such projects, for example, sponsors used radio and print media to inform nearby communities about the project and its potential impacts, held community meetings to provide the public with opportunities to voice their concerns during project preparation, and provided opportunities for concerned parties to review and comment on draft EA reports. On almost all projects, sponsors addressed public concerns through actions such as relocating pipelines or modifying resettlement plans. Several factors contributed to the quality of consultation on the projects we examined. Bank intervention was an important factor and improved sponsor practices beyond the country norm on nearly every project. Consultation was particularly good on projects using a community-based approach to project development and on projects with high visibility. World Bank-supported projects also employed comparatively good consultation practices. Public consultation on 25 percent (11 of 44) of the projects was less than adequate. Most of these projects were supported by the International Finance Corporation or sponsored by the government of China. On many of these projects, the banks became involved after much of the project development process was already complete. Thus, their opportunity to influence the consultation practices employed—particularly during the early stages of project development when public consultation can have its greatest impact—was diminished. In deciding whether to proceed with such projects, bank officials said they must balance the need for adequate consultation against the development benefits of the proposed projects. Providing a complete and accurate summary of the consultation practices employed during project development is an important part of the process and helps the executive directors provide oversight of bank policies. However, in nearly 40 percent (17 of 44) of the projects we reviewed, the documents provided to the executive directors before voting were incomplete or inaccurate about the consultation practices employed. Bank guidance generally calls for project sponsors to (1) inform concerned groups about proposed projects and their potential environmental impacts, (2) identify and clarify public concerns through such means as community meetings, and (3) ensure that concerned members of the public have meaningful opportunities to comment on the results of the EA process. Table 3.1 provides examples of the types of consultation practices that we rated as exemplary, good, adequate, borderline, and unacceptable. For our sample, consultation was adequate or better on 75 percent (33 of 44) of the projects. As shown in figure 3.1, consultation on 50 percent of the projects (22 of 44) was exemplary or good, while it was adequate on 25 percent (11 of 44) of the projects. The remaining 11 projects employed practices that we found to be less than adequate. A major infrastructure project supported by the Inter-American Development Bank provides an example of the eight projects in which consultation with the public was exemplary. In this case, project plans were announced in local media, an information office was created with full-time community liaisons to respond to citizen inquiries, a consultant was hired to ensure that affected peoples were thoroughly consulted and their views taken into account in planning resettlement, and public meetings were held to discuss issues of public interest. The Bank retained consultants to evaluate the project sponsor’s EA report and resettlement plan in light of Bank standards, and the results were discussed in public and made available for further public comment. On the projects we rated as good, sponsors employed consultation practices similar to the project described in the preceding paragraph, though they were not as extensive. One World Bank-supported project that we found to have employed good practices, for example, solicited public input to project design through (a) two regional seminars for professionals in relevant fields (including NGO representatives) and (b) an iterative series of community meetings in affected areas. An example of the 11 projects we found to have adequate consultation was another Inter-American Development Bank project. Town meetings were held to inform the public about the project. After completing a draft EA report, the project sponsor made it available for public review at a site accessible to local residents. A well-publicized public hearing was subsequently held. The hearing was covered by the local media, and the results were made available for public review. Among the projects where we found consultation practices to be less than adequate was an International Finance Corporation-supported project that we visited in Asia. Consultation on this proposal was limited to local traditional leaders. In accordance with local custom, women were not invited to participate. In another, supported by the Asian Development Bank, surveys were undertaken to identify public concerns. However, project documents indicated that public participation for a major portion of the project did not occur. In addition, local residents were not given an opportunity to review or comment on the results of the EA process. In 8 of the 11 projects where we found consultation to be less than adequate, the first phase of the consultation process—informing the public about the proposal—was also less than adequate. Bank guidance calls for sponsors to take public concerns fully into account through such steps as undertaking additional studies to explore previously unconsidered impacts and/or adopting measures to mitigate or compensate for adverse impacts. We deemed the measures employed to take public concerns into account to be adequate or better in the 39 cases where concerns were raised. (On five projects we examined, we found no evidence that the public raised substantive concerns.) In most instances, members of the public were concerned about project impacts that would directly affect their livelihood. On one Asian Development Bank project, for example, proposed highway rights-of-way were relocated in response to residents’ concerns that proposed routes would adversely affect productive cropland. Additional interchanges were also added in response to villagers’ requests for improved highway access. The sponsor of another Asian Development Bank project responded to local concerns by developing methods to mitigate adverse impacts on migratory fish. In two private sector projects that we examined, one supported by the Inter-American Development Bank and the other by the International Finance Corporation, pipelines were rerouted to avoid agricultural and/or forested areas. In another International Finance Corporation project in Asia, the sponsor made a number of alterations in project design in response to concerns that villagers raised about adverse impacts on fishing grounds, shrines, homes, and schools. In some cases, there was no record of any NGO commentary or involvement. However, when activist NGOs did offer comments, the banks generally ensured that the issues raised were taken into account. For example, information provided by an environmental NGO led the Asian Development Bank to decline support for one proposed agricultural development site in an environmentally sensitive forest region. In another Asian Development Bank-supported project, NGO concerns about protecting environmentally sensitive forest areas were addressed by adding several features to the project design, including designation of a portion of project proceeds to support conservation efforts. Several factors were associated with better or worse consultation on the projects in our sample. Bank intervention generally improved sponsor practices. Comparatively good consultation practices were also associated with projects that (1) used community-based approaches in design and implementation, (2) had a “high profile” because of recent adverse publicity on similar projects, and (3) were supported by the World Bank. Bank critics have suggested that the banks’ private sector projects were less likely to employ good consultation practices than the banks’ public sector projects. Our analysis indicated that this perception was true if community-based development projects were included in the sample universe. However, after removing community-based development projects—which are generally not supported by private companies—from our analysis, we found little difference in the quality of the practices employed on private sector projects as compared with those sponsored by the public sector. Of the 11 projects where consultation was inadequate, 5 were supported by the International Finance Corporation and 3 were sponsored by the government of China. In many of these cases, the Bank began working with project sponsors after much of the design and consultation work was already complete. In all but four of the cases we examined, bank intervention, such as insisting on public access to draft EA reports, resulted in at least a marginal improvement in the sponsors’ consultation practices and/or in the measures that sponsors employed to respond to public concerns. As shown in figure 3.2, bank impact on sponsor practices was great or very great on 41 percent (18) of the projects and at least moderate in another 25 percent (11) of the projects. The banks had at least a marginal impact on most of the remaining projects. One country that we visited provides an example of very great bank impact on project development practices. Government officials, NGOs, and others in this country credited the World Bank and the Inter-American Development Bank with fostering highly participatory approaches to developing both the poverty alleviation and infrastructure projects that we examined. Government officials and NGO representatives commented that these practices contrasted dramatically with prior government approaches that lacked any provision for public comment. Officials charged with project implementation credited bank staff with introducing mechanisms for engaging concerned members of the public that had not previously been employed in their ministries but that worked very well in practice. Project documents showed that International Finance Corporation intervention in one project in rural Asia had a very great impact on both the process and the measures taken to respond to identified concerns. In this case, neither an EA nor consultation was required by the government. However, the Corporation required that an EA be conducted and that the results be made available for public review. The Corporation was also instrumental in changing the proposed project site to avoid disrupting existing cultivation sites. On several projects, bank staff indicated that they had suggested innovative approaches to overcome local barriers to effective consultation. One example was a World Bank-supported effort directed at providing small-scale infrastructure for a number of isolated communities populated largely by illiterate people. This project employed a variety of unconventional communication techniques, including dramatic presentations, to effectively inform residents about the proposal. In several instances, the banks placed conditions on loans to ensure that the sponsors addressed the concerns raised by members of the public. For example, on one of the projects we examined, the World Bank required the borrowing government to take action to address outstanding claims of persons adversely affected by a previous bank-financed project in the same area. In another, the World Bank required the borrowing government to address environmental and social risks on a proposed project by implementing a separate bank-financed project. Satisfactory progress on the latter project had to be demonstrated before the Bank would consider financing the original proposal. Despite the banks’ impact in improving sponsor practices, public consultation on 11 of the projects in our sample (25 percent) was less than adequate. In many of these cases, the banks’ relatively late involvement in the project development process limited their influence on sponsor consultation practices—particularly those measures employed in the early phases of project development when public consultation can have its greatest impact. Bank staff noted that they are generally involved in guiding borrowing governments’ project planning efforts from the very beginning of the project development process. This early entry gives the banks the opportunity to influence the approach that sponsors take to preparing project proposals and EA reports. In contrast, bank staff and private sector representatives both noted that private sector projects are typically submitted for bank consideration only after much project planning has been completed. Bank officials also commented that, like private companies, the government of China typically submits projects for bank consideration that are already well on the way to having completed designs ready for approval, placing bank staff in a position similar to that which they occupy on many private projects. Development agencies, including the banks, have found that certain types of objectives—like providing basic infrastructure, ensuring basic services for poor communities, and managing natural resources—can be addressed in a highly effective manner by using community-based approaches to project design and implementation. By definition, control and accountability in such projects are largely transferred to the communities involved. Figure 3.3 describes one such project. On average, the 12 community-based projects in our sample employed consultation practices that we viewed as good. These projects’ average rating for taking public concerns into account was also good. In contrast, the other projects in our sample received an average rating of adequate in both dimensions. Seven of the community-based projects in our sample (more than half) employed exemplary consultation practices, while only 1 of the 32 other projects in our sample achieved this high a rating. Six of the projects in our sample entered development shortly after similar bank-financed projects in the same countries had generated substantial adverse publicity because of environmental impacts and resettlement of affected peoples. Five of these six employed consultation practices that we viewed as good or exemplary. On these projects, sponsors and bank staff were well aware of the adverse publicity and took steps to ensure that consultation with the local residents on the new projects was good. For example, one World Bank-supported infrastructure project took place in a location where the borrowing government and the Bank had previously been criticized for poor consultation practices and adverse environmental impacts in a project in the same sector. On the new project, the sponsors took extraordinary measures to ensure that affected persons were actively engaged in extensive consultation early in the project design. These steps included establishing public information centers at the project site and, with NGO assistance, creating a development organization to facilitate ongoing consultations among the stakeholders involved. Among other things, these community consultations—one of which is shown in figure 3.4—resulted in project design and engineering changes to minimize resettlement of local people. World Bank staff had a very great impact on the sponsor’s practices in this case. At the Bank’s behest, for example, efforts to respond to public concerns were greatly expanded and compensation rates for resettled persons were substantially increased. On average, World Bank-supported projects’ consultation practices rated highest among the four banks included in our study. More than half of the World Bank projects we examined employed good or exemplary consultation practices. On average, the World Bank also had a great impact on improving sponsor practices compared to a moderate impact on improving sponsor practices by the other banks. The World Bank also provided the most complete information for the executive directors’ consideration. (Documentation quality is discussed later in this chapter). International Finance Corporation-supported projects had the lowest average rating on consultation and the other dimensions we examined. The average ratings for Inter-American- and Asian Development Bank-supported projects fell between the World Bank and International Finance Corporation averages. The World Bank’s better performance on consultation stems from the fact that, among the multilateral banks, it was the lead institution in developing participatory approaches to development. Among the banks, it has published the most comprehensive guidance on environmental assessment and consultation and has the greatest resources at its disposal to address such matters. For instance, it has over 360 environmental and social development staff, a number of whom are assigned to overseas missions. In selected overseas missions, such as one that we visited in Jakarta, Indonesia, the World Bank has a fully staffed environmental and social impact unit. The resident mission in New Delhi, India, which we also visited, has a social development unit. The International Finance Corporation has relatively few staff in these fields, and none of them are assigned to overseas missions. Bank critics have expressed concern about the quality of consultation practices employed on the banks’ private sector projects as compared with those employed on public sector projects. However, when we removed community-based development projects (which are generally not supported by private companies) from the analysis, we found little difference between the quality of the practices employed on public and private sector-sponsored projects. This observation applies when we include all private sector projects in our analysis. But as will be discussed in the next section, many of the projects supported by the International Finance Corporation employed less than adequate consultation. Figure 3.5 compares the quality of consultation on private and public sector projects, absent community-based development projects. 38% (6 projects) 44% (7 projects) 25% (4 projects) 38% (6 projects) 31% (5 projects) Each of the four banks included in our review supported at least one project that we found to have employed less than adequate consultation practices. However, 8 of the 11 projects in our sample where we found consultation to be less than adequate were supported by the International Finance Corporation or sponsored by the government of China. Five of the 10 International Finance Corporation projects (including one in China) and 3 of the 5 projects in our sample sponsored by the government of China had less than adequate consultation. The median rating for consultation on the projects supported by the Corporation or sponsored by the government of China was less than adequate compared to the median rating of good for all other projects. As noted previously, substantive bank involvement in project development generally begins relatively late in the process for private sector projects, including those supported by the International Finance Corporation, and for projects sponsored by the government of China. International Finance Corporation and other bank officials acknowledged that consultation sometimes is not as good as they would like in such circumstances. However, in deciding whether to proceed with proposed projects, these officials observed that other factors also had to be considered, including the beneficial development impacts that the project promised to deliver. Another factor in deciding to proceed with a project, according to International Finance Corporation officials, is the opportunity to remedy or ameliorate attendant environmental problems that might never be corrected if the project proceeded without bank sponsorship. In these cases, bank officials said that governments or private firms might find alternative financing without conditions. We examined whether key documents presented for executive directors’ consideration before they voted on proposed projects provided complete and accurate information about consultation on the projects. These documents included, for example, summaries of EA reports and project appraisal reports prepared by bank staff. Adequate documentation summarized the consultation steps, the concerns raised, and the measures taken to address them. Unacceptable documentation provided little or no information other than a brief statement that consultation occurred. Documentation submitted to the executive directors was adequate or better for 61 percent (27 of 44) of the projects we reviewed. For example, documents submitted for executive directors’ review on several infrastructure projects in Asia described in detail the public consultation processes employed at each step in project development. In one project supported by the Asian Development Bank, the documents provided a detailed discussion on consultation activities—listing where meetings were held, who attended, the issues that were discussed, and how the issues were handled. On the other hand, we found that 39 percent (17 of 44) of the projects provided less than adequate information. Shortcomings were particularly evident in project documents presented for board consideration at the Asian Development Bank and the International Finance Corporation. Documentation was less than adequate for more than half (12 of 22) of the projects we examined at these two institutions. A number of the EA report summaries submitted to the Asian Development Bank executive directors, for example, contained only short statements that the residents had been consulted and all were in favor of the project. They contained no discussion of what, if any, concerns had been raised, or how they were addressed. Seven of 10 International Finance Corporation projects had less than adequate documentation about consultation. We generally found that the documentation on these projects forwarded to the board members contained little, if any, mention of the actual steps taken to consult with the public, the parties consulted, the concerns raised, and/or the measures intended to address these concerns. In a few instances, materials submitted for the consideration of the International Finance Corporation and Asian Development Bank boards presented the consultation measures in an excessively favorable light. In one project, for example, the report submitted to the board asserted that the sponsoring company had undertaken a comprehensive public consultation program. However, the report did not provide details of such a consultation program, and other documents and interviews with staff did not indicate such consultation had actually taken place. For another project that consisted of four subprojects, the summary EA report stated that the residents were informed about the subprojects and were generally in favor of them. However, the consultant’s report (which is not routinely submitted to the executive directors but is available to them upon request) stated that half of the residents affected by two of these subprojects had no knowledge of them and that participation was lacking throughout the design of another subproject. Furthermore, the report mentioned some residents’ concerns that were not reflected in the EA report summary. According to officials at the U.S. executive directors’ offices, providing good summary information is a key point in the consultation process. It provides an official record of what happened and helps executive directors exercise effective oversight of U.S. policy and law—ensuring that meaningful public participation and consultation take place during project development. U.S. officials also indicated that, while they rely on several sources of information before making decisions, reliable documentation helps them by summarizing relevant information on consultation in one convenient place. Other officials of the U.S. executive directors’ offices said that tracking down information is time-consuming and that, in some instances, they are faced with spending considerable time collecting and analyzing information that should already be prepared for them. For example, officials of the U.S. executive director’s office at the Asian Development Bank had to spend considerable effort getting information on a project in which resettlement was to take place. (The documentation provided for the executive directors was incomplete and did not discuss the consultation steps taken.) The information obtained ultimately revealed that the project sponsor had not consulted with the residents until after bank officials required it. By then, decisions on resettling the residents had already been made, according to project documents. The U.S. executive director decided not to vote in favor of this project. Officials of the executive director’s office expressed concern because this investigative effort cannot be made on all projects where information is incomplete. Our analysis of sample projects supports this concern. Several of the poorly documented projects that we reviewed had in fact employed consultation practices that were adequate or better. However, in 65 percent of the projects we examined where consultation was inadequate (7 of 11), the summary documentation for executive directors was incomplete or inaccurate. The banks have taken significant steps toward ensuring that meaningful public consultation becomes an integral part of their project development processes. Meaningful consultation occurred on most of the projects we examined, and bank intervention nearly always improved sponsor practices. Nonetheless, consultation on some projects was not adequate. In many of these cases the sponsors asked the banks to fund the projects only after the sponsors had completed much of the project preparation and consultation. In these instances, the executive directors are presented with a dilemma. Critical to their decision in these cases is complete and accurate information on the projects, including a description of the public consultation that has taken place. Given that the executive directors must balance multiple factors in considering these projects, the lack of a complete record of the consultation that has taken place is a distinct disadvantage to efficient and effective decision-making. We recommend that the Secretary of the Treasury instruct the U.S. executive directors at the banks to work with other executive directors and bank management to seek improvements that will result in executive directors being provided with a complete and accurate record of public consultation on all proposed projects with significant environmental implications. The Department of the Treasury agreed with our findings regarding consultation and committed to continuing its efforts to work with U.S. executive directors, bank management, and executive directors representing other member countries to ensure rigorous and consistent implementation of bank public consultation policies. The Treasury also said that, as we recommended, it would work with U.S. executive directors, bank management, and other executive directors to ensure that executive directors are provided with complete and accurate records of public consultation on proposed projects with significant environmental implications. The U.S. Agency for International Development also agreed with our findings and noted that there is room for improvement in the consultation practices employed in preparing bank-supported projects. The Agency also pointed out that good implementation of environmental and social mitigation measures during the active life of a project is another important indicator of bank commitment to sustainable development. The President of the World Bank Group commented that the World Bank and the International Finance Corporation are continuing their efforts to improve performance in this area. He noted that the Bank will shortly be undertaking the third in a series of evaluations of EA practices on bank-supported projects (including both impacts during implementation and the quality of the public consultation practices employed.) With regard to our findings on the consultation practices employed on International Finance Corporation-supported projects, the President acknowledged our recognition of the different circumstances faced by Corporation staff as compared with their counterparts in the World Bank’s public sector lending programs but reiterated that there should be no qualitative difference in the consultation standards employed on public or private sector projects. The banks have established information systems, including public information centers and internet home pages, to provide timely public access to information on proposed projects. We focused on the performance of one part of these systems—the bank’s home pages. We determined whether, as expected by the banks, their home pages provided timely internet access to key documents on proposed projects, including EA reports. We found that the home pages often did not provide timely access to these documents. Bank public information systems are generally expected to provide public access to two key documents. These are the following: Project profiles: The purpose of project profiles is to provide “as much information to the public as early as possible” so that proposed project designs can benefit from consultation with all concerned parties, beginning at the projects’ formative stages. These profiles are expected to include an outline of the main environmental issues raised by proposed projects and are to be posted on the banks’ home pages and made available in hard copy at headquarters public information centers. According to bank guidelines, field offices are also supposed to make profiles available for borrowing country residents to review. Profiles should be periodically updated through board approval. EA reports: As explained in chapter 1, the banks generally assign projects with significant environmental implications to a category for assessment purposes. The banks inform the worldwide general public that EA reports for category A projects are available by listing them on internet home pages. These listings are sometimes accompanied by a summary of the report’s contents. The full reports—which may be several hundred pages long—are made available on request from public information centers and field offices. The banks also generally require that environmental information on category B projects be accessible through their home pages. Sometimes this information is directly available on the home pages. In other cases, relevant documents are listed on the home page and may be obtained by request. As noted in chapter 1, the Inter-American Development Bank no longer assigns projects to categories for EA purposes. Bank policy is to provide broad access to all sponsor EA reports by listing them as available on the Bank’s home page. Project profiles for category A and B projects are supposed to be directly available on the banks’ home pages. As shown in table 4.1, profiles were available for all of the International Finance Corporation projects for which we obtained data, but this was not the case at the other banks. Profiles were available for about 71 percent of World Bank projects and for about half of Inter-American and Asian Development Bank projects. For example, profiles were provided for 10 of the 20 Asian Development Bank projects for which we obtained data. With regard to timeliness, World Bank, Inter-American Development Bank, and Asian Development Bank guidelines specify that project profiles should be made available early on in project development—that is, when projects are identified and enter the bank’s “pipeline” of projects under development. The International Finance Corporation, in contrast, ties issuance of project profiles to the end, rather than to the beginning, of the project development cycle. Corporation policy states that profiles should be made available at least 30 days before board consideration. Corporation staff explained that their guidelines were designed with private sector concerns about limiting access to information about prospective projects in mind. Private companies we interviewed were concerned that widespread disclosure of project information could provide competitors with financial and other data to develop or strengthen a competing proposal after they had invested heavily in project preparation. On average, project profiles for the World, Asian, and Inter-American banks were available on these institutions’ home pages about 2-1/2 years prior to board votes. On average, International Finance Corporation project profiles were available about 68 days before board consideration. The banks have different requirements for when, and where, public access to EA reports is to be provided. The World Bank specifies that sponsors should provide category A project EA reports to the Bank and make them available in the borrowing country before Bank staff appraise the proposals. When the EA report has been officially received by the Bank, a copy is sent to the public information center and its availability noted on the Bank’s home page. Asian Development Bank criteria state that category A project reports must be provided to the executive directors at least 120 days prior to scheduled board consideration of the project. Bank officials added that Bank practice is for public access to these reports to be simultaneously provided via the Bank’s public information center and their availability posted on the Bank’s home page. The International Finance Corporation requires that these reports must be made available to the public (via the Corporation’s home page and the World Bank’s public information center) at least 60 days before board consideration. The Inter-American Development Bank requires that EA reports be made available in the borrowing country before appraisal missions begin. Though Bank policy is for broad access to be provided to these reports through their posting on the Bank’s home page, the Bank did not, during the period for which we collected data, require staff to also send these reports to the public information center, nor did the Bank systematically record these reports’ arrival at the public information center or the date of their posting on the Bank’s home page. We could not, therefore, report on access to EA reports via the Inter-American Development Bank home page. We did, however, obtain data on when these reports were made available in the borrowing countries. As shown in table 4.2, the banks’ home pages sometimes did not provide notice that category A project EA reports were available or did not provide such notice within the banks’ expected time frames. About 8 percent of the reports for category A World Bank projects in our sample were posted on the Bank’s home page in the required time. Forty-six percent were not posted at all. Most Asian Development Bank reports for category A projects were posted in the required time. The International Finance Corporation met its 60-day standard for the sample of category A projects we examined. EA reports for Inter-American Development Bank projects were made available in the borrowing country in all cases, though about 33 percent of the reports were not made available for the required time. Table 4.3 shows the performance of the banks’ internet home pages in providing access to EA reports for proposed category A projects, using the 120-day time frame advanced by the Pelosi Amendment for comparative purposes. The banks generally met their own requirements with regard to providing access to information on EA reports on category B projects. However, these requirements contain several features that limit the timeliness of public access to this information. For example, the Asian Development Bank divides category B projects into “sensitive” and “non-sensitive” subcategories. No information on EA results is provided on “non-sensitive” projects until after the board has voted. The International Finance Corporation does not require that information on the results of category B project EA reports be posted until 30 days before board votes. The banks are not consistently meeting their goal of providing the public with timely access to key project information through the internet. The information that has been made publicly accessible is useful, and the banks have clearly taken the initial steps in providing worldwide access to project information. However, the banks are not fully meeting their commitments on a regular basis. We recommend that the Secretary of the Treasury instruct the U.S. executive directors at the banks to work with other executive directors and bank management to have the banks improve compliance with their guidelines on providing timely public access to project profiles and EA reports through their internet home pages. In commenting on a draft of this report, the U.S. Agency for International Development noted that its experiences in attempting to monitor bank projects reflect our findings regarding difficulties in obtaining access to project profiles and EA reports. The Agency reiterated the importance of the banks’ ensuring timely public access to these documents. The Treasury Department agreed with our findings and said that the Department would work with U.S. executive directors, bank management, and executive directors representing other member countries to ensure timely access to project information for concerned members of the public, particularly affected populations, via the banks’ information centers, the internet, and local venues in borrowing countries. The President of the World Bank Group agreed with our conclusion that performance in this area should be improved. He said that performance had improved since the completion of our review but that the Bank and the Corporation both need to perform even better. Because the actions described by the President of the World Bank Group have only recently begun to take effect, we did not attempt to verify their impact. | Pursuant to a congressional request, GAO reviewed certain aspects of the environmental assessment and information disclosure policies and practices of the multilateral development banks, focusing on the: (1) steps the banks have taken to ensure meaningful public consultation on the environmental implications of proposed projects and timely public access to relevant project documents; (2) quality of consultation that occurs on bank-supported projects and the documentation on the consultation that is provided to executive directors; and (3) extent to which the banks provide broad, timely public access to project information, including environmental assessment reports. GAO noted that: (1) the multilateral development banks, led by the World Bank, have taken significant steps to ensure that meaningful public consultation takes place on the environmental implications of the projects they fund; (2) GAO believes, however, that the banks can take further steps to build on the progress that has been achieved by ensuring that executive directors receive complete and accurate documentation about the consultation practices that have been employed in developing proposed projects, and by more consistently providing the public with timely access to environmental information on these projects; (3) the banks have adopted guidelines that require sponsors to consult with the public in developing projects, and created systems to provide worldwide public access to information about these projects--including information on their environmental implications; (4) generally, public consultation on the projects that GAO reviewed was adequate or better, and bank intervention improved sponsor practices on nearly every project; (5) several factors contributed to the quality of consultation; (6) for example, good consultation was associated with projects employing community-based approaches to project development, as well as those having a high profile because of recent adverse publicity on similar projects; (7) also, in general, World Bank-supported projects received higher ratings than the projects supported by the other banks GAO reviewed; (8) nevertheless, consultation on 25 percent (11 of 44) of the projects, primarily projects supported by the International Finance Corporation or sponsored by the government of China, was less than adequate; (9) also, documentation given to the executive directors provided incomplete or inaccurate information about the consultation measures employed on many of the projects; and (10) the banks' Internet home pages were inconsistent in meeting their own guidelines for providing public information concerning project profiles and environmental assessment reports. |
Before discussing FAA’s efforts to implement a number of security initiatives, it is important to discuss some of the vulnerabilities that exist within the nation’s aviation security system. In our previous reports and testimonies, we highlighted a number of these vulnerabilities. Since the 1988 bombing of Pan Am Flight 103, security reviews by FAA, audits conducted by GAO and the Department of Transportation’s Inspector General, and the work of a presidential commission have shown that the system continues to be flawed. In fact, nearly every major aspect of the system—ranging from screening passengers, checked and carry-on baggage, mail, and cargo to controlling the access to secured areas within an airport environment—has weaknesses that could be exploited. For example, for those bags that are screened, we reported in March 1996 that conventional X-ray screening systems had performance limitations and offer little protection against a moderately sophisticated explosive device. According to the intelligence community, the threat of terrorism against the United States has increased. The World Trade Center bombing and the emergence in the United States of more dangerous international terrorist groups revealed that the threat of attacks in the United States is more serious and more extensive than previously believed. On the basis of information provided by the intelligence community, FAA makes judgments about the threat to aviation and decides which procedures would best address the threat. Among these procedures are methods to identify passengers who pose potential risks and who are then subjected to additional security measures. Such procedures can, at FAA’s discretion, be instituted for a limited period or made permanent by incorporating them into the agency’s security procedures. Our 1994 reports criticized FAA for its lack of progress in addressing identified vulnerabilities and in deploying new explosives detection systems and for related weaknesses in its security research program, such as insufficient attention to integrating different technologies. Past experience has demonstrated that concepts that make sense in a laboratory may not work in an airport environment. Because of this, we recommended that FAA pilot test new equipment and procedures to determine if they improve security before implementing them systemwide in the nation’s airports. We also recommended that FAA pay greater attention to human factors issues, such as security screeners’ performance. Providing effective security is a complex and difficult task because of the size of the U.S. aviation system, the differences among airlines and airports, and the unpredictable nature of terrorism. FAA was attempting to build consensus with the aviation community on how to improve aviation security when, in 1996, TWA Flight 800 crashed. Because the crash was initially suspected to be a terrorist act, national attention focused on the need to address aviation security vulnerabilities. The President created a Commission to review aviation safety and security issues, and the Congress held hearings. The Commission made a total of 31 recommendations for improving aviation security at our nation’s airports. In the 1996 Reauthorization Act, the Congress mandated that FAA take several actions to improve aviation security, and the Congress provided $144.2 million in the Omnibus Consolidated Appropriations Act of 1997 to purchase commercially available advanced security equipment for screening checked and carry-on baggage and to conduct related activities. As we reported in April 1998, FAA has made progress in a number of critical areas to improve aviation security as recommended by the Commission and mandated by the Reauthorization Act. However, the agency has experienced delays of up to 12 months in completing the five efforts we reviewed: passenger profiling, explosives detection technologies, passenger-bag matching, vulnerability assessments, and the certification of screening companies and the performance of security screeners. FAA officials said many of the expected completion dates were ambitious, and they have extended them to take into account the complexities and time-consuming activities involved. We found that delays were caused by the new and relatively untested technologies, limited funds, and problems with equipment installation and contractors’ performance. In some cases, FAA must develop regulations to establish new requirements. Airports, air carriers, and screening companies then must establish programs to meet those requirements. Based on FAA’s current schedule and milestones, this whole process for enhancing the nation’s aviation security system will take years to fully implement. I will briefly discuss the status of these five initiatives and the actions that FAA and others need to take before they can be fully implemented. Automated passenger profiling is a computer-based method that permits air carriers to focus on the small percentage of passengers who may pose security risks and whose bags should be screened by explosives detection equipment or matched with the boarding passengers. The system developed to screen passengers is known as the computer-assisted passenger screening (CAPS) system. It is designed to enable air carriers to more quickly separate passengers into two categories—those who do not require additional security attention and those who do. None of the major carriers had an automated system in place by December 31, 1997, as FAA originally planned. However, as of February 1998, three major air carriers had voluntarily implemented the system, and all but one major carrier are expected to have voluntarily implemented it by September 1998. FAA still needs to issue a regulation to require this type of screening. Concerns have been raised about the potential of this system to function in a discriminatory manner. However, the Department of Justice has determined that the screening process used by the system does not discriminate against travelers because it does not record or give any consideration to the race, color, national or ethnic origin, religion, or gender of passengers. Nor does it include as a screening factor any passenger traits, such as a passenger’s name or mode of dress, that may be directly associated with discriminatory judgments. To ensure the system is run in a nondiscriminatory manner, the system will be reviewed periodically by FAA and the Department of Justice. Explosives detection technologies are screening devices that have the capability to detect the potential existence of explosives that can be concealed in carry-on or checked baggage. This area is one that recently has seen a substantial increase in funding. FAA is a year behind schedule in deploying this equipment. These delays have been caused, in part, by the inexperience of the contractor hired to install the equipment and the ongoing or planned construction projects that must be completed before the equipment can be installed at certain airports. By December 1997, FAA originally planned to deploy 54 certified explosives detection systems to screen checked bags and 489 trace detection devices to screen passengers’ carry-on bags at major airports. However, as of the end of April 1998, FAA had deployed only 21 of the certified explosives detection systems and only about 250 of the trace detection devices. FAA now plans to have all of them installed and operational by December 1998. At that time, still only a limited number of airports and a fraction of the flying public would be covered. During the deployment of this equipment, FAA plans to gather information and evaluate how well the equipment is working in the field. This is important because we previously reported that there were significant differences between how these certified systems performed in the field and in the laboratory. Both the cost of the equipment—two units in one place costing about $2 million are required to meet FAA’s certification standard—and the speed at which the equipment can screen bags have been concerns to the aviation industry. FAA is interested in identifying and certifying less expensive and faster equipment and has continued to fund research to develop more equipment that could potentially meet FAA’s certification standard. Matching checked bags to the passengers who actually board a flight allows airlines to reduce the risk from concealed explosives because they can remove the bags of people who do not board the aircraft. According to FAA, when passenger-bag matching is fully implemented, the system will match some passengers, who are either randomly selected or who have been identified through the profiling system, with their bags. FAA began examining the feasibility of matching bags with passengers before the Commission’s final report was issued and the Reauthorization Act was passed. In June 1997, the agency completed a pilot program at selected airports. Although FAA was required by the Reauthorization Act to report to the Congress on the pilot program within 30 days after its completion, it did not do so. In the fall of 1997, FAA notified the Congress that the report would be delayed because FAA had agreed with the airline industry to combine this report with an economic analysis of the impact of matching passengers and bags systemwide. Some air carriers have already voluntarily begun to match some passengers and bags for their domestic flights. In November 1998, FAA expects to issue a regulation that will require air carriers to implement such a program within 30 days—about 1 year later than the Commission expected. In both the Reauthorization Act and the Commission’s final report, FAA was directed to conduct a number of vulnerability assessments in an airport environment to identify weaknesses in security measures that could allow threats to be successfully carried out. In August 1996, recognizing the vital role of vulnerability assessments, we recommended that steps be taken to conduct a comprehensive review of the safety and security of all major airports and air carriers to identify the strengths and weaknesses of their procedures to protect the flying public and to identify vulnerabilities in the system. FAA has three separate efforts under way. First, FAA is developing a standardized model for conducting airport vulnerability assessments, as the Commission recommended. FAA is working with several companies that are using different models for assessing the vulnerabilities at 14 major airports. FAA has established a panel to review the assessment results and to select the best model for assessing a facility’s vulnerabilities. The agency plans to make this model available to airlines and airports in March 1999. Although some delays have occurred in starting the assessments, they have not been significant. Second, to address the Reauthorization Act’s requirement for FAA and the Federal Bureau of Investigation (FBI) to jointly assess threats and vulnerabilities at high-risk airports, FAA and FBI officials conducted their first assessment in December 1997. In February 1998, FAA officials said they would begin conducting one to two assessments each month. The results of the joint assessments will be used for comparing threats and vulnerabilities at different airports. By having both threat and vulnerability information, FAA and FBI officials should be able to determine which airports and which areas of airports present the highest risks. FAA and FBI have agreed to a schedule for assessing 31 airports considered to be high-risk candidates by the end of calendar year 1999. The Reauthorization Act, however, called for the initial assessments to be completed by October 9, 1999. The schedule FAA and FBI agreed to calls for their reviews at 28 of the 31 airports to be completed by this date. Third, the Reauthorization Act mandates that FAA require airports and air carriers to conduct periodic vulnerability assessments. FAA plans to require that airports and air carriers incorporate periodic assessments into their individual security programs. However, FAA stated that before implementing this change, it intends to make the standardized model that it is developing available to both airports and air carriers for use in conducting these assessments. As mentioned previously, FAA expects the model to be available in March 1999. Implementation of the periodic assessments is to begin around mid-1999. Both the Reauthorization Act and the Commission’s report directed FAA to certify the screening companies that air carriers contract with to provide security at airport checkpoints and to improve the training of the personnel doing the screening. Certifying the companies would ensure that these companies and their employees meet established standards and have consistent qualifications. FAA plans to complete the final regulation for certifying screening companies and screener performance in March 2000. According to FAA officials, they need time to develop performance standards based on screener performance data and to incorporate those standards into the final regulation. Improving the training and testing of people hired by these companies to screen passengers’ baggage at airport security checkpoints would also improve aviation security. Regardless of advances in technology, the people who operate the equipment are the last and best line of defense against the introduction of any dangerous object into the aviation system. Currently, the people who are hired to screen baggage attend a standardized classroom training program. FAA is deploying a computerized, self-paced training and testing system, called the Screener Proficiency Evaluation and Reporting System (SPEARS). This effort was begun well before the Commission issued its initial report and the Reauthorization Act was enacted. As of February 1998, FAA had deployed computer-based training systems for personnel who use X-ray machines for screening carry-on bags at 17 major airports. Deployment is planned for two additional major airports by May 1998. FAA had also awarded a contract to deploy these systems at another 60 airports, but as of March 1998, the agency had decided to deploy only 15 of the 60 systems because it lacked necessary funding. If funds are available, FAA plans to deploy the other 45 systems by the end of fiscal year 1998 or early fiscal year 1999. Although no system can guarantee full protection against the threat of terrorist activities, security improvements can help to reduce that threat. Further improvements in the nation’s aviation security system will need long-term efforts by FAA and the aviation industry. To maintain momentum, it is important for the Congress to provide continual oversight and to address funding issues. Funding for aviation security improvements is an issue that the Congress will be faced with for a number of years. The Commission envisioned a federal investment of approximately $100 million annually to enhance aviation security. The President’s 1999 budget requested $100 million to continue the purchase and installation of explosives detection devices, as recommended by the Commission, and an additional $2 million for vulnerability assessments. The amount of funding appropriated to date, as well as FAA’s request in fiscal year 1999, represents only a fraction of the funding needed to fully implement security improvements throughout the nation’s aviation system. For example, several years ago, FAA estimated that the cost of acquiring and installing the certified systems at the nation’s 75 busiest airports could range from $400 million to $2.2 billion, depending on the number and the cost of machines installed. In 1996, we stressed that it is important for the Congress to oversee the implementation of FAA’s security measures. We recommended that the Congress require the responsible agencies to establish consistent goals and performance measures. This is consistent with the purpose behind the Government Performance and Results Act, which requires agencies to set goals and measure their performance against those goals so that the Congress can hold the agencies accountable for results. Starting with fiscal year 1998, FAA began including such goals and specific performance measures for its security programs in its annual budget submissions. FAA is also incorporating goals and performance measures into its 1998 Strategic Plan, which should be issued shortly. Using these established goals and performance measures, the Congress can then oversee FAA’s progress in improving aviation security. In closing, Mr. Chairman, vulnerabilities in our aviation security system still exist. While FAA has made some progress in addressing these vulnerabilities, it is crucial that the Congress maintain vigilant oversight of the agency’s efforts. When we testified before several committees nearly 20 months ago following the crash of TWA Flight 800, a parallel was drawn between actions taken following Pan Am Flight 103 and TWA Flight 800. In both instances, presidential commissions were formed, vulnerabilities were identified, and a period of heightened activity by the government, the aviation industry, and the media ensued. Regrettably, after the commission investigating Pan Am Flight 103 issued its report, activity began to wane and not much progress was made. Although improvements have been made since the crash of TWA Flight 800, we must ensure that momentum will not be lost. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any Member of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its recent review of the Federal Aviation Administration's (FAA) implementation of five key initiatives: automated passenger profiling, explosives detection technologies, passenger-bag match, vulnerability assessments, and certification of screening companies and improvement of screeners' performance. GAO noted that: (1) FAA has made some progress in five critical areas as recommended by the White House Commission on Aviation Safety and Security and mandated by Congress; (2) given the current implementation schedule, it will take years for FAA and the aviation industry to fully implement the initiatives; (3) to date, FAA has encountered delays of up to 12 months in implementing these initiatives, in part because they are more complex than originally envisioned and involve new and relatively untested technologies; (4) delays have also been caused by limited funding and problems with equipment installation and contractors' performance; (5) while progress is being made in strengthening aviation security, the completion of the current initiatives will require additional financial resources and a sustained commitment by the federal government and the aviation industry; (6) because momentum and public attention began to subside after the downing of Pan Am Flight 103, sufficient progress did not occur; and (7) to avoid a similar situation, congressional oversight and commitment are important. |
Title IV-B of the Social Security Act authorizes funds to states to provide an array of child welfare services to prevent the occurrence of abuse, neglect, and need to place children in foster care. The Administration for Children and Families within HHS is responsible for the administration and oversight of federal funding to states for child welfare services under Title IV-B. HHS headquarters staff are responsible for developing appropriate policies and procedures for states to follow in obtaining and using federal child welfare funds, while staff in HHS’s 10 regional offices are responsible for providing direct oversight of state child welfare systems. No federal eligibility criteria apply to the children and families receiving services funded under Title IV-B. The amount of subpart 1 funds a state receives is based on its population under the age of 21 and the state per capita income, while subpart 2 funding is determined by the percentage of children in a state whose families receive food stamps. Subpart 1 provides grants to states for child welfare services, that are broadly defined. Subpart 1 funds are intended for services that are directed toward the accomplishment of the following purposes: protect and promote the welfare of all children; prevent or remedy problems that may result in the abuse or neglect prevent the unnecessary separation of children from their families by helping families address problems that can lead to out-of-home placements; reunite children with their families; place children in appropriate adoptive homes when reunification is not possible; and ensure adequate care to children away from their homes in cases in which the child cannot be returned home or cannot be placed for adoption. Subpart 2 services are similar to those allowed under subpart 1, although the range of services allowed under subpart 2 is more limited in some cases. For example, time-limited family reunification services can only be provided during a child’s first 15 months in foster care, while no such restriction is placed on the use of subpart 1 funds. In addition, states must spend a “significant portion” of their subpart 2 funds on each of four service categories: Family preservation service. Services designed to help families at risk or in crisis, including services to (1) help reunify children with their families when safe and appropriate; (2) place children in permanent homes through adoption, guardianship, or some other permanent living arrangement; (3) help children at risk of foster care placement remain safely with their families; (4) provide follow- up assistance to families when a child has been returned after a foster care placement; (5) provide temporary respite care; and (6) improve parenting skills. Family support services. Community-based services to promote the safety and well-being of children and families designed to increase the strength and stability of families, to increase parental competence, to provide children a safe and supportive family environment, to strengthen parental relationships, and to enhance child development. Examples of such services include parenting skills training and home visiting programs for first time parents of newborns. Time-limited family reunification services. Services provided to a child placed in foster care and to the parents of the child in order to facilitate the safe reunification of the child within 15 months of placement. These services include counseling, substance abuse treatment services, mental health services, and assistance to address domestic violence. Adoption promotion and support services: Services designed to encourage more adoptions of children in foster care when adoption is in the best interest of the child, including services to expedite the adoption process and support adoptive families. Federal child welfare funding has long been criticized for entitling states to reimbursement for foster care placements, while providing little funding for services to prevent such placements. When the Congress enacted the Adoption Assistance and Child Welfare Act of 1980, it created a new funding source for foster care and adoption assistance under Title IV-E of the Social Security Act. Title IV-E provides an open-ended entitlement for foster care maintenance payments to cover a portion of the food, housing, and incidental expenses for all foster children whose parents meet certain federal eligibility criteria. Title IV-E also provides payments to adoptive parents of eligible foster children with special needs. While states could still use Title IV-B funding for foster care and adoption assistance for children ineligible under Title IV-E, the law established a dollar cap on the amount of Title IV-B funds that states could use for three categories of service: foster care maintenance payments, adoption assistance payments, and child care related to a parent’s employment or training. The law requires that the total of subpart 1 funds used for these categories cannot exceed a state’s total 1979 subpart 1 expenditures for all types of services. The intent of this restriction, according to a congressional document, was to encourage states to devote increases in subpart 1 funding as much as possible to supportive services that could prevent the need for out-of- home placements. However, this restriction applies only to the federal portion of subpart 1 expenditures, as the law provides that states may use any or all of their state matching funds for foster care maintenance payments. For the fourth consecutive year, the President’s budget proposes a Child Welfare Program Option. HHS developed the proposal to give states more flexibility in using Title IV-E foster care funds for preventive services such as those under Title IV-B. Under this proposal, states could voluntarily choose to receive a fixed IV-E foster care allocation (based on historic expenditure rates) over a 5-year period, rather than receiving a per child allocation. States could use this allocation for any services provided under Titles IV-B and IV-E, but would also have to fund any foster care maintenance payments and associated administrative costs from this fixed grant or use state funds. No legislation to enact this option has been introduced. While states funded similar services under subparts 1 and 2, most states reported using subpart 1 funds primarily to pay for costs associated with operating child welfare programs, while most states reported using subpart 2 funds for family services as shown in table 1. For example, states used over 44 percent of subpart 1 funds to pay for staff salaries and costs to administer and manage programs. In contrast, states spent over 71 percent of subpart 2 funds for services to support, preserve, and reunify families. The majority of subpart 1 funds were spent on staff salaries, and Washington officials said that in their state, over half of these costs paid for staff providing direct services to children and families. Overall, states reported that nearly half of Title IV-B funds used for staff salaries supported social worker positions in child protective services. Another 20 percent of funds supported positions for other social workers. The remaining costs supported other staff including those providing supervision of caseworkers and legal services. (See fig. 1.) Percentages do not total to 100 due to rounding. The remaining subpart 1 funds were split fairly evenly among administration and management, child protective services, and foster care maintenance payments: Administration and management comprised the second largest category of subpart 1 expenditures, accounting for almost 17 percent of subpart 1 dollars. These services included rent and utilities for office space, travel expenses for agency staff, and staff training. Child protective services represent the third largest category of subpart 1 expenditures. States reported using about 16 percent of their subpart 1 funds to provide a variety of CPS services, such as telephone hotlines for the public to report instances of child abuse and neglect, emergency shelters for children who needed to be removed from their homes, and investigative services. States reported using nearly 11 percent of their subpart 1 funds to make recurring payments for the room and board of foster children who were not otherwise eligible for federal reimbursement. For example, New Jersey officials reported spending over half of the state’s subpart 1 funds on foster care maintenance payments. States reported using over 70 percent of their subpart 2 dollars on serving families, with nearly half of these funds used to fund family support and prevention services. These services included mentoring programs to help pregnant adolescents learn to be self-sufficient, financial assistance to low- income families to help with rent and utilities, parenting classes, child care, and support groups provided by community-based resource centers. The remaining subpart 2 funds were split fairly evenly among family preservation, family reunification, and services to support and preserve adoptive families. Family preservation services accounted for nearly 12 percent of subpart 2 dollars. Services provided by Washington state in this category included counseling and parent training services for up to 6 months for families with children who were at risk of being placed in foster care. Adoption support and preservation services accounted for over 11 percent of subpart 2 dollars. With these funds, states provided services such as counseling for children who were going to be adopted, family preservation services to adoptive families, and respite care for adoptive families. Officials in Ohio reported using almost half of its subpart 2 dollars for adoption services, including post adoption services and services to recruit families for children in need of homes. Family reunification services accounted for over 9 percent of subpart 2 funds. These services included supervised visitation centers for parents to visit with their children who were in foster care and coordinators for alcohol and drug treatment services for families whose primary barrier to reunification was substance abuse. New Jersey funded a supervised visitation program that offered parenting education, counseling, transportation, and support groups and was located in a private home, allowing families to visit together in a homelike setting and engage in more natural interactions. States served similar populations under subparts 1 and 2; however, states reported using most subpart 1 funds primarily to serve families whose children had been removed from the home, while most subpart 2 funds were reported to serve families with children at risk of removal due to child abuse or neglect, as shown in table 2. For example, states used 42 percent of subpart 1 funds to serve children in foster care and/or their parents. In contrast, states used 44 percent of subpart 2 funds for children at risk of child abuse and neglect and/or their parents. In our survey, we asked states for more detailed information about the populations served by programs under subparts 1 and 2, such as demographic and socioeconomic characteristics. However, few states were able to provide this data. For selected subpart 1 services, 10 states were able to estimate the extent to which the same children and families also received services under subpart 2: four states reported that generally none or almost none of the recipients also received a service funded by subpart 2, three states reported that generally less than half of the recipients received subpart 2 services, one state reported that all or almost all recipients received subpart two states provided varying estimates for different subpart 1 services. Officials in almost all of HHS’s regional offices supported retaining the current balance between allowing states some flexibility in use of funds and targeting some resources toward prevention, regardless of whether federal funding sources are combined under alternative financing options. One regional official noted that the current financing structure of subpart 1 gives states the flexibility to address unexpected circumstances affecting the child welfare system—for example, the need to develop substance abuse treatment programs for parents affected by the cocaine epidemic of the 1980s. Other regional officials noted that the spending requirements under subpart 2 helped ensure that states used some funds on family support services and prevention activities to help preserve families and keep children from entering foster care. States reported in our survey that flexibility was important to meet the needs of their child welfare systems, and thus generally preferred the financing structure of subpart 1 over subpart 2, as shown in figure 2. HHS provided relatively little oversight specific to state spending under subpart 1. HHS does not collect data on subpart 1 expenditures, relying instead on cursory reviews of plans submitted by states that discuss how they intend to use their subpart 1 funds in the coming year. HHS regional officials reported that they review these plans for relatively limited purposes because there are few restrictions on how states can spend subpart 1 dollars. We also found that HHS regional offices had paid little attention to statutory limits in states’ planned use of subpart 1 funds. In response to our survey, 10 states reported actual 2002 subpart 1 expenditures that exceeded the spending limits by over $15 million in total. HHS received forms from states each year that showed how they planned to spend subpart 1 funds, but had little information on how states actually spent these funds. Officials from four HHS regional offices said that they generally reviewed the forms to ensure that states were requesting the total amount of subpart 1 funds to which they were entitled, and that they complied with the requirement to match 25 percent of subpart 1 funds with state funds. Most regional offices indicated that their review of the state submitted forms focused more on subpart 2 than subpart 1. For example, they reported reviewing planned subpart 2 spending to ensure that states complied with the requirement to spend at least 20 percent of funds on each of the service categories and spend no more than 10 percent of funds for administrative purposes. Several HHS officials said that they did not monitor subpart 1 funds as closely as other federal child welfare funds due to the relatively small funding amount and the lack of detailed requirements about how these funds could be spent. Oversight of subpart 1 was further limited because spending plans states provided on the annual forms may not reliably show how states actually spent Title IV-B funds. HHS officials explained that states’ actual expenditures may vary from planned expenditures as states address unforeseen circumstances. The timing for submitting the annual forms also affected how well states could plan Title IV-B spending. HHS required states to submit their initial spending plans for the upcoming year by June 30, prior to states receiving information on program appropriations for the upcoming year. While we did not conduct a review comparing state submitted planned expenditures to actual expenditures for previous years, we did identify instances that suggested differences in planned and actual expenditures as well as data on actual expenditures that were not always accurate. For example, two states with county-administered child welfare systems said they could not reliably estimate planned spending by service category because the states did not collect expenditure data from county child welfare agencies that administer Title IV-B funds. One regional official explained that the only way to determine how a state actually used its Title IV-B funds was to review its financial accounts. At the time of our review, three regional offices had indicated that they had begun asking states to provide Title IV-B expenditure data. HHS regional offices paid little attention to the statutory limits on the use of subpart 1 funds for foster care maintenance and adoption assistance. Officials in only 1 of HHS’s 10 regional offices said that they ensured state plans complied with statutory spending limits for subpart 1. In contrast, 5 regional offices were unaware that any limits on the use of subpart 1 funds existed. Four other regional offices were aware that some limitations existed, but did not ensure state compliance with them. Two regional offices said they did not monitor planned expenditures for subpart 1 because they had no data to calculate the spending limit for each state, and HHS had not provided guidance on how to enforce the limits. Officials in another region said that their office discontinued subpart 1 compliance reviews because they considered the limits to be meaningless because state and federal funds are fungible and state funds spent on child welfare services greatly exceeded subpart 1federal funds. In other words, any attempt to enforce the limits, according to these officials, would only lead to changes in how states accounted for state and federal funds. Some states reported in our survey that they spent 2002 subpart 1 funds in excess of the statutory authority for foster care maintenance and adoption assistance payments. (See fig. 4.) While spending excesses were small in some states, they were large in others, ranging from a low of $27,000 in New Hampshire to nearly $4 million in Michigan. In total, reported actual spending by the 10 states exceeded the statutory limit by over $15 million. Subsequent to our review, ACF issued guidance to states reminding them of the statutory spending limits for Title IV-B subpart 1 funds in November 2003. This guidance included information needed by each state to calculate its spending limit for foster care and adoption assistance payments, and day care related to employment or training. Research on the effectiveness of services provided under subpart 1of Title IV-B was limited, and HHS evaluations of subpart 2 services showed no or little effect on children’s outcomes. In our survey, 22 states reported providing services other than maintenance payments, staff salaries, or administration under subpart 1; however, none of these states had evaluated the outcomes of these services. One state official said that few states could afford to divert resources away from direct services to families in order to conduct formal program evaluations, given the tremendous service needs of families involved in the child welfare system. Similarly, our literature review showed that few evaluations had been conducted, and evaluations that had been conducted produced mixed results. For example, one study evaluating a program in Texas to increase family literacy and prevent child abuse by enhancing parent-child interactions cited results showing positive effects on children’s measured competence and classroom behavior. However, evaluation of the same program in New York did not consistently show differences in outcomes for children and parents in the program compared to those in a control group. HHS evaluations of subpart 2 services also have shown no or little effect, as reported by the Congressional Research Service. The Congress required HHS to evaluate the effectiveness of programs funded under subpart 2 as part of its initial approval of funding for family preservation and family support services. HHS focused on the use of subpart 2 funds in three large-scale evaluations. One looked at overall implementation issues for the program, the second looked at the effectiveness of two models of family preservation services (both providing relatively intensive casework), and the third looked at the effectiveness of a wide range of family support services. Overall, the findings were similar across all evaluation sites showing subpart 2 services provided no or little effect in reducing out-of-home placement, maltreatment recurrence, or improved family functioning beyond what normal casework services achieved. No similar large scale evaluations of time-limited reunification services or of adoption promotion and support services have been made. Our 2003 report recommended that the Secretary of HHS provide the necessary guidance to ensure that HHS regional offices are providing appropriate oversight of subpart 1, consider the feasibility of collecting data on states’ use of these funds to facilitate program oversight and guidance to states, and use the information gained through enhanced oversight of subpart 1 to inform its design of alternative child welfare financing options. ACF agreed with our findings and implemented guidance to states reminding them of the statutory requirements for subpart 1 spending. ACF disagreed with our recommendation to consider collecting data on subpart 1 expenditures. ACF believed that its level of oversight was commensurate with the scope and intent of subpart 1, noting that its oversight efforts are more appropriately focused on reviews of the states’ overall child welfare systems. ACF did not comment on our recommendation to use such data to inform the design of an alternative financing option. 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. For further information regarding this testimony, please contact me at (202) 512-8403. Individuals making key contributions to this testimony include Lacinda Ayers, Diana Pietrowiak, and Michelle St. Pierre. Lessons Learned for Protecting and Educating Children after the Gulf Coast Hurricanes. GAO-06-680R. Washington, D.C.: May 11, 2006. District of Columbia: Federal Funds for Foster Care Improvements Used to Implement New Programs, but Challenges Remain. GAO-05-787. Washington, D.C.: July 22, 2005. Child Welfare: Better Data and Evaluations Could Improve Processes and Programs for Adopting Children with Special Needs. GAO-05-292. Washington, D.C.: June 13, 2005. Indian Child Welfare Act: Existing Information on Implementation Issues Could Be Used to Target Guidance and Assistance to States. GAO-05-290. Washington, D.C.: April 4, 2005. Foster Youth: HHS Actions Could Improve Coordination of Services and Monitoring of States’ Independent Living Programs. GAO-05-25. Washington, D.C.: November 18, 2004. D.C. Child And Family Services Agency: More Focus Needed on Human Capital Management Issues for Caseworkers and Foster Parent Recruitment and Retention. GAO-04-1017. Washington, D.C.: September 24, 2004. 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. D.C. Family Court: Operations and Case Management Have Improved, but Critical Issues Remain. GAO-04-685T. Washington, D.C.: April 23, 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. Child Welfare: Improved Federal Oversight Could Assist States in Overcoming Key Challenges. GAO-04-418T. Washington, D.C.: January 28, 2004. D.C. Family Court: Progress Has Been Made in Implementing Its Transition. GAO-04-234. Washington, D.C.: January 6, 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: Enhanced Federal Oversight of Title IV-B Could Provide States Additional Information to Improve Services. GAO-03-956. Washington, D.C.: September 12, 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. D.C. Child and Family Services: Key Issues Affecting the Management of Its Foster Care Cases. GAO-03-758T. Washington, D.C.: May 16, 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. Foster Care: States Focusing on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-03-626T. Washington, D.C.: April 8, 2003. Child Welfare: HHS Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff. GAO-03-357. Washington, D.C.: March 31, 2003. Foster Care: Recent Legislation Helps States Focus on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-02-585. Washington, D.C.: June 28, 2002. District of Columbia Child Welfare: Long-Term Challenges to Ensuring Children’s Well-Being. GAO-01-191. Washington, D.C.: December 29, 2000. Foster Care: HHS Should Ensure That Juvenile Justice Placements Are Reviewed. GAO/HEHS-00-42. Washington, D.C.: June 9, 2000. Juvenile Courts: Reforms Aim to Better Serve Maltreated Children. GAO/HEHS-99-13. Washington, D.C.: January 11, 2000. Foster Care: States’ Early Experiences Implementing the Adoption and Safe Families Act. GAO/HEHS-00-1. Washington, D.C.: December 22, 1999. Foster Care: HHS Could Better Facilitate the Interjurisdictional Adoption Process. GAO/HEHS-00-12. Washington, D.C.: November 19, 1999. Foster Care: Effectiveness of Independent Living Services Unknown. GAO/HEHS-00-13. Washington, D.C.: November 5, 1999. Child Welfare: States’ Progress in Implementing Family Preservation and Support Services. GAO/HEHS-97-34. Washington, D.C.: February 18, 1997. Child Welfare: Opportunities to Further Enhance Family Preservation and Support Activities. GAO/HEHS-95-112. Washington, D.C.: June 15, 1995. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | For federal fiscal year 2004, state and local child protective services staff determined that an estimated 872,000 children have been victims of abuse or neglect. Title IV-B subparts 1 and 2 authorize a wide array of child welfare services with some restrictions on states' use of funds. This testimony discusses: (1) how states used Title IV-B dollars to serve families under subparts 1 and 2; (2) the extent that federal oversight ensured state compliance with spending requirements under subpart 1; and (3) what the research said about the effectiveness of service states have provided to families using Title IV-B funds. This testimony was primarily based on a 2003 report (GAO-03-956). States used Title IV-B funds to provide a broad range of services to prevent the occurrence of abuse, neglect, and foster care placements in addition to other child welfare services. While there was some overlap, states reported using Title IV-B subpart 1 funds primarily to operate child welfare programs and serve families in the foster care system, while states reported using subpart 2 funds primarily for family services targeted to families at risk of child removal due to abuse or neglect. For example, nearly half of subpart 1 staff costs paid salaries for social worker positions in child protective services. Family services under subpart 2 included those to support, preserve, and reunify families by providing mentoring programs, financial assistance to help with rent and utilities, parenting classes, child care, and support groups. HHS provided relatively little oversight specific to state spending under subpart 1. HHS did not collect data on subpart 1 expenditures and regional officials paid little attention to statutory limits in states' planned use of funds. In response to GAO's survey, 10 states reported actual 2002 subpart 1 expenditures that exceeded the sending limits by over $15 million in total. Research is limited assessing the effectiveness of services provided under Title IV-B. In GAO's survey, 22 states reported providing services other than foster care and adoption assistance payments, staff salaries, or administration under subpart 1; however, none of these states had sufficiently evaluated the outcomes of these services. Similarly, GAO's literature review showed that few evaluations had been conducted, and evaluations that had been conducted showed mixed results. HHS evaluations of subpart 2 services also have shown no or little effect in reducing out-of-home placement, maltreatment recurrence, or improved family functioning beyond what normal casework services achieved. |
Three Interior bureaus—BLM, BOEM, and BSEE—are responsible for regulating the processes that operators must follow when leasing, drilling, and producing oil and gas from federal lands and waters. BLM manages onshore oil and gas activities, and BOEM and BSEE manage offshore oil and gas activities. Onshore. 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 for the sustained yield of renewable resources. BLM oversees onshore oil and gas development on and under BLM-managed federal lands, under other federal agencies’ lands, and under private lands for which the federal government has retained mineral rights— totaling about 700 million subsurface acres. BLM manages these responsibilities through its headquarters office in Washington, D.C.; 12 state offices; 38 district offices; and 127 field offices. BLM’s headquarters office develops guidance and regulations for the bureau, and the state, district, and field offices manage and implement the bureau’s programs. BLM’s oil and gas development oversight efforts are led by 33 field offices located primarily in the Mountain West—the center of much of Interior’s onshore oil and gas development and production—although some BLM offices in other locations have small oil and gas programs that are administered with the assistance of these 33 offices (see fig. 1). Across these offices, BLM employs petroleum engineers, natural resource specialists, geologists, and other scientists to carry out land-use planning efforts and review and approve APDs before operators can begin to drill any new oil or gas wells. Operators that obtain leases for oil and gas development are required to submit to BLM (onshore) or BSEE (offshore) an APD for approval before beginning to drill any new oil or gas wells. The APD contains a detailed set of forms and documents that specify requirements that the operator must follow when drilling. In addition, other specialists, including petroleum engineering technicians, carry out a variety of oil and gas inspections, including drilling inspections, production inspections, and environmental compliance inspections. Offshore. BOEM and BSEE oversee all offshore oil and gas activities on federal leases in the United States. Through its three regional offices— in Alaska, the Gulf of Mexico, and the Pacific––Interior manages more than 1.7 billion offshore acres. The vast majority of Interior’s offshore oil and gas development and production occurs in the Gulf of Mexico; accordingly, the majority of BOEM’s and BSEE’s workforces are located in the Gulf of Mexico Outer Continental Shelf Region. BOEM and BSEE also have offices in the Pacific and Alaska Outer Continental Shelf Regions (see fig. 2). BOEM employs petroleum engineers, geoscientists, and other specialists who are responsible for leasing and resource management, and BSEE employs petroleum and other engineers, inspectors, and other specialists who are responsible for reviewing and approving APDs and conducting drilling and production inspections to ensure that operators comply with all regulatory requirements. Over the last decade, we have reported on Interior’s persistent challenges hiring and retaining sufficient staff to provide efficient and effective oversight of oil and gas activities on federal lands and waters, and we have made a number of recommendations to Interior to address these challenges. In June 2005, we reported that BLM did not have sufficient staff to manage the increasing demand for onshore oil and gas drilling permits while fulfilling its environmental protection responsibilities. We recommended that BLM ensure that its staffing needs are accurately reflected in its workforce plans. In response to this recommendation, BLM analyzed the staffing levels needed to process drilling permits and used this analysis to fill additional inspection and environmental monitoring positions. In March 2010, among other things, we reported that BLM field offices were unable to hire and retain sufficient numbers of staff to complete all required inspections. We reported that, according to BLM officials, low pay when compared with industry salaries and the high housing costs in energy boom towns were major factors affecting their ability to hire sufficient numbers of staff. We recommended that Interior determine what additional policies or incentives were necessary, if any, to attract and retain staff. Interior agreed with our recommendation, and we are evaluating the actions they have taken, including developing a workforce strategy and issuing guidance for the use of recruitment and retention incentives. In June 2012, we reported that salaries for some key oil and gas oversight positions—which are generally set by the federal salary schedule—were significantly lower than salaries offered by industry for candidates with similar skills, and that top applicants are typically hired by the petroleum industry, leaving Interior with less-skilled applicants. To improve Interior’s oversight of oil and gas activities in the Gulf of Mexico, we recommended that Interior assess how the number of inspectors affects the agency’s ability to conduct monthly inspections and whether the monthly inspection goals were appropriate. Interior agreed with our recommendation but has not fully taken action to address it. In August 2013, we reported that BLM also faces challenges in retaining its oil and gas staff and in hiring new employees, including staff responsible for environmental inspections and enforcement. BLM officials told us that some environmental protection positions were unfilled for long periods, and new hires were often inexperienced and required greater supervision, limiting their effectiveness. We did not make any recommendations that directly addressed this concern. In March 2010, we reported that BLM had experienced high turnover rates in key oil and gas inspection and engineering positions from 2004 through 2008, and that this high turnover resulted in a greater reliance on less-trained and less-experienced staff. In July 2012, we reported that Interior continued to face workforce planning challenges following a reorganization effort to improve its oversight of oil and gas activities in the wake of the April 2010 oil spill in the Gulf of Mexico. In particular, we found that Interior had not developed a strategic workforce plan that outlined specific strategies to help address recruitment and retention challenges. We recommended that BOEM and BSEE develop a strategic workforce plan that would determine the critical skills and competencies needed to achieve current and future programmatic results and develop strategies to address critical skills gaps. In response to this recommendation, BSEE completed its workforce plan in September 2013, and BOEM officials told us that they will complete their plan in fiscal year 2014. In addition to our work, Interior’s Office of Inspector General (OIG) and others have reported on Interior’s challenges related to hiring and retention of key oil and gas oversight staff. With respect to hiring, in September 2010, Interior’s Outer Continental Shelf Safety Oversight Board reported that Interior did not have a formal program for recruiting the best candidates or well-defined career advancement and promotion opportunities for inspectors. A December 2010 report from Interior’s Inspector General echoed that finding and concluded that the Pacific Region faced considerable hiring challenges because of increased hiring by the oil and gas industry, citing the industry’s significant salary advantage over federal service. With respect to retention, the Outer Continental Shelf Safety Board also reported that Interior lacked a formal program for retaining the most-qualified inspectors. Moreover, the report found that in the Pacific Region, 8 out of 10 staff responsible for permitting were eligible for retirement within the next 3 years. In December 2010, Interior’s Inspector General reported that, in spite of the considerable investment in both time and money for inspector training, BLM’s inspection and enforcement program risked losing its inspectors once they were trained because trained inspectors were highly sought by industry. Interior’s Inspector General reported that oil and gas operators commonly recruit petroleum engineering technicians by offering high salaries during successful business periods, and recommended, among other things, that BLM consider developing and implementing a continued service agreement requiring newly certified inspectors to stay with the bureau for a specified period of time following certification. In February 2013, BLM issued guidance that requires the use of a mandatory service agreement for inspectors as a condition of employment. According to the guidance, if an inspector voluntarily separates from BLM within 2 years of certification, the inspector will have to reimburse BLM the full cost of the training, which is estimated at $48,000 per certification. In 2011, we added Interior’s management of federal oil and gas resources to our list of programs at high risk for waste, fraud, abuse, and mismanagement in part because Interior continued to experience problems hiring and retaining sufficient staff to provide oversight and management of oil gas operations on federal lands and waters. More broadly, in 2001 we added strategic human capital management across the federal government to our high-risk list. At that time, we highlighted various challenges the federal government faces, including strategic human capital planning, succession planning, and acquiring and developing staff sufficient to meet agencies’ needs. We concluded that these challenges may leave agencies unable to effectively, efficiently, and economically perform their missions. In addition, we have issued a series of reports highlighting human capital challenges at individual federal agencies—including the Department of Housing and Urban Development, the U.S. Patent and Trademark Office, the Food and Drug Administration, and the Department of State—and these reports highlight problems similar to the problems at Interior. The federal government has made substantial progress addressing its human capital challenges over the past 12 years. As we noted in September 2012, both Congress and OPM have taken several actions in this regard. For example, in 2002, Congress created a chief human capital officer position in 24 agencies to advise and assist the head of these agencies and other agency officials in their strategic human capital efforts. In addition, in 2002 and 2004, Congress provided agencies with additional authorities and flexibilities to manage the federal workforce, such as the authority to offer recruitment bonuses. In 2005, and again in 2008, OPM issued guidance on the use of hiring authorities and flexibilities. In 2008, OPM launched an 80-day hiring model to help speed the hiring process. In 2012, OPM launched the Pathways Programs to recruit and hire students and recent graduates. Interior continues to face challenges hiring and retaining key oil and gas staff—particularly petroleum engineers, inspectors, and geologists. Interior officials told us that a number of factors affected their ability to hire and retain staff but cited two key factors—higher salaries in industry and the lengthy federal hiring process—and said that difficulties were especially prevalent at offices with an active industry presence that competes with Interior for employees. BLM, BOEM, and BSEE offices continue to find it difficult to fill vacancies for key oil and gas oversight positions, including petroleum engineers, inspectors, geologists, natural resource specialists, and geophysicists. In responding to our survey, officials from a majority of BLM, BOEM, and BSEE offices that had vacancies in these key oversight positions reported that filling these vacancies was either somewhat or very difficult, with petroleum engineers and geologists identified as the most difficult to hire. In addition, many field offices reported difficulties retaining key oil and gas staff, and officials told us that they are concerned that key staff will leave for industry. (See app. II for information regarding survey responses.) With the exception of BLM’s petroleum engineers (21.7 percent attrition) and BSEE inspectors (10.1 percent attrition), however, the attrition rate for other key oil and gas staff for fiscal year 2012 was less than the rest of the federal government, which had an average 9.1 percent attrition rate for all federal positions. Nonetheless, field office officials told us that attrition raises concerns because it is not unusual for some field offices to have only one or two employees in any given position, meaning that a single retirement or resignation can significantly affect office operations. At BLM, the fiscal year 2012 attrition rate for petroleum engineers was over 20 percent, or more than double the average federal attrition (see fig. 3). Significantly, resignations rather than retirements, accounted for nearly half of BLM’s petroleum engineer attrition rate, suggesting that petroleum engineers sought employment opportunities outside the bureau. Hiring and retention problems appear to be more acute at offices where industry activity is greatest. For example, attrition rates for BLM oil and gas oversight positions—especially petroleum engineers—appeared to be higher at field offices where industry submitted the highest number of APDs in recent years. From 2010 to 2012, at the five BLM field offices that received the highest number of APDs, the average attrition rate for petroleum engineers was 21.2 percent annually, while the average attrition rate for petroleum engineers at all other BLM field offices was 11.4 percent. At a BLM field office in North Dakota, which has experienced significant new industry activity in recent years, APDs have increased from 84 in fiscal year 2007 to 287 in fiscal year 2012. Office managers from this field office told us that they have been understaffed for the past few years and struggled to hire sufficient numbers of staff to meet the increased APD and inspection workload. Officials at BOEM’s Alaska Regional Office, where both BOEM and industry are preparing for potential development of offshore oil and gas, stated that they face challenges hiring and retaining staff because they are competing with industry for the same small group of geologists, geophysicists, and petroleum engineers. Adding to Interior’s retention difficulties is the high proportion of staff in key oil and gas positions that will be eligible to retire within a few years (see fig. 4). For example, according to our analysis of OPM data on federal civilian personnel, more than half of BLM petroleum engineers and BOEM geologists will be eligible to retire by 2017 compared with a government-wide average of about 27.5 percent for all federal employees during the same period. Interior officials widely agreed that two major factors contribute to difficulties in hiring and retention of oil and gas oversight staff—higher salaries in industry and the lengthy federal hiring process—but cited other factors as well, including not having qualified applicants in some areas and limited opportunities for career advancement and promotion. BLM, BOEM, and BSEE officials overwhelmingly cited the difference between federal and industry salaries as a major factor contributing to difficulties in hiring and retaining staff. In response to our survey and in interviews with field offices, officials from all three bureaus reported that they have lost potential applicants and staff to industry because industry can pay higher salaries than Interior is able to pay under the federal salary schedule. In responding to our survey, a majority of the BLM, BOEM, and BSEE offices that reported vacant positions for petroleum engineers, inspectors, or geologists indicated that the difference in salaries between Interior and industry somewhat or greatly hindered their ability to hire qualified applicants in one or more of these positions. Bureau of Labor Statistics data on industry salaries confirm that there is a wide and growing gap between industry and federal government salaries for petroleum engineers and geologists (see fig. 5). Salaries for natural resource specialists were an exception. Bureau of Labor Statistics salary data for natural resource specialists do not show a significant difference between industry and federal government salaries. According to BLM officials, industry does not have a position equivalent to Interior’s natural resource specialist and has had less demand for staff with these skills and background. Consistent with this exception, our survey results showed that most BLM, BOEM, and BSEE oil and gas offices reported that salary differences did not hinder their ability to hire or retain natural resource specialists. The difference in salaries between Interior and industry appears to be greater in areas with more oil and gas development. According to field office officials, in regions where both Interior and industry are hiring, the pool of eligible applicants is smaller, industry salaries are higher, and the difference in salaries is wider. BSEE officials told us that recent increases in oil and gas exploration and development in the Gulf of Mexico have increased industry salaries and signing bonuses for new hires. Officials from a BLM field office in North Dakota, where industry is actively developing shale oil, told us that starting salaries for engineers in industry are at least twice that of BLM midlevel engineers, and that applicants for inspector positions at BLM can earn 60 to 70 percent more if they work for industry. Interior officials frequently cited the lengthy federal hiring process as a key factor contributing to difficulties hiring staff. Officials we interviewed from all three bureaus told us that the federal hiring process hurt their ability to fill key oil and gas positions. Similarly, for almost 90 percent of the vacancies in 2012, as reported by BLM, BOEM, and BSEE officials in response to our survey, the federal hiring process somewhat hindered or greatly hindered their ability to hire qualified candidates. BLM, BOEM, and BSEE officials we interviewed told us that the federal hiring process is lengthy because there are a number of required steps—including the preparation of a job description, formally announcing the vacancy, creating a list of qualified candidates, conducting interviews, and performing background and security checks. BLM, BOEM, and BSEE officials told us that this process often means that contacting qualified applicants is delayed by weeks or months, and by the time that they contact the applicant, the applicant has found other work. According to our analysis of Interior hiring data, the average hiring time for petroleum engineers and inspectors at BOEM and BSEE in recent months exceeded 180 calendar days (see table 1), and the average hiring times for these positions at BLM in fiscal year 2012 exceeded 120 days (see table 2). These hiring times are much longer than OPM’s target of 80 calendar days. For other key positions, such as natural resource specialists and geologists, bureau officials responding to our survey reported fewer overall vacancies—in part because there are fewer staff in these positions—but still reported lengthy hiring times. Interior officials also identified other factors that contribute to difficulties in hiring and retention of oil and gas oversight staff, including not having qualified applicants in some areas and a limited career path or opportunities for advancement for some positions. Not having qualified candidates in some areas. In responding to our survey about the availability of qualified candidates to fill vacancies, almost 70 percent of those who responded indicated that a lack of available applicants was a factor that somewhat or greatly hindered their ability to fill those vacancies. In particular, field offices located in remote areas or extreme climates often reported that it was difficult to fill oil and gas oversight positions. For example, an official from a BLM field office in rural Colorado reported that the office was located in an area where winter temperatures can fall to -40 degrees Fahrenheit, making it difficult to attract qualified applicants and fill positions. In addition, the high cost of living in many areas limited the pool of qualified applicants, according to officials. At one BLM field office in Wyoming, for instance, an official reported that local housing options were limited and expensive, reducing the number of potential qualified applicants willing to move to the area. Limited career path. Officials from all three bureaus told us that limited opportunities for advancement, promotion, or changing responsibilities and activities over time, caused some staff to leave and take industry positions or other positions within Interior. Several Interior officials cited limited opportunities for growth, advancement, and promotion as factors that affected retention. For example, we have reported that, according to BLM field office officials, natural resource specialists assigned to oil and gas tasks such as reviewing APDs have left BLM to work at other federal agencies where they can make greater use of their education and areas of specialization, such as biology. A 2012 BLM report on BLM’s oil and gas inspection and enforcement workforce strategy recognized that the lack of a career ladder for petroleum engineering technicians could contribute to these employees leaving and said that the bureau is working on a strategy to create a career ladder for these employees. Overall, almost 60 percent of survey responses to our question regarding opportunities for advancement and promotion indicated that the limited nature of such opportunities somewhat or greatly hindered retention for these positions. Interior and the three bureaus—BLM, BOEM, and BSEE—have taken some actions to address their hiring and retention challenges, such as actions to increase or supplement salaries to reduce the salary gap and streamline the hiring process to reduce hiring times. However, they have made limited use of their existing authorities to supplement salaries for key oil and gas oversight staff. Although the department has taken some steps to reduce hiring times, it does not have complete and accurate data on hiring times to identify the causes of delays in the hiring process and help identify further opportunities for reducing them. Also, Interior has taken some actions to improve recruiting. For example, Interior and its bureaus are working on workforce plans to, in part, help coordinate hiring and retention efforts, but these efforts are ongoing, and the extent to which these plans will help these efforts is uncertain. Interior and the three bureaus have taken some actions to obtain special salary rates for key oil and gas positions and have used their existing authorities to supplement salaries; however, they have not fully used these funding authorities. Interior obtained special salary rates from Congress for key oil and gas positions at BOEM and BSEE for fiscal years 2012 and 2013. Agencies may receive special salary rates by request to OPM or through the congressional appropriations process. In February 2011, Interior submitted a request to OPM for special salary rates for petroleum engineers, geologists, and geophysicists in the Gulf of Mexico Region. OPM initially declined the request, citing the federal salary freeze that limited special salary rates only to agencies experiencing extraordinary circumstances. However, OPM noted that Interior’s need to quickly fill new positions created by the reorganization of MMS, which was replaced first by the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) and then by BOEM and BSEE, could be considered an extraordinary circumstance and suggested that Interior suspend its request until Congress provides funding for the additional positions. Interior did not resubmit its request, however, because in its fiscal year 2012 appropriation, Congress provided a special 25 percent base pay increase for geologists, geophysicists, and petroleum engineers in the Gulf of Mexico applicable to fiscal years 2012 and 2013. BOEM and BSEE officials in the Gulf of Mexico Region noted that the actual pay increase is lower than 25 percent because it does not include locality pay. For example, staff in BSEE’s Lake Jackson District office in Texas did not receive a pay increase because their locality rate is higher than the 25 percent provided by Congress. Nonetheless, BOEM and BSEE officials in the Gulf of Mexico Region stated that this special pay authority appears to have helped in the near term to retain some geologists, geophysicists, and petroleum engineers. BOEM and BSEE have requested an extension of this special pay authority though fiscal year 2014 in their fiscal year 2014 budget request. According to Interior, all three bureaus are actively working to develop a department-wide request for special salary rates. Once complete, Interior will submit the request to OPM. BLM officials said that their bureau is considering applying for special salary rates for some BLM oil and gas positions. BLM officials met with OPM in April 2012 to discuss special salary rates for petroleum engineers and petroleum engineering technicians in western North Dakota and eastern Montana, where a BLM official said disparities between federal and industry salaries are most acute. A BLM official told us that OPM requested that BLM provide more data to support its request and that BLM is currently compiling and analyzing human capital data to support a request to OPM in the near future. At the same time, according to this official, BLM recently submitted draft language to Congress requesting special salary rates through the congressional appropriations process. Interior has not fully used its existing authorities to offer recruitment, relocation, and retention incentives to supplement salaries for key oil and gas positions. Interior’s bureaus have discretionary authority to pay incentives in the form of recruitment, relocation, and retention awards of up to 25 percent of basic pay in most circumstances and for as long as the use of these incentives is justified, in accordance with OPM guidance, such as in the event an employee is likely to leave federal service. OPM officials told us that use of these incentives was a factor they consider when evaluating agency requests for special salary rates. Although BLM, BOEM, and BSEE officials told us that the use of these recruitment, retention, and relocation awards were key options to address salary differences with industry, our review of OPM and Interior data indicated that they were not widely used by the three bureaus. For instance, our assessment of Interior data indicates that Interior’s use of recruitment, relocation, and retention awards for petroleum engineers and inspectors—critical positions that the bureaus have had difficulty hiring and retaining in recent years—has been limited (see tables 3 and 4). BLM officials cited fiscal constraints as the primary reason why they did not use these incentives more often. A July 2011 memorandum from OPM and the Office of Management and Budget (OMB) directed federal agencies to limit the use of recruitment, retention, and relocation incentive awards to fiscal year 2010 levels. Our review of OPM data shows, however, that in 2011Interior paid about one-third less in such awards than it did in 2010. Specifically, in 2010, Interior paid just over $3 million for 401 recruiting, retention, and relocation incentive awards as opposed to 2011, when the department paid just under $2 million. As such, Interior had the discretion to spend another $1 million on these incentive awards in 2011 but chose not to do so even as it faced difficulty hiring and retaining key oil and gas oversight positions. Other factors may have also contributed to the limited use of recruitment, retention, and relocation incentive awards. Specifically, a BLM official stated that there was confusion about OPM and OMB’s requirement to limit incentive awards to 2010 levels, and that some field office managers were uncertain about the extent to which they were allowed to use these incentive awards. A 2012 BLM report on BLM’s oil and gas inspection and enforcement workforce strategy reported that the process to request use of these incentive awards required the development of a justification on a case-by-case basis for each award. Therefore, it recommended developing a “bureau-wide blanket authorization” for a 25 percent recruitment and retention incentive for all petroleum engineers and inspectors. BSEE officials, however, also described situations where potential employees declined job offers even though they were offered these incentive awards. Without clear guidance outlining when these incentives are to be used and a means to measure their effectiveness, however, Interior will not be able to demonstrate that it has fully used its existing authorities to offer recruitment, relocation, and retention incentives to supplement salaries for key oil and gas positions. To help reduce hiring times, Interior participated in an OPM-led, government-wide initiative to streamline the federal hiring process and has taken other actions. Specifically, under the OPM-led effort, an Interior official stated that, in 2009, Interior formed a team composed of hiring managers and human resources specialists representing all of Interior’s bureaus to examine the department’s hiring process. The team compared Interior’s hiring processes to OPM’s 80-day hiring model and identified 27 action items to reduce hiring times, including standardizing position descriptions and reducing the number of managers involved in the hiring approval process. Interior and its bureaus have addressed many of these action items over the past few years and, according to Interior officials and agency records, made significant progress in reducing hiring times. For example, in 2010, BLM developed and distributed guidance to streamline its hiring processes, including the use of standardized position descriptions and vacancy announcements. According to Interior officials, these steps reduced hiring times at Interior as a whole from an average of 190 days in fiscal year 2009 to 80 days in fiscal year 2012, although, as discussed above, hiring times for some key oil and gas positions averaged over 120 days. In addition, BLM, BOEM, and BSEE have taken other steps to expedite the hiring process. To respond to the hiring needs of BOEM and BSEE following the reorganization of BOEMRE in October 2011, BSEE hired additional human resources staff in the Gulf of Mexico Region. In August 2012, BSEE implemented a new process that reduced the number of days from 90 to 30 for managers to select eligible applicants. Although this new guidance still exceeds OPM’s 80-day hiring model, which allocates 15 days for a manager to review and select eligible candidates. BSEE’s analysis of its hiring data shows that this guidance has reduced hiring times at BSEE headquarters and two of the three BSEE regional offices. A BLM official told us that the bureau is working on additional initiatives to improve the efficiency of the hiring process such as automating vacancy announcements and streamlining administrative processes. However, neither the department nor the three bureaus have complete and accurate data on hiring times that could help them identify and address the causes of delays in the hiring process. In 2011, Interior began reporting data on hiring times to OPM on a quarterly basis. A senior Interior official explained that the department calculates hiring times based on a combination of dates from Interior’s personnel and payroll databases. However, we identified instances where these data appear to be inaccurate—for example, in some cases, hiring times were recorded as 0 days or 1 day. An official from BLM stated that the bureau does not have a systematic approach to analyzing data on hiring times, and neither BOEM nor BSEE collects comprehensive data that could be used to identify delays in the hiring process so that problems can be systematically addressed. BSEE has begun taking some informal actions to identify the causes of delays. For example, BSEE human resources officials said that, in August 2012, they began collecting hiring data on a biweekly basis in a spreadsheet and tracking the status of each BOEM and BSEE job announcement to help track the progress of individual applicants as they move through the hiring process. To use these data to evaluate hiring times at various stages of the hiring process, however, BOEM and BSEE would have to manually sum how long it takes each applicant to complete each stage of the hiring process. Without reliable data on hiring times, Interior’s bureaus cannot identify how long it takes to complete individual stages in the hiring process, identify delays, and implement changes to expedite the hiring process. Interior’s bureaus have taken the following actions to improve their recruiting efforts: Developing a marketing strategy. In 2012, BOEM and BSEE contracted with a media strategy firm to study the competitive marketplace for qualified applicants and draft a strategy to attract and retain staff for key technical positions. BOEM and BSEE officials cited various advantages to employment at Interior as compared with industry, including more flexible work hours, better job satisfaction, and more employment security. For example, according to BSEE officials, many industry oil and gas jobs require staff to spend up to 2 consecutive weeks offshore, whereas BSEE inspectors or engineers rarely spend more than 2 to 5 nights offshore. One BSEE manager stated that some of its new hires are former industry employees who do not want to be away from their families for extended periods. A BLM planning document indicates that BLM is also considering contracting with a media strategy firm to review its recruiting strategy. Broadening recruiting efforts. Some BLM and BSEE officials told us that they are making an effort to visit college campuses to recruit oil and gas staff. In addition, BSEE officials told us that, in late 2013, they plan to visit 27 colleges and universities, as well as attend conferences, such as those sponsored by the Society of Petroleum Engineers and the American Association of Petroleum Geologists. The BSEE officials also described planning joint hiring activities with BLM and Interior. BOEM has sent staff to universities and conferences to recruit geoscientists. Officials from BLM’s Bakersfield Field Office told that they have a long-standing relationship with California State University, Bakersfield, and have hired students from that school. Offering internships. BLM, BOEM, and BSEE have had some success offering positions to student interns and converting them to full-time positions. Currently, Interior conducts its internship program under the Pathways Program, which recently replaced the Student Career Experience Program and the Student Temporary Employment Programs. In summer 2013, BSEE hired 24 interns through the Pathways Program. Interior and the three bureaus—BLM, BOEM, and BSEE—are participating in several workforce planning efforts, including government- wide, department-wide, and bureau-level initiatives. Because these efforts are ongoing, however, it is too early to evaluate how they will affect hiring and retention challenges across BLM, BOEM, and BSEE. As we have previously reported, strategic workforce planning helps an organization align its human capital program with its current and emerging mission and programmatic goals, as well as develop long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. We also previously reported on the importance of workforce planning to ensure that programs are implemented consistently across the department. At the department level, Interior is currently participating in two efforts to improve its workforce planning. First, Interior is participating in a government-wide initiative led by OPM to identify and mitigate critical skills gaps across the federal government. Specifically, this effort aims to develop strategies to hire and retain staff possessing targeted skills to help address government-wide and department-specific mission-critical occupations and skill gaps. Second, in response to an OMB request, Interior issued Managing People and Programs – Department of the Interior Strategic Workforce Management Plan in March 2012, which provided an overview of workforce planning strategies that Interior can use to manage workforce levels in consideration of emerging needs, skills gaps, and constrained budgets. As part of the next phase of this effort, Interior has asked its bureaus and offices to begin developing detailed workforce plans using a standardized model based on best practices used at Interior. According to the March 2012 plan, these bureau-level plans are to include a risk assessment of funding, workload, personnel, and positions; an analysis of workforce demand and supply; a skills gap analysis; and an action plan to mitigate risks and address skills gaps. Because both of these initiatives are ongoing, however, it is too early to assess the effect of these efforts on Interior’s hiring and retention challenges for key oil and gas positions. BLM, BOEM, and BSEE are also developing or implementing workforce plans, which are in various stages of completion. As previously mentioned, in July 2012, we reported that BOEM and BSEE did not have strategic workforce plans in place and recommended that each bureau develop such a plan. BSEE recently issued its Human Capital Strategic Plan, 2013-2018, in September 2013. BOEM officials told us that they expect to complete their strategic workforce plan in 2014. In March 2012, BLM issued its Workforce Planning Strategy, 2011 to 2015, which outlines broad, strategic objectives that addressed some key human capital challenges but leaves the development of implementation strategies to BLM managers at other organizational levels, including the state office level. In addition, BLM’s plan did not address challenges with the hiring process or outline mechanisms to monitor, evaluate, or improve the hiring process. Although BLM’s plan discusses the use of relocation and other incentive awards, it does not indicate when the use of these incentive awards is warranted, how the effectiveness of their use will be assessed, or how BLM will balance priorities to budget for these incentives. It remains unclear whether these efforts will help BLM address its human capital challenges. In addition, BLM and BSEE have a number of planning teams working on various aspects of recruitment and retention. In particular, these teams make recommendations for bureau initiatives, including actions to improve the hiring process or to increase the use of recruitment and retention incentives. These efforts, however, do not appear to have been conducted as part of a workforce plan. Therefore, these efforts do not appear to have been conducted in a coordinated and consistent manner across the bureaus or offices, and officials do not have a basis to assess the success of these efforts or determine whether and how these efforts should be adjusted over time. Officials from BLM, BOEM, and BSEE reported that hiring and retention challenges have had numerous effects on some field offices’ operations, including making it more difficult for some field offices to carry out oversight activities because of position vacancies. Officials we interviewed and surveyed at the three bureaus reported that their hiring and retention challenges have generally resulted in less time available for oversight activities. These officials stated that vacancies directly affect the number of oversight activities they can carry out— including the number of inspections they can conduct and the amount of time they can spend processing APDs. Officials at some BLM field offices reported that they have not been able to meet their annual inspection and enforcement goals because of vacancies. Compounding these problems is the fact that new staff are less experienced and, thus, less efficient in carrying out oversight activities, according to BLM, BOEM, and BSEE officials. In addition, officials said that experienced staff are expected to help train and mentor new staff, which reduces the amount of time they can spend on their own oversight work. Interior officials also told us that retention challenges in particular have led to a loss of institutional knowledge and fewer staff available to mentor the less-experienced newcomers. For instance, a BOEM official in Alaska stated that the primary effect of hiring difficulties in Alaska is the lost mentoring opportunities for senior geologists and engineers to train new staff. He said the work BOEM does is highly specialized and technical and that the bureau is often not able to hire candidates with related experience, which exacerbates the lost mentoring opportunities. In response to our survey, officials from 13 of the 20 BLM and BSEE offices with inspector vacancies reported that they somewhat or greatly reduced the number of inspections conducted in 2012 compared with what they would have done if fully staffed, and officials from 9 of the 20 offices with inspector vacancies indicated that the thoroughness of inspections was somewhat or greatly reduced because of these vacancies. In addition, officials from 8 of the 21 BLM and BSEE offices with petroleum engineer vacancies indicated that vacancies somewhat or greatly reduced the number of APDs reviewed in 2012 compared with what they would have done if fully staffed. The effects of vacancies can be difficult to quantify because so much depends on the circumstances of the office, including the type and scale of local industry activity, as well as the field office’s overall staffing levels and ability to adjust to vacancies. BSEE officials said, however, that fewer or less-thorough inspections may mean that some offices are less able to ensure operator compliance with applicable laws and regulations and, as a result, there is an increased risk to human health and safety due to a spill or accident. According to a BSEE official, the longer federal inspectors are away from a site, the more likely operators are to deviate from operating in accordance with laws and regulations. In responding to our survey, a few BLM field offices noted that hiring and retention difficulties have hindered the development of oil and gas resources in some cases. In particular, the survey respondents reported experiencing delays in conducting leasing reviews, conducting resource management plan amendment reviews, or approving seismic studies to locate oil and gas reservoirs. For instance, in May 2013, a BLM field office postponed all remaining oil and gas leasing activities in California for the remainder of the fiscal year due, in part, to the need to shift staff to permitting and inspections. In addition, according to some BSEE officials we interviewed, field offices are not always able to reassign staff to make up for staffing shortfalls as some positions are highly specialized. Officials at the three bureaus cited steps they have taken to address vacancies in key oil and gas positions, including reassigning staff from lower-priority to higher-priority tasks, borrowing staff from other offices, or increasing overtime. However, each of these steps comes at a cost to the agency and are not sustainable solutions. Interior officials stated, for instance, that shifting staff from lower to higher priority work means that the lower priority tasks—many of which are critical to the bureaus’ mission—are deferred or not conducted. For example, a BLM office in Utah reported in our survey that, while it was able to conduct all high- priority inspections, doing so delayed other priorities, such as processing APDs and planning for an oil or gas lease sale. Similarly, offices that borrow staff from other offices gain the ability to carry out their activities, but this comes at a cost to the office that loaned the staff. For example, officials from a BLM field office in North Dakota described how they borrowed staff from a field office in Montana to help process APDs and carry out inspections. As a result, the BLM officials in the North Dakota field office told us they were able to make some progress to address a backlog of APDs and complete required inspections; however, according to BLM survey respondents, the field office work in Montana has suffered. With regard to overtime, offices from BOEM reported in our survey that a heavy reliance on overtime was exhausting their staff. Further, both BLM and BSEE are developing and implementing risk- based inspection strategies—long recommended by us and others—as they work to ensure their oversight resources are efficiently and effectively allocated; however, staffing shortfalls and turnover may adversely affect the bureaus’ ability to carry out these new strategies. Specifically, in 2010, we found that BLM routinely did not meet its goals for conducting key oil and gas facility inspections and recommended that the bureau consider an alternative inspection strategy that allows it to inspect all wells within a reasonable time frame, given available resources. In response to this recommendation, in fiscal year 2011, BLM implemented a risk-based inspection strategy whereby each field office inspects the highest risk wells first. Similarly, BSEE officials told us that they have contracted with Argonne National Laboratory to help develop a risk-based inspection strategy. As part of this review, we analyzed the effect of staffing shortages on oversight of offshore oil and gas activities in the Gulf of Mexico Region and found that continued hiring difficulties could hinder implementation of a risk-based inspection strategy. Specifically, we estimated the number of inspections that could have been conducted in the Gulf of Mexico under three staffing scenarios: (1) a scenario where BSEE was unable to hire additional inspectors between fiscal years 2010 and 2012; (2) a scenario approximating the actual number of inspectors in fiscal year 2012; and (3) a scenario where BSEE was able to hire double the number of inspectors it hired between fiscal years 2010 and 2012. Based on our analysis, increasing the number of production inspectors by 14 provided the capacity to conduct annual inspections at all or almost all Gulf of Mexico production facilities in fiscal year 2012. If BSEE had increased the number of production inspectors by 28 before fiscal year 2012, our analysis indicates that it would have been able to conduct annual inspections at all production facilities and conduct additional inspections at some production facilities considered high risk. Even with these additional staff, however, BSEE would not have had the capacity to conduct additional inspections at every facility considered high risk. See appendix III for details on our analysis. In recent years, Interior has navigated major challenges in its oversight of oil and gas activities on federal lands and waters—including a major reorganization of its oil and gas oversight activities amid a dramatic increase in domestic oil and gas development. These changes notwithstanding, effective oversight of oil and gas development on federal lands and waters is a challenging endeavor requiring experienced staff with highly specialized training and skills. Interior has faced long-standing challenges hiring and retaining these staff and, with the current energy boom and increased industry competition for skilled workers, these problems have been exacerbated. Interior and its bureaus have made some progress to address the two major factors affecting hiring and retention of key oil and gas staff—higher salaries in industry and the lengthy federal hiring process—but difficulties persist. While federal salaries for key oil and gas positions may not match salaries in industry—particularly in periods and locations of rapid industry growth—Interior is not doing all that it can to bridge this gap. Interior has obtained special salary rates in certain regions, such as in the Gulf of Mexico, and for certain positions, such as petroleum engineers and geologists, but it has not made full use of its existing authorities to offer recruitment, retention, and relocation incentives. We recognize that the use of these incentives comes at a cost to other programmatic efforts, and Interior must balance these needs as it develops its workforce plans. However, in the event that Interior applies for special salary rates for key oil and gas positions in the future, whether from OPM or Congress, demonstrating that it has fully utilized its existing authorities can help support its request for such salary rates. Similarly, Interior’s hiring times for key oil and gas positions continue to lag behind hiring times for other positions at Interior and lag behind the federal government more broadly. However, because Interior does not systematically collect and analyze data on its hiring process, it cannot readily identify delays in the process or the causes of such delays. Without reliable data on hiring times, Interior’s bureaus cannot identify how long it takes to complete individual stages in the hiring process, identify delays, and implement changes to expedite the hiring process. To ensure a consistent and comprehensive approach to addressing BLM’s, BOEM’s, and BSEE’s ongoing hiring and retention challenges, we recommend the Secretary of the Interior direct the following two actions: Explore the expanded use of existing authorities, including recruitment, relocation, and retention incentives to help bridge the salary gap for key oil and gas oversight positions such as petroleum engineers, geologists, and geophysicists, and develop clear guidance for when the use of these incentives are warranted and how the effectiveness of their use will be assessed. Systematically collect data on hiring times for key oil and gas positions, ensure the accuracy of the data, analyze the data to identify the causes of delays and expedite the hiring process. We provided a draft of this report to the Department of the Interior for review and comment. Interior generally agreed with our findings and concurred with both recommendations. In its written comments, Interior agreed that its long-term human capital challenges will require the full use of available hiring and retention incentives to the extent that they can be supported by each bureau’s budget. Interior also stated that the bureaus have begun a more systematic collection and analysis of hiring data to identify the causes of delays and help expedite the hiring process. Interior noted, as described in our report, that it has taken a number of actions to address its hiring and retention challenges. Interior noted that the continuing resolutions and sequester in fiscal years 2013 and 2014 reduced funds available for bureaus’ staffing. This required a hiring freeze as well as a reduction to the bureaus’ budget allocations for oil and gas activities. Interior also noted that, beginning in fiscal year 2012, the agency requested the authority to collect fees for BLM’s onshore inspection program. Interior stated that this would increase the certainty of available funding for staffing and help adequately fund the inspection program. In its written comments, Interior stated that it believed it has implemented one of our recommendations from GAO-12-423, Oil and Gas Management: Interior’s Reorganization Complete, but Challenges Remain in Implementing New Requirements, that BOEM and BSEE need to prepare strategic workforce plans. However, as discussed in this report, BSEE completed its plan in September 2013 and BOEM officials told us that they will complete their plan in fiscal year 2014. Finally, Interior stated that BSEE continues to be concerned that the analysis presented in appendix III is limited. We agree that our model, like all empirical models, has certain limitations. While these limitations affect our ability to make precise predictions about the effect of BSEE’s hiring difficulties, they do not, however, change our finding that these difficulties could hinder implementation of a risk-based inspection strategy. In its response, Interior noted that it will consider our model, along with other factors, as it develops a new risk-based inspection strategy. Interior provided written technical comments, which we incorporated into the report, as appropriate. Appendix IV reproduces Interior’s comments. 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 the Department of the Interior, the 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 members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This report examines (1) the extent to which Interior continues to face challenges hiring and retaining key oil and gas staff and the causes of these challenges; (2) Interior’s efforts to address its hiring and retention challenges; and (3) the effects, if any, of hiring and retention challenges on Interior’s oversight of oil and gas activities. To conduct this work, we reviewed relevant laws and Interior guidance, as well as independent studies of Interior’s oil and gas oversight conducted by Interior’s Office of Inspector General and others. In addition, we reviewed reports evaluating Interior’s oil and gas oversight that were conducted in response to the BP Deepwater Horizon incident. We also interviewed officials from Interior’s bureaus responsible for oil and gas oversight—the Bureau of Land Management (BLM), the Bureau of Ocean Energy Management (BOEM), and the Bureau of Safety and Environmental Enforcement (BSEE). Specifically, we interviewed BLM headquarters officials as well as BLM officials in the Bakersfield, California, field office and Dickinson, North Dakota, field office; BOEM and BSEE headquarters officials, as well as BOEM and BSEE officials in the Gulf of Mexico, Alaska, and Pacific regional offices; and BSEE officials in all five Gulf of Mexico district offices—Houma District Office, Lafayette District Office, Lake Charles District Office, Lake Jackson District Office, and New Orleans District Office. In addition, we surveyed management officials from 3 BOEM regional offices, 7 BSEE district offices, and 33 BLM field offices, and one BLM state office with oil and gas responsibilities (collectively referred to as field offices for the purposes of this report) to ask about the extent to which field offices experienced problems hiring and retaining oil and gas management and oversight staff, the factors that contribute to success or difficulty hiring and retaining staff, and the effects of staffing difficulties, if any, on the ability of the field offices to oversee oil and gas operations. Our survey had a 91 percent response rate. Appendix II presents more information about our survey. To examine the extent to which Interior continues to face challenges hiring and retaining key oil and gas personal and the causes of these challenges, we analyzed statistical data from the Office of Personnel Management’s (OPM) Enterprise Human Resources Integration (EHRI) data on attrition and retirement eligibility and reviewed and analyzed Interior data on vacancies and hiring times. We compared attrition rates for key oil and gas oversight positions with vacancy and attrition rates for Interior bureaus, Interior, other federal agencies, and the federal government. We also reviewed Interior and federal government data on retirement eligibility, and compared retirement eligibility for Interior oil and gas positions with positions at other federal agencies. We also analyzed Bureau of Labor Statistics data on federal and industry salary rates and compared the rates for key oil and gas oversight positions with analogous positions in industry. In addition, we reviewed OPM’s hiring reform initiative for the federal government, including standards for hiring time frames for federal employees and analyzed Interior’s data on hiring times for key oil and gas oversight positions. To examine Interior’s efforts to address its hiring and retention challenges, we reviewed documents from Interior, BSEE, and BLM such as strategic workforce plans, implementation plans, guidance, and other documents outlining steps Interior has taken, or plans to take, to address hiring and retention problems, and we spoke with officials responsible for their implementation. We also discussed special salary rates for specific positions with officials from OPM and officials from BSEE and BLM who were responsible for working with OPM on these special pay rate issues. We reviewed bureaus’ use incentives such as recruitment, retention, and relocation payments data provided by Interior. We focused on the challenges reported by agency officials during interviews and in our survey. To examine the effects, if any, of hiring and retention challenges on Interior’s oversight of oil and gas activities, we surveyed BLM, BOEM, and BSEE about the factors affecting their abilities to hire and retain oil and gas oversight staff and how vacancies in these positions have affected day-to-day operations. Based on interviews with Interior officials, reviews of Interior workforce planning reports, and a review of staffing data, we identified the following key BLM oil and gas oversight positions: petroleum engineers, petroleum engineering technicians (inspectors), natural resource specialists, environmental protection specialists, and geologists. Similarly, we identified petroleum engineers, inspectors, biologists (natural resource specialists), geophysicists, and geologists as key BOEM and BSEE oil and gas oversight positions. We also analyzed BSEE inspection data from the Gulf of Mexico and Pacific regions— where nearly all federal offshore drilling has occurred—for fiscal years 2010 through 2012. This data is held in Interior’s Technical Information Management System (TIMS) database. TIMS provides the foundational data for BOEM and BSEE, including data on lease sales, lease adjudication, wells and platforms, pipelines, and inspection records, among other things. We obtained TIMS data on offshore facilities, including facility characteristics; inspectors; and inspection records, including inspection duration and inspection results. We analyzed data from fiscal year 2010 through fiscal year 2012. We assessed the reliability of these data by (1) reviewing the data for obvious errors in accuracy and completeness; (2) reviewing existing documentation about the data and the TIMS database; (3) interviewing Interior officials knowledgeable about the data; and (4) verifying with agency officials a limited sample of some of our results. On the basis of our assessment, we determined that the data were sufficiently reliable for our purposes. Appendix III presents more information about our analysis of BSEE inspection data. We conducted this performance audit from May 2012 to January 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. As part of our assessment of the challenges that Interior’s field offices continue to face hiring and retaining key oil and gas oversight staff and the effects of these challenges on oversight, we surveyed officials from 44 field offices that have oil and gas management responsibilities on (1) the extent of these challenges, (2) the factors affecting hiring and retention, and (3) the effects of hiring and retention challenges on oil and gas oversight. We received responses from 40 of the 44 field offices— including 30 of the 33 Bureau of Land Management (BLM) field offices, 1 BLM state office with oil and gas oversight responsibilities, 7 of the 7 Bureau of Safety and Environmental Enforcement (BSEE) district offices, and 3 of the 3 Bureau of Ocean Energy Management (BOEM) regional offices—for a response rate of 88 percent from BLM and 100 percent from BSEE and BOEM, or a total response rate of 91 percent. We statistically analyzed the survey responses and found that officials reported almost 200 vacancies in 2012 in the six oil and gas occupations we asked about—petroleum engineers, inspectors, natural resource specialists, environmental protection specialists, geologists, and geophysicists—and officials indicated that almost 90 percent of these vacancies took more than three months to fill. Our analysis shows that the vacancies resulted in varied effects on field offices. Some field offices reported carrying out fewer inspections, or doing less-thorough inspections or delaying application for permit to drill (APD) approvals, and other field offices also reported delaying or forgoing tasks other than conducting inspections or reviewing APDs and increasing the amount of overtime staff worked. Survey respondents identified several factors that contributed to difficulties hiring and retaining staff, including differences in salaries between Interior and industry, the slow federal hiring process, and limited promotion opportunities. By contrast, survey respondents indicated more positive effects on hiring because of working conditions and benefits, which were identified as helping field offices hire and retain staff more often than other factors. However, based on our analysis, these factors did not prevent the agency from experiencing significant vacancies. Details about the survey methodology, results of our analysis, and detailed survey data are presented below. We designed our survey to quantify the perceptions of field office managers regarding the extent of Interior’s vacancies in oil and gas oversight positions and the causes and effects of those vacancies. We asked respondents: (1) how many authorized staff and how many vacancies they had in selected positions; (2) whether they had difficulty hiring and retaining oil and gas oversight staff in 2012; (3) what factors contributed to any difficulty hiring and retaining these staff; and (4) how hiring and retention difficulties, if any, affected oil and gas oversight activities at their field offices. To identify the potential causes and effects of oil and gas staff vacancies, we conducted one focus group with field office managers, interviewed bureau officials, and reviewed reports on Interior’s oil and gas oversight, including our reports and Interior’s Inspector General reports. Based on our interviews and focus group, we identified: (1) potential factors affecting the agency’s ability to fill vacancies, including salaries, benefits, working conditions, and speed of the hiring process; (2) potential effects on oil and gas oversight, including reductions in the number of facilities inspected, reductions in the thoroughness of these inspections, and reductions in the number of APDs reviewed; and (3) potential effects on staff, including increases in the amount of overtime worked and increases in the number of other tasks left undone. We used this information to develop survey questions for completion by field office managers, which were simple enough to yield valid responses, and we designed our survey to maximize the reliability of our survey data. To limit the scope of our survey to the most pertinent information, we asked questions about these topics for a small number of specific oil and gas oversight positions that were identified as critical to oil and gas oversight or as likely problematic to hire and retain, or both. To determine which oil and gas oversight positions to include in our survey, we interviewed agency officials, reviewed GAO and Inspector General reports on hiring and retention, reviewed Interior’s staffing data covering fiscal year 2009 through fiscal year 2012, and reviewed Interior’s list of mission-critical occupations as identified as part of its human capital high- risk initiative. From these inputs, we chose six occupations to include in our survey: petroleum engineers, inspectors, natural resource specialists, environmental protection specialists, geologists, and geophysicists. For BLM, we asked about petroleum engineers, petroleum engineering technicians, natural resource specialists, environmental protection specialists, and geologists. For BOEM and BSEE, we asked about petroleum engineers, inspectors, natural resource specialists, geologists, and geophysicists. To help ensure that survey respondents were able to recall the information, we asked about experiences with these staff in calendar year 2012. Our survey was sent to respondents in January 2013. Our survey was divided into five sections. In the first section, we asked field offices how many staff were authorized for each position and the number of vacancies during 2012. In the second section, we asked general questions about the factors we identified as affecting hiring and retention. In the third section, we asked about the extent to which the field offices had difficulty hiring staff followed by a series of questions linking the factors to those hiring difficulties. In the fourth section, we asked about the extent to which the field offices had difficulty retaining staff followed by a series of questions linking the factors to retention difficulties. In the fifth section, we asked about the effect of vacancies on the ability of the field offices to carry out oil and gas oversight activities. In addition, we included a number of open-ended questions in the survey to allow respondents to elaborate on these topics. To view the survey as sent to field offices, see the end of this appendix. To minimize the potential for errors in responses, we conducted three cognitive pretests with field office managers. During these pretests, we assessed whether the questions were clear, could be answered with available information, and did not pose an undue burden on field office managers. We modified the survey questions in response to these pretests, as appropriate. We administered the survey to the managers of 44 field offices; specifically, 33 BLM field offices and 1 BLM state office, 3 BOEM regional offices, and 7 BSEE district offices. We implemented our survey as a Microsoft Word document that was disseminated to field offices via e- mail. We sent the survey to senior field office officials, with instructions on how to open, complete, and save it, on January 10, 2013. We sent two reminders via e-mail in the following weeks before closing the survey in February 2013. We received responses from 30 of the 34 BLM field offices, and from each of the 3 BOEM regional offices and the 7 BSEE district offices, for an overall response rate of 91 percent. To understand how the factors in our survey relate to vacancies and Interior’s ability to oversee oil and gas facilities, we arranged the survey data into a cause-and-effect diagram (see fig. 6). This diagram outlines the relationships between responses to questions about factors affecting hiring and retention, the level of difficulty respondents reported in hiring and retaining staff, and the reported effects of the resultant vacancies on staff time and oil and gas oversight. We first analyzed the factors affecting hiring and retention based on the extent to which they helped or hindered hiring and retention. We then analyzed the relationship between reported vacancies and the responses to our questions regarding effects on staff time and, ultimately, on the ability of Interior to manage oil and gas activities on federal leases. Four factors generally contribute to difficulties hiring and retaining staff and two factors generally help, according to our analysis. Complete survey results are presented in tables 5-11. For each of the six positions we asked about in our survey, managers first indicated how many staff were authorized for each position at their field office and how many vacancies they had in calendar year 2012 for each position (see table 5). Managers also indicated the level of difficulty they had hiring and retaining staff during calendar year 2012. We found that a significant number of field offices indicated that it was somewhat or very difficult to hire and retain staff (see table 6). Subsequently, we asked about factors that help or hinder hiring and retention, and we found that a majority of managers cited the following factors as generally hindering their ability to hire and retain staff: higher salaries in industry, the slower speed of the federal hiring process, the lack of qualified applicants in some areas, and greater opportunities for promotion in industry (see tables 7 and 8). By contrast, far fewer than half of the managers cited two factors—employment benefits and working conditions at field offices—as hindering their ability to hire and retain staff (see tables 7 and 8). The majority of field offices that reported vacancies in these six positions reported that those vacancies were unfilled for 3 months or more (see table 9). These vacancies caused field offices to delay or forego tasks or require staff to work overtime (see table 10). Vacancies also led field offices to reduce the number of inspections conducted, the thoroughness of inspections, or the number of APDs reviewed than what they would have done if they were fully staffed (see table 10). Although we believe the results of our analysis characterize the staffing challenges faced by Interior, our analysis is subject to certain limitations that prevent us from making precise quantitative estimates or causal statements. In particular, our survey data are based on the perceptions of field office managers. An analysis using data for conditions at field offices, vacancies for specific positions, and oil and gas oversight activities conducted might produce different results. In addition, our analysis was based on frequency counts of survey data, rather than on a statistical model or a research design that would isolate cause and effect. Therefore, although we believe that field office managers are in the best position to assess the effect of Interior’s staffing challenges, our results must be characterized as their perceptions. The survey sent to BLM field offices asked about petroleum engineering technicians while the survey sent to BOEM and BSEE field offices instead asked about inspectors. The survey sent to BLM field offices asked about environmental protection specialists while the survey sent to BOEM and BSEE field offices instead asked about geophysicists. Following the Deepwater Horizon incident in April 2010, Congress increased funding to the Bureau of Safety and Environmental Enforcement (BSEE), which allowed the bureau to more than double the number of oil and gas inspector positions allocated to the Gulf of Mexico Region, from 52 nonsupervisory inspectors to 129 nonsupervisory inspectors. Since then, BSEE has had difficulty filling these allocated positions because of problems with both hiring and retention. As of October 2012, BSEE had filled about one-quarter of the new inspector positions, bringing the total number of nonsupervisory inspectors in the bureau’s Gulf of Mexico Region to 71. To determine the effect of the remaining vacancies on the bureau’s capacity to oversee oil and gas operations in the Gulf of Mexico, we modeled the bureau’s capacity for conducting production facility inspections under three staffing scenarios. Specifically, we estimated the number of production inspections that the bureau could have conducted in fiscal year 2012 on the 2,498 production facilities in the Gulf of Mexico Region under three staffing scenarios. Based on our analysis, we found that the additional inspectors hired by BSEE in the past few years have given it the capacity to conduct annual inspections at all or nearly all of the production facilities in the Gulf of Mexico in fiscal year 2012, something it had not otherwise been able to do. However, at the 2012 staffing levels, our model shows that the bureau did not have the capacity to conduct additional inspections at more than a small number of the 1,409 facilities it had designated as high risk. Bureau officials told us that such a risk-based inspection strategy is critical to effectively managing the risks of oil and gas production. However, our analysis shows that Interior’s continued hiring difficulties may hinder the implementation of this strategy. Our model estimated the bureau’s capacity to inspect oil and gas production facilities in the Gulf of Mexico in fiscal year 2012 under three staffing scenarios. Because the bureau did not formally distinguish production inspectors from other types of inspectors until fiscal year 2012, we approximated the number of production inspectors for each of these scenarios for the purpose of our model as follows: Scenario 1. In this scenario, we assumed that the bureau had 34 full- time equivalent (FTE) production inspectors—the approximate number of production inspectors employed at the end of fiscal year 2010 before the bureau was able to hire additional staff. Scenario 2. In this scenario, we assumed that the bureau had 48 FTE production inspectors—the approximate number of production inspectors employed during fiscal year 2012. Scenario 3. In this scenario, we assumed that the bureau hired double the number of production inspectors than it actually did between fiscal years 2010 and 2012, for a total of 62 FTE production inspectors— significantly more inspectors than it actually hired, but fewer than its allocation. For each of the three staffing scenarios, our model estimates the number of annual inspections and additional risk-based inspections that could have been conducted. We compared the first set of estimates with the total number of annual inspections that the bureau was required to perform in fiscal year 2012 under the Outer Continental Shelf Lands Act (OCSLA), which requires Interior to provide for the inspection of every outer continental shelf facility at least once annually, as well as periodic on-site inspections without advance notice. We compared the second set of estimates with the number of facilities that the bureau identified as high risk in fiscal year 2012. Our model operates in two stages. The first stage assumes that the bureau would conduct an annual inspection of each offshore facility as provided for by OCSLA. The second stage assumes, after annual inspections are completed, that inspectors would use the remaining time to conduct additional inspections at high-risk facilities. These additional inspections are not required by statute, but bureau officials told us they are necessary to more fully ensure compliance with regulations, and that additional staff hired prior to fiscal year 2012 would likely have been used to carry out these additional inspections. High-risk facilities include those that produce a lot of oil and gas, are staffed around the clock, or had poor inspection results or significant incidents in the past, among other characteristics. BSEE is currently developing a risk- based inspection methodology that BSEE officials told us will likely include reinspections of high-risk facilities, as well as more emphasis on important inspections that are currently not being carried out—such as inspections of construction activities and certain critical components. According to our analysis of BSEE inspection records, by hiring new inspectors between fiscal years 2010 and 2012, the bureau gained the capacity to conduct annual inspections at all or nearly all of the production facilities in the Gulf of Mexico Region. Even with these additional inspectors, however, the bureau did not have the capacity in fiscal year 2012 to conduct additional, risk-based inspections at more than a small number of high-risk facilities. Because every inspection takes a differing amount of time, and because each inspector spends a different amount of time each year conducting inspections, there is some uncertainty in predicting the number of inspections that would be conducted with a given number of staff. We account for this uncertainty by presenting ranges of estimates for each scenario. Our results are described below, presented in table 11, and illustrated in figure 7. Scenario 1. If the bureau had not hired additional inspectors with funds received from its fiscal year 2012 appropriations, it would not have been able to conduct the required annual inspections of all production facilities in fiscal year 2012, according to our estimates. Under its fiscal year 2010 staffing level of approximately 34 production inspectors, we estimate that the bureau had the capacity to inspect between 1,575 and 2,061 production facilities out of a total of 2,498 existing production facilities in fiscal year 2012—enough to conduct the required annual inspections at between 63 percent and 83 percent of production facilities in that year. Because the bureau would not have been able to complete 100 percent of the required annual inspections under this scenario, we conclude that it would have not have had the capacity to conduct any additional risk-based inspections in fiscal year 2012. Scenario 2. By hiring enough staff to have a net increase of 14 production inspectors, the bureau gained the capacity to conduct the required annual inspections at all or almost all of the production facilities in fiscal year 2012. Specifically, we estimate that the bureau had the capacity to conduct between 2,263 and 2,788 production inspections in fiscal year 2012—enough to complete required annual inspections at between 91 percent and 100 percent of production facilities in fiscal year 2012. In addition, our model estimates that the bureau could have conducted additional risk-based inspections at between 0 and 290 facilities, or as few as zero or as many as 21 percent of the high-risk production facilities in fiscal year 2012. This staffing level gave the bureau the capacity to typically conduct the required annual production inspections at approximately all production facilities but would not have given the bureau the capacity to consistently conduct a significant amount of additional risk-based inspections in fiscal year 2012. Scenario 3. If the bureau had been able to hire enough staff to have a net increase of 28 production inspectors—14 more inspectors than it actually hired but still significantly short of its allocation—it would have had the capacity to conduct annual inspections at all production facilities, as well as significantly more risk-based inspections. Under this scenario, the bureau would have had the capacity to conduct between 2,785 and 3,386 production inspections—enough to conduct the required annual inspections at 100 percent of production facilities in fiscal year 2012. In addition, this staffing level would have given the bureau the capacity to conduct additional, risk-based inspections at between 287 and 888 production facilities—approximately 20 to 63 percent of the high-risk facilities in fiscal year 2012. Even with these additional staff, however, the bureau would still not have had the capacity to conduct additional inspections at all high-risk facilities. Without filling its additional vacancies, its ability to fully implement a risk-based inspection strategy could be hindered. In conducting our analysis, we used data from Interior’s Technical Information Management System (TIMS) database. We focused our analysis on production facilities inspected by production operations inspectors in the Gulf of Mexico in fiscal year 2012. These facilities account for nearly 30 percent of the nation’s domestic oil production and nearly 11 percent of domestic natural gas production. We limited our analysis to sample inspections, in which BSEE inspects a random subset of safety devices on a facility, and to complete inspections, in which it completes a full inspection of all paperwork, safety devices, and physical condition of the facility. These are the two types of scheduled inspections BSEE uses to fulfill its annual production facility inspection requirement. In fiscal year 2012, the nonsupervisory inspectors conducted approximately the same number of sample and complete production inspections as there were production facilities. In particular, there were 2,498 production facilities in the Gulf of Mexico that were eligible for inspection, and nonsupervisory inspectors conducted 2,511 production inspections, including both sample inspections and complete inspections during this period. Some of the facilities were inspected more than once in this time period, while others were inspected not at all. We examined the accuracy of Interior’s TIMS data and determined the data were sufficiently reliable for the purpose of estimating the effect of broad policy scenarios, although we detected some inaccuracies. In particular, data on the number of hours spent on an inspection are based on estimates made by individual inspectors when completing inspections. These data are subject to the ability of individual inspectors to properly estimate time spent on various inspection tasks. For example, if an inspector visits two facilities on a single day, the inspector would need to determine how to allocate travel time, waiting time, inspection time, and paperwork time to allot to multiple facilities. Using the TIMS data described above, we developed a multiple regression model to estimate the number of staff hours required to conduct an inspection based on the characteristics of the facilities. We defined staff hours to include the total number of hours recorded by all nonsupervisory production inspectors on a given inspection. We tallied the time for all aspects of an inspection, including travel time, paperwork time, and waiting time, in addition to the time to conduct the inspection. Because the number of hours did not follow a normal statistical distribution, we transformed the variable into its natural logarithm for our analysis. In conducting our regression analysis, we used data for a random sample of 1,239 inspections that the bureau conducted in fiscal year 2012. To double-check the predictive accuracy of the model, we used data for an additional 1,238 inspections as a testing sample and calculated goodness of fit statistics. Our multiple regression model estimates the amount of time required to conduct an inspection based on two characteristics of a facility: (1) whether BSEE classifies the facility as major or minor and (2) whether it classifies the facility as high risk or low risk. BSEE defines a major facility as one that has at least six wells or more, as well as more than two pieces of production equipment, which are components that process oil, gas, or water, such as a separator. BSEE defines a high-risk facility by a number of characteristics, such as the amount of oil or gas the facility produces, whether the facility is staffed or unstaffed, and the history of the operator’s compliance with regulations. Of the inspections conducted in fiscal year 2012, 36.9 percent were classified as major and higher-risk, 10.9 percent were classified as major and low-risk, 19.4 percent were classified as minor and high-risk, and 31.5 percent were classified as minor and low-risk. We included these variables in our analysis based on the premise that larger, riskier facilities would require more time to inspect. The results of the multiple regression model are presented in table 12. Both variables were statistically significant predictors of the time required to inspect a facility and, correspondingly, we found that the time required to conduct an inspection varies widely by facility type. As expected, major and high-risk facilities require the most time to inspect. On average, inspections of such facilities require approximately 22.4 staff hours, according to our model. By contrast, minor, low-risk facilities require the least amount of time to inspect. On average, inspections of such facilities require approximately 4.0 staff hours, according to our model. Other types of facilities require a more moderate amount of time, with minor, high-risk facilities requiring an average of 5.8 hours to inspect and major, low-risk facilities requiring an average of 8.6 hours to inspect. To make these predictions, we transformed the estimates from the regression equation, which are on a logarithmic scale, to a linear scale. The model has a good fit based on the F statistic (p<.001) and predicts 37 percent of the variance in the time required to conduct an inspection (adjusted R=0.37). We checked to ensure that the residuals, which represent the difference between the predicted value and the actual value for a given facility, were normally distributed and on average, zero. We estimated robust standard errors accounting for the fact that facilities are clustered within operators. To estimate the number of inspections that the bureau would be able to conduct under each staffing scenario, we incorporated the results of our multiple regression analysis into a Monte Carlo simulation. A Monte Carlo simulation is a type of numerical analysis that produces a range of estimates to account for the random variability among inspections and the statistical uncertainty in the model’s equations. In this case, we used a Monte Carlo simulation to account for the variability in the number of hours necessary to inspect each facility and the number of inspections conducted by each inspector. For instance, BSEE officials told us that some facilities may take longer to inspect than others because of factors that are difficult to account for, such as the availability and ability of the operator’s onboard personnel on offshore facilities being inspected. Similarly, not all inspectors spend the same amount of time conducting inspections each year, so there is some variability in the total amount of time that a given number of inspectors would spend on production inspections. The Monte Carlo simulation entailed several key steps. For each staffing scenario, the model estimates the amount of time that a given number of inspectors has available for conducting production inspections, taking into account the variation we found in our analysis of BSEE’s fiscal year 2012 inspection records. On average, production inspectors spent 627 hours conducting production inspections, though some inspectors spent considerably more time, and others spent considerably less time. The model also estimates the number of hours required to inspect each facility for each staffing scenario, taking into account the variability in inspection times we found in the multiple regression model described above. The model then simulates facility inspections until the total number of hours available for inspections is reached. If all facilities are able to be inspected within the total number of available hours, the model uses the remaining time to simulate additional inspections beginning with the high- risk facilities. When the total number of available hours is reached, the model stops simulating inspections and calculates the total number of facilities inspected. The model repeats each of these steps 1,000 times to produce 1,000 estimates of the total number of facilities inspected for a given number of inspectors. Collectively, these 1,000 estimates characterize the range of uncertainty in the bureau’s capacity to conduct inspections for each of the staffing scenarios. To further assess the accuracy of the model, we compared the number of inspections estimated by our model with the number of inspections conducted by BSEE in fiscal year 2012. The actual number of inspections—2,511—was within 1 percent of our mean estimate of 2,531 and within the 95 percent confidence interval as shown in table 11. To estimate the effect of various staffing scenarios, our analysis makes some simplifying assumptions. First, we assume that the time required to conduct annual inspections is a valid approximation of the time required to conduct additional, risk-based inspections. Because the bureau has seldom conducted such inspections, we did not have sufficient data to test this assumption. Second, because of the natural variability in inspections—such as variations in the amount of time that inspectors spend inspecting production facilities during a year and the number of hours required to inspect a given facility—it is difficult to make precise predictions about the outcomes of any given staffing scenario. Third, because our estimates are based on data from fiscal year 2012, our results may not apply to future years if future years differ significantly. For example, if weather conditions are more favorable in future years, inspectors may be able to fly to facilities on more days, leading to more inspections being conducted by the same number of inspectors. By contrast, if production inspectors are diverted to perform duties other than inspections of production facilities, the same number of inspectors may be able to conduct fewer inspections. Even with this difference, we believe our model is a valid approximation of the relative effects among different staffing scenarios. In addition to the individual named above, Christine Kehr, Assistant Director; Mark Braza; Mitchell B. Karpman; Michael Kendix; Michael Krafve; Armetha Liles; Steven Lozano; Alison O’Neill; Kelly Rubin; Jerome T. Sandau; Rebecca Shea; Jeff Tessin; Kiki Theodoropoulos; Barbara Timmerman; and Arvin Wu made key contributions to this report. | Interior employs a wide range of highly-trained specialists and scientists with key skills to oversee oil and gas operations on leased federal lands and waters. GAO and others have reported that Interior has faced challenges hiring and retaining sufficient staff to carry out these responsibilities. In February 2011, GAO added Interior's management of federal oil and gas resources to its list of programs at high risk of fraud, waste, abuse, and mismanagement in part because of Interior's long-standing and continued human capital challenges. GAO was asked to update the status of Interior's human capital challenges. This report examines: (1) the extent to which Interior continues to face challenges hiring and retaining key oil and gas staff and the causes of these challenges; (2) Interior's efforts to address its hiring and retention challenges; and (3) the effects of hiring and retention challenges on Interior's oversight of oil and gas activities. GAO surveyed 44 Interior offices that oversee oil and gas operations of which 40 responded; analyzed offshore inspection records and other documents; and interviewed agency officials. The Department of the Interior (Interior) continues to face challenges hiring and retaining staff with key skills needed to manage and oversee oil and gas operations on federal leases. Interior officials noted two major factors that contribute to challenges in hiring and retaining staff: lower salaries and a slow hiring process compared with similar positions in industry. In response to GAO's survey, officials from a majority of the offices in the three Interior bureaus that manage oil and gas activities--the Bureau of Land Management (BLM), the Bureau of Ocean Energy Management (BOEM), and the Bureau of Safety and Environmental Enforcement (BSEE)--reported ongoing difficulties filling vacancies, particularly for petroleum engineers and geologists. Many of these officials also reported that retention is an ongoing concern as staff leave for positions in industry. Bureau of Labor Statistics data confirm a wide gap between industry and federal salaries for petroleum engineers and geologists. According to Office of Personnel Management (OPM) data, the fiscal year 2012 attrition rate for petroleum engineers at BLM was over 20 percent, or more than double the average federal attrition rate of 9.1 percent. However, the attrition rate for other key oil and gas staff during fiscal year 2012 was lower than the federal average. Nonetheless, field office officials stated that attrition is of concern because some field offices have only a few employees in any given position, and a single separation can significantly affect operations. Additionally, Interior records show that the average time required to hire petroleum engineers and inspectors in recent months generally exceeded 120 calendar days--much longer than OPM's target of 80 calendar days. Interior and the three bureaus--BLM, BOEM, and BSEE--have taken some actions to address their hiring and retention challenges but have not fully used their existing authorities to supplement salaries or collect and analyze hiring data to identify the causes of delays in the hiring process. For instance, BLM, BOEM, and BSEE officials said that recruitment, relocation, and retention incentives are key options to help hire and retain staff, but use of these incentives to attract and retain petroleum engineers and inspectors has been limited. Moreover, the department and bureaus have taken some steps to reduce hiring times, but they do not have complete and accurate data on hiring times. For instance, while BSEE and BOEM collect hiring data on a biweekly basis, the data are used primarily to track the progress of individual applicants as they move through the hiring process. Likewise, a BLM official stated that the bureau does not systematically analyze data on hiring times. Without reliable data on hiring times, Interior's bureaus cannot identify how long it takes to complete individual stages in the hiring process or effectively implement changes to expedite the hiring process. According to BLM, BOEM, and BSEE officials, hiring and retention challenges have made it more difficult to carry out oversight activities in some field offices. For example, many BLM and BSEE officials GAO surveyed reported that vacancies have resulted in a reduction in the number of inspections conducted. As a result of these challenges, bureau officials cited steps they have taken to address vacancies in key positions, such as borrowing staff from other offices or using overtime, but these solutions are not sustainable. GAO recommends that the Department of the Interior explore the bureaus' expanded use of recruitment, relocation, retention, and other incentives and systematically collect and analyze hiring data. In commenting on a draft of this report, Interior generally agreed with GAO's recommendations. |
Safeguarding government computer systems and the sensitive information that resides on them is an ongoing challenge because of the complexity and interconnectivity of systems, the ease of obtaining and using hacking tools, the steady advances in the sophistication and effectiveness of attack technology, and the emergence of new and more destructive attacks. Without adequate safeguards, systems are vulnerable to individuals and groups with malicious intentions, who may obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Federal agencies have experienced a significant rise in security incidents in recent years, with data from the U.S. Computer Emergency Readiness Team showing an increase in security incidents and events from 29,999 in 2009 to 42,887 in 2011. EPA was established in 1970 in response to concerns about environmental pollution. To perform its statutory responsibilities, EPA develops and enforces regulations and gives grants to and sponsors partnerships with state environmental programs, non-profit organizations, educational institutions, and others. In addition, the agency conducts research and publishes materials on a variety of environmental topics. In fiscal year 2011, EPA’s appropriation was about $8.6 billion. The agency has headquarters in Washington, D.C., 10 regional areas, and multiple laboratories and centers that support research and development. At headquarters, EPA develops national programs, policies, and regulations for mission areas, as described in table 1. EPA’s regional offices are responsible for the execution of agency programs within the states, and within some regions, including U.S. territories. Figure 1 shows the distribution of these ten regions. EPA relies on IT to support its mission and achieve its goals. In fiscal year 2011, the agency reported having 117 agency-operated systems and 12 contractor-operated systems. These systems include networks, telecommunications, and specific applications. The Office of Technology Operations and Planning within the Office of Environmental Information provides centralized management and control of EPA’s IT resources and services, including the EPA wide area network, a primary general support system of EPA. The Office of Technology Operations and Planning is located in Washington, D.C., and provides connectivity to EPA program offices, regional offices and laboratories, and federal agencies. It is responsible for the planning, design, operation, management, and maintenance of the EPA wide area network with support from on-site contractors and its Managed Trusted Internet Protocol Services (MTIPS) service provider. Two divisions within the Office of Technology Operations and Planning have primary responsibility for carrying out day- to-day operations of these services: the National Computer Center (NCC), located in Research Triangle Park, North Carolina, is responsible for EPA’s wide area network operations and server operations for systems operated in the NCC. The Enterprise Desktop Solutions Division, located in Washington, D.C., is responsible for the D.C. area local area network, voice, and shared server room operation. Figure 2 depicts a simplified version of EPA’s network. EPA, in response to the Office of Management and Budget’s (OMB) “Cloud First” policy that requires each agency to identify three services that it will migrate to a cloud by June 2012, has identified two cloud services: Enterprise Service Desk and MTIPS, which is part of the Networx program offered by the General Services Administration. EPA also operates a virtual hosting infrastructure in four internal data centers with a standardized platform supporting up to 1,750 servers. Officials stated that the goal is to migrate e-mail and collaboration services to a commercial external cloud provider by 2015. The Federal Information Security Management Act of 2002 (FISMA) requires each federal agency to develop, document, and implement an agencywide information security program to provide security for the information and information systems that support the operations and assets of the agency, including those provided or managed by other agencies, contractors, or other sources. According to FISMA, each agency is responsible for providing information security protections, commensurate with risk, for information collected or maintained by or on behalf of the agency, and information systems used or operated by the agency or on its behalf. FISMA requires that a chief information officer or a comparable official of the agency be responsible for developing and maintaining an agencywide information security program. The Administrator of EPA is responsible for ensuring that an information security program is implemented, and that security processes are integrated with strategic and operational planning. EPA is responsible for reporting annually to congressional committees, GAO, and to the Director of OMB on the effectiveness of the agency’s information security program and compliance with FISMA. The Chief Information Officer appoints a senior agency information security officer and ensures that EPA’s information security program follows applicable federal laws. Senior leaders of EPA’s program offices and regions appoint information security officers to implement agency information security program requirements for the systems and information under their control. The Office of Environmental Information centrally administers EPA’s information security program. The Assistant Administrator of the Office of Environmental Information serves as the Chief Information Officer for EPA. As described in table 2, EPA has designated key roles in IT security according to FISMA and agency policy. Although EPA has taken steps to safeguard the information and systems that support its mission, security control weaknesses pervade its systems and networks, thereby jeopardizing the agency’s ability to sufficiently protect the confidentiality, integrity, and availability of its information and systems. These deficiencies include those related to access controls, as well as other controls such as configuration management and sensitive media protection. A key reason for these weaknesses is that EPA has not yet fully implemented its agencywide information security program to ensure that controls are appropriately designed and operating effectively. As a result, EPA has limited assurance that its information and information systems are being adequately protected against unauthorized access, use, disclosure, modification, disruption, or loss. A basic management objective for any organization is to protect the resources that support its critical operations from unauthorized access. Agencies accomplish this objective by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Inadequate access controls diminish the reliability of computerized information and increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. Access controls include those related to (1) protection of system boundaries, (2) user identification and authentication, (3) authorization, (4) cryptography, (5) audit and monitoring, and (6) physical security. Boundary protection controls logical connectivity into and out of networks and controls connectivity to and from devices connected to the network. For example, multiple firewalls can be deployed to prevent both outsiders and trusted insiders from gaining unauthorized access to systems, and intrusion detection technologies can be deployed to defend against attacks from the Internet. Unnecessary connectivity to an organization’s network increases not only the number of access paths that must be managed and the complexity of the task, but also the risk of unauthorized access in a shared environment. National Institute of Standards and Technology (NIST) guidance states that agencies should provide adequate protection for networks and employ information control policies and enforcement mechanisms to control the flow of information between designated sources and destinations within information systems. EPA has established network boundaries, but did not always adequately enforce those boundaries to secure connectivity into and out of its networks. For example, at one location, network boundaries did not have adequate segregation between a public library and the EPA facilities in Research Triangle Park, North Carolina. In addition, EPA had allowed unrestricted inbound use of an encrypted protocol that could be used to access EPA internal networks. As a result, EPA’s networks were vulnerable to unnecessary and potentially undetectable access at these points. A computer system must be able to identify and authenticate different users so that activities on the system can be linked to a specific individual. When an organization assigns a unique user account to a specific user, the system is able to distinguish that user from another—a process called identification. The system must also establish the validity of a user’s claimed identity by requesting some kind of information, such as a password, that is known only by the user—a process known as authentication. The combination of identification and authentication—such as a user account/password combination—provides the basis for establishing individual accountability and for controlling access to the system. NIST 800-53 recommends that information systems uniquely identify and authenticate all users (or processes on behalf of users) and that systems establish complex passwords to reduce the likelihood of a successful attack. NIST also recommends using multifactor authentication to access user accounts via a network. While EPA has developed an interim security policy that addresses identification and authentication and a draft procedure that is based on NIST guidance, the agency did not always adequately implement these interim requirements. For example, EPA did not authenticate routing protocols on several of its internal network devices, leaving them vulnerable. In addition, EPA did not enforce its own password complexity requirements or change passwords for multiple servers. Further, EPA did not require two-factor authentication for remote authentication and access to e-mail accounts. As a result, EPA’s networks and systems are at increased risk that an unauthorized individual could guess a legitimate user’s identification and password combination and gain access to these devices. Authorization is the process of granting or denying access rights and permissions to a protected resource, such as a network, a system, an application, a function, or a file. For example, operating systems have some built-in authorization features such as permissions for files and folders. Network devices, such as routers, have access control lists that can be used to authorize a user who can access and perform certain actions on the device. A key component of granting or denying access rights is the concept of “least privilege.” Least privilege is a basic principle for securing computer resources and information. This principle means that a user is granted only those access rights and permissions needed to perform official duties. To restrict legitimate user access to only those programs and files needed to perform work, agencies establish access rights and permissions. “User rights” are allowable actions that can be assigned to a user or to a group of users. File and directory permissions are rules that regulate which users can access a particular file or directory and the extent of that access. To avoid unintentionally authorizing user access to sensitive files and directories, an agency must give careful consideration to its assignment of rights and permissions. NIST requires federal agencies to grant a user only the access and rights to information and information systems needed to perform official duties. National Security Agency (NSA) network security best practice guidance recommends prohibiting root from logging directly into a remote system. The guidance also recommends creating a set of filtering rules, also known as an access control list, which permits the traffic identified on the list and prohibits other traffic. Although EPA has established an access control methodology based on least privilege and need-to-know principles, it did not always limit user access rights and permissions to only those necessary to perform official duties. For example, EPA allowed for a large number of unused accounts across several network domains. At one location, EPA did not have adequate restrictions on a sensitive server to control access in managing and administering network devices either locally or remotely, leaving them vulnerable. In addition, EPA had not removed the accounts of former employees. The result of these weaknesses is an increased risk of unauthorized access to EPA systems and information. Cryptography underlies many of the mechanisms used to enforce the confidentiality and integrity of critical and sensitive information. Cryptographic tools help control access to information by making it unintelligible to unauthorized users and by protecting the integrity of transmitted or stored information. A basic element of cryptography is encryption. Encryption is the conversion of data into a form, called a cipher text, which cannot be easily understood. Encryption can be used to provide basic data confidentiality and integrity by transforming plain text into cipher text using a special value known as a key and a mathematical process known as an algorithm. NIST guidelines state that agencies should use encryption to protect the confidentiality of remote access sessions and encrypt sessions between host systems. The NIST standard for an encryption algorithm is Federal Information Processing Standards (FIPS) 140-2. EPA did not always effectively encrypt certain sensitive information. For example, EPA did not always encrypt private keys stored on certain servers and had used a weak password encryption feature on network devices. In addition, the agency allowed the use of insecure network protocols to manage network devices. The agency also did not always use a FIPS-compliant algorithm to encrypt passwords on three support servers we reviewed. These weaknesses expose critical and sensitive information to unnecessary risk of unauthorized access, modification, or destruction. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions have been taken on a system. Agencies accomplish this by implementing system or security software that provides an audit trail, or a log of system activity, that can be used to determine the source of a transaction or attempted transaction and to monitor a user’s activities. Audit and monitoring involves the regular collection, review, and analysis of auditable events for indications of inappropriate or unusual activity, and the appropriate investigation and reporting of such activity. Automated mechanisms may be used to integrate audit monitoring, analysis, and reporting into an overall process for investigation and response to suspicious activities. Audit and monitoring controls can help security professionals routinely assess computer security, perform investigations during and after an attack, and even recognize an ongoing attack. Audit and monitoring technologies include network and host-based intrusion detection systems, audit logging, security event correlation tools, and computer forensics. NIST guidance states that agencies should retain sufficient audit logs to allow monitoring of key activities, provide support for after-the-fact investigation of security incidents, and meet organizational information retention requirements. Although EPA has many useful mechanisms at its disposal to help prevent and respond to security breaches, such as firewalls and intrusion detection systems, it has not consistently implemented integrated and responsive audit and monitoring. For example, EPA had not enabled auditing on a server used for receiving confidential data from commercial entities. Furthermore, more than 150 of EPA’s network devices had remote logging set to a severity level that was not sufficient for logging important security information. In addition, the number of error logs on one server database system was set so low that old logs would be overwritten as soon as this number was reached, thus removing the old logs from use. As a result, EPA is limited in its ability to establish accountability, ensure compliance with security policies, and investigate violations. Physical security controls are a key component of limiting unauthorized access to sensitive information and information systems. These controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. They involve restricting physical access to computer resources and sensitive information, usually by limiting access to the buildings and rooms in which the resources are housed and periodically reviewing access rights granted to ensure that access continues to be appropriate based on established criteria. Such controls include perimeter fencing; surveillance cameras; security guards; gates; locks; environmental controls such as smoke detectors, fire alarms and extinguishers; and uninterruptible power supplies. NIST guidance states that federal agencies should implement physical security and environmental safety controls to protect employees and contractors, information systems, and the facilities in which they are located. EPA had implemented numerous physical security controls for protecting its information, information systems, and employees. For example, the agency used electronic badges, guards, magnetometers, and x-ray machines to help control access to computing environments at two locations. EPA had also implemented environmental and safety controls such as temperature and humidity controls as well as emergency lighting to protect its staff and sensitive IT resources. Nonetheless, EPA did not always ensure that these controls were consistently implemented. For example, over a period of 5 days, five staff members at one location used their electronic badges to gain access to the computer room, but they were not on the list of staff authorized to enter the area. Two of these staff members were contractors, and the other three were EPA staff. Similarly, EPA did not always effectively control access to sensitive IT equipment kept in server or telecommunication rooms. To illustrate, visitor logs were incomplete for several rooms that contained sensitive IT equipment. These logs did not always include information such as the visitor’s purpose for visiting the room, the time of departure, or the type of identification used to sign in. As a result, EPA has diminished assurance that its computing resources are protected from inadvertent or deliberate misuse including sabotage, vandalism, theft, and destruction. EPA officials stated that the access controls list issue had been resolved and that IT equipment in the rooms would be moved as part of its data center consolidation effort. The agency also provided a subsequent response stating that most of the IT equipment had been moved. We have not yet verified this information. In addition to access controls, other important controls should be in place to ensure the confidentiality, integrity, and availability of an agency’s information. These controls include policies, procedures, and techniques for securely configuring information systems, sufficiently disposing of media, and implementing personnel security. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of sensitive information and information systems supporting EPA’s mission. EPA had personnel security controls in place. Configuration management controls ensure that only authorized and fully tested software is placed in operation, software and hardware are updated, patches are applied to these systems to protect against known vulnerabilities, and changes are documented and approved. To protect against known vulnerabilities, effective procedures must be in place, appropriate software installed, and patches updated promptly. Up-to-date patch installation helps mitigate flaws in software code that could be exploited to cause significant damage and enable malicious individuals to read, modify, or delete sensitive information or disrupt operations. NIST guidance states that agencies should document approved system changes and retain records of configuration changes to systems and that agencies should configure security settings to the most restrictive mode consistent with operational requirements. Both NIST and NSA guidance recommend that certain system services be disabled. EPA has developed, documented, and established procedures to manage configuration changes. For example, although the agencywide configuration management procedure is still a draft document, EPA’s Office of Technology Operations and Planning has developed, documented, and implemented a change management process and procedures document that is intended to provide formal and standardized processes and procedures for identifying, assessing, approving, implementing, and accounting for changes to EPA information systems. In addition, the agency uses a central tool to request, approve, and track the status of configuration change requests. The system owners or managers have responsibility for documenting these changes. According to agency officials, EPA uses an automated tool for applying patches that are intended to correct software security vulnerabilities. Despite these efforts, EPA had not always implemented configuration management controls. For example, although the agency has an automated tool in place for managing changes, officials could only provide records of approved changes for four of the six systems we reviewed. Information for the other two systems consisted only of e-mails describing the changes. Furthermore, information for only two of the six systems included the unique change request number generated by the tool; this number could be used to research and determine whether a change had been formally approved. During a demonstration of the tool, an EPA official suggested that we contact system owners for system- specific change reports. However, change information provided by the system owners varied in content, and the agencywide configuration management guide did not instruct them on how such records should be documented. Similarly, EPA had not securely configured its networks and databases in accordance with NIST guidance and web applications and operating systems were not always configured to the most restrictive settings in accordance with NIST guidance. Moreover, some EPA information systems and network devices were running outdated software that was no longer supported by the manufacturer, resulting in EPA being unable to effectively patch them for vulnerabilities. In addition, newly released security patches, service packs, and hot fixes had not been installed in a timely manner, and several critical systems had not been patched or were out of date, and some had known vulnerabilities. Without adequate security controls, EPA systems are susceptible to many known vulnerabilities. The destruction of media and their disposal are key to ensuring the confidentiality of information. Media can include magnetic tapes, optical disks (such as compact disks), and hard drives. Agencies safeguard used media to ensure that the information they contain is appropriately controlled or disposed of. Media that are improperly disposed of can lead to the inappropriate or inadvertent disclosure of an agency’s sensitive information, including the personally identifiable information of its employees and customers. NIST guidance states that verifying the selected information sanitization and disposal process and testing of media is an essential step for maintaining confidentiality. EPA has documented a media protection policy through its interim network security policy that states that all IT resources scheduled for disposal must be adequately sanitized to protect the confidentiality of agency information and that appropriate security controls such as those prescribed by NIST must be applied. EPA has a supplemental disk sanitization procedure, and program offices have the option to develop their own separate procedures if needed. However, EPA did not provide evidence that equipment used for disposal of sensitive information had been tested to ensure that it was working properly. Specifically, EPA could not provide documentation or support to verify whether or not media disposal equipment had been tested for three systems. Additionally, both sanitized and unsanitized hard drives were being kept together in the storage area for one system. None of the drives were labeled to show whether or not they had been sanitized, which could allow intended or unintended access to sensitive data on an unsanitized hard drive. Until EPA tests, documents, and implements information security controls for media disposal and sanitization, increased risk exist that the agency’s sensitive information may not be adequately protected. The greatest harm or disruption to a system comes from the actions, both intentional and unintentional, of individuals. These intentional and unintentional actions can be reduced through the implementation of personnel security controls. According to NIST guidance, personnel security controls help agencies ensure that individuals occupying positions of responsibility (including third-party service providers) are trustworthy and meet established security criteria for these positions. According to NIST, personnel security controls include, among other things, that the agency develop a formal personnel security policy and screen individuals prior to authorizing access to an information system. EPA’s security policy for personnel screening states that the type of investigation should be based on the sensitivity of the position and the level of public trust. According to EPA policy, all system administrative staff, including contractors, must have an adequate background check. EPA has conducted the appropriate background investigations for all 14 employees and contractors reviewed. For one system reviewed, we verified that EPA has a process in place to track whether personnel who require access to the system have the necessary security clearances. A key reason for the weaknesses in controls over EPA’s information and information systems is that it has not yet fully implemented its agencywide information security program to ensure that controls were effectively established and maintained. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes policies and procedures that (1) are based on risk assessments, (2) cost-effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, and systems; security awareness training to inform personnel of information security risks and their responsibilities in complying with agency policies and procedures, and information security training for personnel with significant security responsibilities for information security; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, to be performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in its information security policies, procedures, or practices; and plans and procedures to ensure continuity of operations for information systems that support operations and assets of the agency. FISMA also requires agencies to maintain and update annually an inventory of major information systems and the program requirements that apply to the information and information systems that support the operations and assets of the agency, including those provided or managed by another agency, contractor, or other source. A key element of an effective information security program is to develop, document, and implement risk-based policies, procedures, and technical standards that govern the security over an agency’s computing environment. If properly implemented, policies and procedures should help reduce the risk that could come from unauthorized access or disruption of services. Developing, documenting, and implementing security policies is important because they are the primary mechanisms by which management communicates its views and requirements; these policies also serve as the basis for adopting specific procedures and technical controls. In addition, agencies need to take the actions necessary to effectively implement or execute these procedures and controls. Otherwise, agency systems and information will not receive the protection that the security policies and controls should provide. FISMA requires agencies to develop and implement policies and procedures that support an effective information security program. Although EPA has developed information security policies and procedures, most of its agencywide requirements were not finalized. For example, EPA’s agencywide information security policy and its security assessment and authorization procedure are both interim documents. While EPA has developed 18 procedures that correspond to NIST’s “18 families of controls,” such as those for access controls, security training, and contingency planning, 17 of the procedures are still in draft, including 12 that have been in draft since 2008. The Office of Environmental Information, the organization with the primary responsibility for implementing EPA’s security program, has also issued its own information security program manual intended to complement EPA’s security policy. However, the Office of Environmental Information program manual has not been revised since 2006 and is not based on the current EPA interim security policy issued in August 2011. According to EPA’s Office of Environmental Information web page, the agency is undertaking an extensive IT/management policy review and update, but the website does not cite any specific dates for completion. Until EPA has finalized and implemented its security policies and procedures, the agency cannot be sure that its information security requirements are being applied consistently and effectively across the agency. An objective of system security planning is to improve the protection of IT resources. A system security plan provides an overview of the systems’ security requirements and describes the controls that are in place or planned to meet those requirements. OMB Circular A-130 directs agencies to develop system security plans for major applications and general support systems, and to ensure that those plans address policies and procedures for providing management, operational, and technical controls.explains that agencies were expected to be in compliance with NIST In addition, OMB’s fiscal year 2011 FISMA reporting guidance standards and guidelines within 1 year of publication unless otherwise directed by OMB. EPA has developed and documented system security plans, but those plans have not been updated to reflect current policies and procedures. For example, all six systems we reviewed referenced expired policies and procedures. In addition, two of the six plans did not reflect controls identified in the current NIST Special Publication 800-53. two controls for moderate systems, publically accessible content and least privilege—allowing only authorized access for users—were not reflected in system security plans. An EPA official with responsibility for one of the system’s that had an outdated plan attributed this to the agency not having a security procedure in place to clearly explain how updated federal guidance should be implemented. In a fiscal year 2010 report,agency’s system security plans were not current. EPA’s Inspector General also indentified instances where the EPA officials informed us that the agency was replacing its current automated tool for managing security with one that is intended to improve system security planning, among other activities. Currently in the pilot stage, the new tool is to provide a built-in system security planning capability and a central location to store all system security documentation. However, until EPA updates system security plans and finalizes security plan procedures, the agency may not have assurance that controls are being effectively implemented for its systems. NIST, Special Publication 800-53. complying with agency policies and procedures designed to reduce these risks. FISMA also includes requirements for training personnel with significant responsibilities for information security. OMB guidance states that personnel should be trained before they are granted access to systems or applications. The training is intended to ensure that personnel are aware of the system’s or application’s rules, their responsibilities, and their expected behavior. In addition, EPA interim policy requires annual security awareness training to be completed by all personnel and those personnel with significant network security roles and responsibilities to complete sufficient information system security training and continuing education to ensure compliance with agency policy. EPA has implemented a security awareness training program and maintains training records as part of its e-learning system: users of EPA systems are required to complete and pass a web-based course. According to EPA’s fiscal year 2011 FISMA report, the Chief Information Officer reported that 100 percent of EPA’s employees had completed the required security awareness training. EPA also uses its e-learning system to deliver training content for employees who have significant network and system security roles. However, for this group of employees, the Chief Information Officer reported that approximately 81 percent had completed training related to their specialized security responsibilities. According to EPA officials, the agency has been unable to enforce the specialized security training requirement, which has led to reporting a lower percentage. In addition, officials also noted that formalized standard procedures related to specialized training are not well documented, including to what extent employees should complete specialized training and the specific actions to take if an employee does not complete the training. To assist with addressing these inconsistencies, the senior agency Information Security Officer distributed a memorandum to information security officials that describes the requirement for employees with significant information security responsibilities. Specifically, EPA has determined that, at a minimum, all employees with significant security responsibilities should complete two courses using the e-learning system or through another mechanism. In addition, EPA sent e-mails to its information security officers that denote what positions include the requirement to complete the two-courses. However, EPA’s actions did not ensure that all employees with significant security responsibilities met this requirement. Until EPA implements a procedure to enforce the completion of specialized security training and tailors the training to specific roles, the agency will not have reasonable assurance that its staff have the adequate knowledge, skills, and abilities consistent with their roles to protect the confidentiality of the information housed within EPA systems to which they are assigned. Another key element of an information security program is to test and evaluate policies, procedures, and controls to determine whether they are effective and operating as intended. This type of oversight is a fundamental element because it demonstrates management’s commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. FISMA requires that the frequency of tests and evaluations of management, operational, and technical controls be based on risks and occur no less than annually. OMB directs agencies to meet their FISMA-required controls testing by drawing on security control assessment results that include, but are not limited to, continuous monitoring activities. EPA’s interim security assessment procedure requires that information system security controls be assessed annually to meet FISMA’s requirements and to support continuous monitoring. EPA had documented that management, operational, and technical controls for five of six systems were tested or reviewed. Assessment results for five systems consisted of self assessments generated by EPA’s Automated System Security Evaluation and Remediation Tracking (ASSERT) tool, used for continuous monitoring, along with vulnerability assessments for two of the five systems. However, the agency did not provide any information demonstrating that controls for a clean air markets division system had been tested or reviewed at least annually. The last assessment for the system had been completed during fiscal year 2009. An EPA official stated that testing would be completed during fiscal year 2012. We also identified data reliability challenges with EPA’s ASSERT tool. The data reliability weakness with this tool was previously reported by EPA’s Inspector General in 2010.in 2011 that the agency had not implemented continuous monitoring The Inspector General also reported procedures or a strategy. As a result, EPA has less assurance that controls over its information and information systems are adequately implemented and operating as intended. Remedial action plans, also known as plans of action and milestones (POA&M), help agencies identify and assess security weaknesses in information systems, set priorities, and monitor progress in correcting the weaknesses. NIST and OMB guidance specify steps that federal agencies should take to address identified security weaknesses. NIST standards state that organizations must periodically assess security controls in their information systems and develop and implement plans of action to correct deficiencies and reduce or eliminate vulnerabilities. OMB guidance specifies information that should be recorded for each POA&M, including a description of the weakness identified, the audit or other source where it was identified, and key milestones with completion dates. NIST guidance also states that POA&Ms should be updated to show progress made on current outstanding items and to incorporate the results of the continuous monitoring process. OMB guidance further states that initial milestone and completion dates should not be altered; rather, changes to dates should be recorded in a separate column. Further, EPA procedure states that any IT security finding and recommendation that results from a review, audit, assessment, test, or from another source must be assigned a risk level and assessed for appropriate action. EPA uses an automated tool to record and track remediation of vulnerabilities. This tool contains fields for entering a description of each weakness, where it was reported, the risk level, milestones describing appropriate actions and their completion dates, and the status of actions taken. However, the manner in which the agency uses the tool can preclude retrieval of specific POA&Ms and pose weaknesses with data reliability. For example, EPA officials were unable to locate certain POA&Ms pertaining to findings and recommendations in fiscal year 2011 reports from EPA, the agency’s Inspector General, and GAO. These officials could not find the requested information because POA&M entries did not have all the information called for by federal guidance. In particular, these entries lacked a specific description of each weakness and did not list the report where the weakness had initially been identified. Additionally, the tool does not have built-in safeguards to keep individuals who have access to POA&Ms from altering initial milestone and completion dates. Since the Chief Information Officer and other agency officials use POA&M information to track the progress of corrective actions, inaccurate milestone information could hinder their efforts to effectively remediate program and system-level IT security weaknesses. The EPA Inspector General had also documented weaknesses in the agency’s remediation process. In its fiscal year 2011 FISMA report, the Inspector General found that EPA does not consistently create POA&Ms for vulnerabilities and the agency missed remediation deadlines for about 20 percent of the POA&Ms that have been created. Another fiscal year 2011 Inspector General report found that data in the agency’s POA&M tracking tool is unreliable, and that EPA lacked the skills and resources needed to identify and remediate ongoing cyber threats. EPA officials noted that deficiencies in the way that the current tool is used are expected to be addressed when the new remediation tool is deployed agencywide in fiscal year 2013. Until weaknesses with EPA’s remediation of vulnerabilities have been resolved, they will compromise the ability of the Chief Information Officer and other EPA officials to track, assess, and report accurately the status of the agency’s information security. Contingency planning is a critical component of information protection. If normal operations are interrupted, network managers must be able to detect, mitigate, and recover from a service disruption while preserving access to vital information. Contingency plans detail emergency response, backup operations, and disaster recovery for information systems. To mitigate service disruptions, these plans should be clearly documented, communicated to potentially affected staff, updated to reflect current operations, and regularly tested. FISMA, a NIST Special Publication, and EPA procedures specify requirements and guidelines for contingency planning. FISMA requires each agency to develop, document, and implement plans and procedures to ensure continuity of operations for information systems that support the agency’s operations and assets. NIST guidance states that contingency plans for information systems In addition, the plans should account for be developed and tested. primary and alternate contact methods and should discuss procedures to be followed if an individual cannot be contacted. EPA procedures further specify that the plans must be reviewed, tested, and updated at least annually. EPA has taken steps to implement FISMA requirements and NIST specifications but has not fully met them. Contingency plans were in place for five of the six systems we reviewed. The contingency needs for the one remaining system were addressed in disaster recovery plans. However, the agency did not follow its own procedures or NIST guidance for approving contingency plans, reviewing them annually, and updating them as necessary. All six of the plans lacked evidence that they had been signed by the approving officials. According to EPA, an approving official does not need to sign a contingency plan because the plan is included in each system’s certification and authorization package and approval of the package applies to all documents within it. The agency provided documentation indicating that system security plans were part of certification and authorization packages, and two systems had contingency plans embedded in their respective system security plans. However, EPA did not provide clear evidence that contingency plans were included in certification and authorization packages for the other four systems. In addition, two of the six plans had no evidence of having had an annual review. Without clear dates for initial approvals and subsequent reviews, EPA employees and contractors cannot be certain that they have access to current, updated versions of contingency plans. In addition to providing current information, plans are to provide adequate contact information on personnel who may be needed during an emergency. For example, the National Computer Center Hosting Systems contingency plan states that personal contact information should include home addresses, cell phone numbers, pager numbers, and alternate contact information. Among the six plans reviewed, five did not provide full contact information for some staff listed, giving only office telephone numbers and e-mail addresses or, in some cases, office numbers alone. Having inadequate information could jeopardize the agency’s ability to contact key personnel during an emergency. To help ensure that contingency plans are viable and will meet an agency’s needs during an emergency, these plans should be tested at least annually. While EPA provided evidence that it had tested three of the six plans in 2011, it did not provide the requested test results for the other three plans. The EPA Inspector General has also noted deficiencies with the agency’s contingency planning. In reports from fiscal years 2009 through 2011, the Inspector General described plans that lacked approval, were out of date, did not have a record of changes, and did not have evidence that contingency plans had been tested annually. Until EPA addresses identified weaknesses in its contingency planning processes, the agency will have less assurance that it can recover important systems in a timely manner when disruptions occur. FISMA requires agencies to maintain and update annually an inventory of major information systems operated by the agency or operated by others on its behalf, such as those operated by a contractor or other third party. For their fiscal year 2011 FISMA reports, agencies were required to report the number of agency and contractor systems by impact levels.fiscal year 2011, EPA reported a total of 129 systems, composed of 117 agency and 12 contractor systems, as shown by impact level in table 3. This represents a slight decrease in the total number of systems from For fiscal year 2010, with the number of agency systems remaining the same and the number of contractor systems decreasing. EPA did not ensure that its inventory of information systems was accurate. For example, the total number of systems in inventories provided by EPA on August 5, 2011, and September 26, 2011, did not equal each other or equal the number of systems in the agency’s fiscal year 2011 FISMA report. Specifically, the initial inventory provided listed 59 general support systems and 85 major applications for a total of 144 systems, but a subsequent list reflected 47 general support systems and 85 major applications, for a total of 132 systems. Within that same time, the agency provided another listing that consisted of only general support systems; that list identified 57 general support systems, a number that did not equal the totals on either of the two inventories. EPA also provided three lists of systems that the agency had determined contained or processed confidential business information, and all three lists differed in the number of systems identified, totaling 19, 21, and 24 systems. One system on the third list was not included on either of the first two inventories provided by EPA. Furthermore, three systems were erroneously listed twice, with minor variations of the spelling of the system names as the distinguishing information between the duplicate entries. These errors could be due to inadvertent data entry errors, as the agency places responsibility on individual information security officers to update the central systems inventory that is maintained in its ASSERT tool. The agency’s Inspector General has previously identified issues with the quality of system-related information entered into the tool. As a result, senior management has reduced assurance that the inventory accurately represents the number of EPA systems cited in its annual FISMA reporting and reduced assurance that agency information systems have been accounted for properly. Although EPA has implemented numerous controls and procedures intended to protect key information and information systems, control weaknesses continue to jeopardize the confidentiality, integrity, and availability of its sensitive information. The agency has established a framework for its information security program and taken actions toward developing, documenting, and implementing the components of its program. However, there are weaknesses in access controls and other information security controls over EPA’s systems. Additionally, some control deficiencies are longstanding, having been identified in past reports by the EPA Inspector General. These shortcomings will likely persist until EPA (1) addresses weaknesses such as those for identification and authentication, authorization, cryptography, audit and monitoring, physical security, and configuration management and (2) fully implements key components of a comprehensive information security program that ensures that policies and procedures are completed and effectively implemented; security plans are updated to reflect current federal and agency requirements; remedial actions are effectively managed for all weaknesses; and management, operational, and technical controls for all systems are tested and evaluated at least annually. However, until EPA fully implements these controls, it will have limited assurance that its information and information systems are being adequately protected against unauthorized access, disclosure, modification, and loss. To help establish an effective and comprehensive information security program for EPA’s information and information systems, we recommend that the Administrator of EPA direct the Assistant Administrator for the Office of Environmental Information to take the following 12 actions: Update configuration management procedures to ensure they include guidance for documenting records of approved changes. Finalize the 17 agencywide interim information security policies and draft procedures. Update system security plans to reflect current policies and procedures. Include current NIST Special Publication 800-53 guidance in system security plans. Develop and finalize a role-based security training procedure that tailors specific training requirements to EPA users’ role/position descriptions and details the actions information security officers must take when users do not complete the training. Conduct testing of management, operational, and technical controls, based on risks, to occur no less than annually, for the clean air markets division system identified. Include features in the planned remedial action tracking tool that will require users to enter all information required by OMB policy, including descriptions of each weakness and the source of the finding. Include features in the planned remedial action tracking tool that block inappropriate alteration of data. Implement an agencywide, uniform method for approving contingency plans. Develop and implement procedures to annually test the viability of contingency plans for agency systems. Develop and implement procedures to ensure that both work and home contact information are included for each individual in a contingency plan’s emergency contact list. Implement procedures to verify the accuracy of system inventory information. In a separate report with limited distribution, we are also making 94 detailed recommendations to correct weaknesses in access controls and in other information security controls. In providing written comments on a draft of this report (reprinted in app. II), EPA’s Assistant Administrator stated that the agency’s response reflected its continued efforts to ensure that information assets are protected and secured in a manner consistent with the risk and magnitude of the harm resulting from loss, misuse, or unauthorized access to or modification of information. The Assistant Administrator also indicated that the agency agreed with 10 of our 12 draft recommendations, and partially agreed with the other 2 recommendations, as discussed below. EPA agreed with implementing our recommendation to implement an agencywide method for approving contingency plans, but did not agree with requiring the approving officials’ signature and date to be on the document. The agency stated that a centralized repository for managing all security documents would be the more appropriate mechanism for ensuring plans are the most recent official versions. We believe this alternative action meets the intent of our draft recommendation and have modified our recommendation accordingly. For the second recommendation, EPA agreed to implement a uniform method for recording annual contingency plan testing, but did not agree to keep records of contingency plan testing within the contingency plans. The intent of our draft recommendation was to ensure that EPA implements procedures to test contingency plans at least annually. Accordingly, we have clarified our recommendation to emphasize this point. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to interested congressional committees and to the Administrator of the Environmental Protection Agency. 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 Gregory C. Wilshusen at (202) 512-6244 or [email protected] or Dr. Nabajyoti Barkakati at (202) 512-4499 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. The objective of our review was to determine whether the Environmental Protection Agency (EPA) had effectively implemented appropriate information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. To determine the effectiveness of EPA’s security controls, we gained an understanding of the overall network control environment, identified interconnectivity and control points, and examined controls for the agency’s networks and facilities. Specifically, we reviewed controls over EPA’s network infrastructure and systems that support EPA’s business functions of air, land, and water quality management and process or contain confidential business information. We performed our work at EPA’s National Computer Center in Research Triangle Park, North Carolina; Potomac Yard Data Center in Arlington, Virginia; and at EPA headquarters in Washington, D.C. We selected these sites to maximize audit coverage while limiting travel costs, since the majority of EPA systems and applications are supported or maintained in these locations. We used GAO’s Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information; National Institute of Standards and Technology (NIST) standards and guidance; and EPA’s policies, procedures, practices, and standards to evaluate the agency’s controls over its information systems. Specifically, we reviewed network access paths to determine if boundaries had been adequately protected; reviewed the complexity and expiration of password settings to determine if password management was being enforced; analyzed users’ system authorizations to determine whether they had more permissions than necessary to perform their assigned functions; observed methods for providing secure data transmissions across the network to determine whether sensitive data were being encrypted; reviewed software security settings to determine if modifications of sensitive or critical system resources had been monitored and logged; observed physical access controls to determine if computer facilities and resources were being protected from espionage, sabotage, damage, and theft; examined configuration settings and access controls for routers, network management servers, switches, and firewalls; inspected key servers and workstations to determine if critical patches had been installed and/or were up-to-date; reviewed media handling procedures to determine if equipment used for clearing sensitive data had been tested to ensure correct performance; and reviewed personnel clearance procedures to determine whether staff had been properly cleared prior to gaining access to sensitive information or information systems. Using the requirements identified by the Federal Information Security Management Act of 2002 (FISMA), which establishes key elements for an effective agencywide information security program, and associated NIST guidelines and EPA requirements, we evaluated EPA systems and networks by analyzing EPA policies, procedures, practices, and standards to determine their effectiveness in providing guidance to personnel responsible for securing information and information systems; analyzed security plans for six systems to determine if those plans had been documented and updated according to federal guidance; examined the security awareness training process for employees and contractors to determine whether they had received training according to federal requirements; examined training records for personnel who have significant responsibilities to determine whether they had received training commensurate with those responsibilities; analyzed EPA’s procedures and results for testing and evaluating security controls to determine whether management, operational, and technical controls for six systems had been sufficiently tested at least annually and based on risk; reviewed EPA’s implementation of continuous monitoring and use of automated tools to determine the extent to which it uses these tools to manage IT assets and monitor the security configurations and vulnerabilities for its IT assets; evaluated EPA’s process to correct weaknesses and determine whether remedial action plans complied with federal guidance; and examined contingency plans for six systems to determine whether those plans had been developed and tested. We also discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. To determine the reliability of EPA’s computer-processed data, we performed an assessment. We evaluated the materiality of the data to our audit objectives and assessed the data by various means, including reviewing related documents, interviewing knowledgeable agency officials, and reviewing internal controls. Through a combination of methods, we concluded that the data were sufficiently reliable for the purposes of our work. We conducted this performance audit from July 2011 to July 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. In addition to the individuals named above, the following made key contributions to this report: West Coile, Anjalique Lawrence, Duc Ngo, and Chris Warweg, (assistant directors); Gary Austin; Angela Bell; Larry Crosland; Saar Dagani; Kirk Daubenspeck; Nancy Glover; Kevin Metcalfe; Mary Marshall; Sean Mays; Dana Pon; Jason Porter, Sr.; and Eugene Stevens. | EPA is responsible for protecting human health and the environment by implementing and enforcing the laws and regulations intended to improve the quality of the nations air, water, and lands. The agencys policies and programs affect virtually all segments of the economy, society, and government. In addition, it relies extensively on networked computer systems to collect a wealth of environmental data and to disseminate much of this information while also protecting other forms of sensitive or confidential information. Because of the importance of the security of EPAs information systems, GAO was asked to determine whether the agency has effectively implemented appropriate information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. To do this, GAO tested security controls over EPAs key networks and systems; reviewed policies, plans, and reports; and interviewed officials at EPA headquarters and two field offices. Although the Environmental Protection Agency (EPA) has taken steps to safeguard the information and systems that support its mission, security control weaknesses pervaded its systems and networks, thereby jeopardizing the agencys ability to sufficiently protect the confidentiality, integrity, and availability of its information and systems. The agency did not fully implement access controls, which are designed to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Specifically, the agency did not always (1) enforce strong policies for identifying and authenticating users by, for example, requiring the use of complex (i.e., not easily guessed) passwords; (2) limit users access to systems to what was required for them to perform their official duties; (3) ensure that sensitive information, such as passwords for system administration, was encrypted so as not to be easily readable by unauthorized individuals; (4) keep logs of network activity or monitor key parts of its networks for possible security incidents; and (5) control physical access to its systems and information, such as controlling visitor access to computing equipment. In addition to weaknesses in access controls, EPA had mixed results in implementing other security controls. For example, EPA conducted appropriate background investigations for employees and contractors to ensure sufficient clearance requirements had been met before permitting access to information and information systems. However, EPA had not always securely configured network devices and updated operating system and database software with patches to protect against known vulnerabilities. EPA had not always ensured equipment used for sanitization and disposal of media was tested to verify correct performance. An underlying reason for the control weaknesses is that EPA has not fully implemented a comprehensive information security program. Although EPA has established a framework for its security program, the agency has not yet fully implemented all elements of its program. Specifically, it did not always finalize policies and procedures to guide staff in effectively implementing controls; ensure that all personnel were given relevant security training to understand their roles and responsibilities; update system security plans to reflect current agency security control requirements; assess management, operational, and technical controls for agency systems at least annually and based on risk; and implement a corrective action process to track and manage all weaknesses when remedial actions were necessary. Sustained management oversight and monitoring are necessary for EPA to implement these key information security practices and controls. Until EPA fully implements a comprehensive security program, it will have limited assurance that its information and information systems are adequately protected against unauthorized access, use, disclosure, modification, disruption, or loss. GAO is making 12 recommendations to the Administrator of EPA to fully implement elements of EPAs comprehensive information security program. In commenting on a draft of this report, EPAs Assistant Administrator generally agreed with GAOs recommendations. Two of GAOs recommendations were revised to incorporate EPAs comments. In a separate report with limited distribution, GAO is also making 94 recommendations to EPA to enhance access and other information security controls over its systems. |
In recent years, Congress passed legislation that modified the visa program for foreign workers who enter the country with H-1B visas to work in specialty occupations. Changes have included expanding the limits on the number of workers who may be approved for these visas from 65,000 to 195,000, providing Labor with additional enforcement authority, and establishing an employer fee to fund training of American workers. The American Competitiveness and Workforce Improvement Act of 1998 (P.L. 105-277) authorized programs to provide technical skills training and scholarships for low-income postsecondary students pursuing high technology fields of study. To fund these programs, it assessed a $500 fee on employers for each person for whom they submitted an application for an H-1B visa. In 2000, the H-1B visa application fee for employers was raised to $1,000. Also, the American Competitiveness in the Twenty-First Century Act (P.L 106-313) clarified some guidelines for administering the skill grant program and included Commerce as a consultant to the skill grant distribution process. The fee for employers who apply for H-1B visa workers, which funds the skill grants and scholarship grants, expires on September 30, 2003. Currently, 55 percent of the fees collected are distributed to Labor for skill grants and 22 percent are distributed to NSF for scholarship grants. The remaining 23 percent of the funds is to be used for other activities. The 2003 Labor budget proposed redirecting the skill grant funding beginning in fiscal year 2003 to reducing the backlog of applications submitted on behalf of foreign workers for permanent residency. In 1998, Congress also passed WIA, which replaced the Job Training Partnership Act (JTPA) and introduced various reforms to the coordination and delivery of federal employment and training services. WIA seeks to create a workforce investment system that connects employment, education, and training services to better match workers to labor market needs. WIA specifies separate funding sources for each of the act’s main client groups adults, dislocated workers, and youth. The American Competitiveness and Workforce Improvement Act of 1998 linked the H-1B skill grants to federally funded employment and training services administered by Labor by requiring that the grants be awarded to private industry councils, workforce investment boards or regional consortia of these boards. Labor is responsible for administering and overseeing the H-1B grant program on a national level, which includes compiling and collecting reports, maintaining an H-1B skill grants website, and providing technical assistance. Labor’s regional offices assign one staff person to each grantee within the region to serve as the front-line contact and monitor of the grantees. Through its Office of Policy and Research, Labor has awarded 43 skill grants totaling about $96 million distributed in three separate rounds in February 2000, July 2000, and October 2000, and an additional 24 grants totaling about $67 million were distributed in a rolling award process beginning in December 2001. Workforce investment boards or regional consortia of these can receive skill grants. For each application, a local workforce investment board must indicate that the project is consistent with, and will be coordinated with, the region’s workforce investment efforts. The 2000 law allotted 25 percent of the skill grants to business- related consortia; a first round was awarded in May 2002 to 14 grantees, totaling about $34 million. Labor convenes panels to review grant applications and recommends grantees for selection on the basis of specific criteria, such as target population, service delivery, and ability to meet labor market needs. Grantees have been required to submit a quarterly financial report and a quarterly narrative progress report. While Labor did not require a standard format for the narrative progress report until the quarter ending September 30, 2002, some grantees used a template developed by Labor that included numbers for the following: individuals continuing to be served from any quarter, individuals served during the quarter, individuals served since the beginning of the project, individuals newly enrolled, and individuals who exited without completion. Labor limited the amount of money grantees’ could spend on administrative costs to 10 percent of the funding and set the grant period at up to 2 years, although some grantees have received 1 year extensions at no additional cost. Grantees are required to obtain matching funds from other parties; the amount they have been required to obtain ranged from 25 percent to 50 percent of the grant, depending on the round in which they received their grant. Business consortia grantees are required to obtain matching funds of 100 percent of the grant they receive. The 2000 law provided specific guidance about the types of training that should be provided under the skill grants, which was absent from the 1998 law. It said that the training is not limited to skill levels commensurate with a 4-year undergraduate degree, but should include the preparation of workers for a broad range of positions along a career ladder. It also required that at least 80 percent of the grants be awarded to programs and projects that train employed and unemployed workers in skills in high technology, information technology, and biotechnology. The 1998 law did not elaborate on the nature of the training authorized and did not mention any particular occupations. NSF provides scholarship grants to schools that grant associate, baccalaureate, or graduate degrees. The schools are selected by panels that review applications from postsecondary schools. Students must be majoring in computer science, engineering, or math; must be enrolled in classes full-time; must demonstrate financial need; and must demonstrate academic potential and ability. Initially, only students who were eligible for Pell grants could be eligible for scholarships, but NSF later relaxed this requirement to include students who were eligible for any federal financial aid. Each student receives up to $3,125 per year for up to 4 years. As of May 2002, 277 schools have obtained grants ranging from $24,750 to $760,320 in a series of three rounds of grant awards totaling about $72 million. Schools may ask for an additional 5 percent of the total requested scholarship amount for administrative costs, an increase from the original 2 percent for the first set of grants awarded. Schools may also ask for an additional 5 percent of the total requested scholarship amount for student support services. Skill grantees use the grant program to offer training through a variety of service delivery options to people whose skills need to be upgraded; scholarship grantees use the scholarship program to offer traditional degree programs in mathematics, computer science, and engineering to low-income students. While the skill grant program requires grantees to create partnerships to implement the program, the nature of the partnerships is flexible. The grant training, which can be used to prepare workers for a range of occupations, can be offered to employed and unemployed individuals in a variety of settings. However, in the scholarship grant program, the postsecondary schools receiving grants provide scholarships toward undergraduate and graduate postsecondary education, with a goal of attracting and retaining low-income students in computer science, engineering, and mathematics degree programs. Some schools are having difficulty finding students eligible for the scholarship grant program to fill all available slots. NSF officials, however, believe that their change to a less strict standard for financial eligibility has made it easier to recruit students. In implementing their skill grant programs, grantees form partnerships to meet local workforce needs and to train diverse participants. However, many grantees have not planned for alternative funding to sustain the training program beyond the 2-year time frame allowed for the grant. The skill grant program requires grantees to create partnerships with local entities to implement the program, yet the nature of the partnerships is flexible. Data on participants are limited, however, because Labor does not require grantees to collect consistent participant and outcome information. Although many grantees have used the skill grant program to create innovative programs and build ties with new partners, many have not planned for alternative funding beyond the end of the grant period and may be unable to offer their program in the future. Skill grantees taking advantage of the skill grant program’s flexibility, have formed partnerships with local entities, and have used a variety of innovative service delivery options. For the first three rounds in which skill grants were awarded, workforce investment boards or private industry councils were required to submit grant proposals to Labor; however various partners initiated or implemented the skill grant training program to best meet local workforce needs. Other partners may include employers, unions, for-profit and not-for-profit training institutions, community colleges, public and private 4-year colleges, and other organizations such as business trade or industry associations or community and faith-based organizations. The following sites that we visited exemplify the variety of partner configurations and service delivery options. At several sites in various states, the grantee implemented the skill grant using local government, nonprofit or community based organizations that were also administering WIA programs. The skill grant funds were awarded either to employers to train current workers or individuals to upgrade their skill set. For example, one offered businesses grants of up to $50,000 to train their employees in information technology, electrical engineering, mechanical engineering, or precision manufacturing; another offered funds for IT training and targeted employed workers as well as dislocated (laid-off) workers, low-income people, and high school students. The local boards advertised the availability of training through standard advertising channels such as flyers, newspapers, and the one- stop centers. The training providers were chosen by the employer or the individuals participating in the programs. At a site in California, a major health care provider with thousands of employees partnered with the local board, the union, and training providers to address specific skill shortages within its company. Similarly, at a site in Massachusetts, unions at two manufacturing plants partnered with the local board, training providers, and the employers. For both grants, training was available primarily to company employees. In this arrangement, the local workforce boards were not heavily involved in the operation of the training program, but did connect the grant to the local workforce system. Employers and unions implemented the skill grants in the regions covered by the employers instead of limiting participation to only workers in the area served by the board. At a site in D.C., a college initiated and implemented the skill grant, while the local board advised the college and established networks to other partners. The college sought out employers who wanted their underemployed workers to receive IT training. It also marketed the training directly to unemployed individuals. All training occurred at the college administrating the grant. At one site in California, the local board partnered with four training providers to offer different IT curriculums to both employed individuals and dislocated workers. The training partners and the board were responsible for recruiting participants for the program. The skill grant training programs vary in length and by type of provider; different approaches are taken to respond to employers and trainees’ needs. Training programs at sites we visited were as short as a 1-day course on new software taught through a for-profit training provider and as long as a 2-year college curriculum at a technical college. A grantee has the flexibility to provide different training at different sites. For example, one grantee ran four different IT training programs, each with a different time frame: one on weekends for 9 months at a community college; one summerlong program on weekdays at a community college; one full time for 10 months at a nonprofit training provider; and one with various schedules offered through a major state university continuing education program. Depending on the partners and service delivery option for the skill grant, the training can take place in a variety of locations, such as on-site at a company or at a training facility. At one skill grant location, a local community college offered math, electronics, and other courses at the workplace after the close of the workday. Employees could earn an associate degree in computer and telecommunications technology at a convenient location, while upgrading their skills for their employer. The skill grant program’s flexibility allows grantees to adjust the content of their training in response to changes in local labor market demands or events. The grant administrators at one site providing training in both health care and IT increased the number of health care training participants and decreased the number of IT training participants in response to changing employer demand for workers. Similarly, a local board that partnered with two large employers to train current workers amended their grant to include training for dislocated workers when one employer had a major lay-off. Participants who had been laid off could continue in the training program. Despite the flexibility of the skill grant program, many of the skill grantees experienced challenges during the start-up phase of the grant. On average, grantees took about 4 months from the time the grants were awarded until the programs were operational and began serving individuals. For two, forming new partnerships with employers and training providers took longer than anticipated. For others, the economic downturn that began in 2001 altered their ability to participate. For a few grantees, these obstacles delayed their program start-up 9 months or longer. As a result, several grantees asked or planned to ask for a no-cost extension of up to 1 year beyond the original 2-year grant period. Between December 2001 and July 2002, Labor has awarded an additional 38 grants, including 14 awards under the 25 percent allotment reserved for business or business-related consortia. Based on information in the summaries of the funded projects, some of the regional consortia are led by large nationwide corporations such as MetLife, Inc., or General Motors Corporation, while other programs are led by community colleges, or in one case, an organization working to enhance opportunities for the Latino population. Many of the projects cover geographic areas larger than the areas served through a single local workforce board. For example, one project led by a national employer will serve participants in five states: Alabama, Indiana, Michigan, New York, and Ohio. Other projects will serve participants in a broad area of one state or a few selected major metropolitan areas around the country. In the first three rounds of skill grant awards, the training programs served a range of participants, in part because of the flexibility afforded in the skill grant program. The skill grant programs were not required to select participants on the basis of eligibility factors such as age, income, or employment status of the individuals. However, in its solicitations for grant applications, Labor encouraged grant applicants to reach out to underrepresented groups, such as minorities, women, and individuals with disabilities. Grantees targeted various combinations of employed, dislocated, and unemployed individuals, and specific populations such as youth, disabled, or public assistance recipients. For example, at one site, the grantee targeted two groups: individuals who were employed and wanted to upgrade IT skills or gain a new skill set and unemployed individuals who were seeking a computer-related job. At another site, the grantee used the skill grant program to train high school students in an IT program at the vocational high school and also trained employed, dislocated, and low-income adults using other training providers. Data on participant characteristics are limited because Labor did not require standard data on individual participants to be collected and reported. Until the quarter from July 1 through September 30, 2002, grantees were not required to report on standard data elements. For that quarter, Labor will be requiring that grantees submit standard information on the status of participants’ training and certain outcomes, such as new job placements and the number of wage increases individuals received as a result of H-1B training. However, the new requirements still do not require specific demographic data on the individual participants or information on the specific levels of training provided. Because data collection varies across sites, the responses to our survey questions about participant characteristics vary as well. All grantees provided information on the number of training participants in their program, reporting that a total of 16,590 individuals were enrolled in training between March 1, 2000, and January 31, 2002. Grantees from the first three rounds who collected participant employment data (39 of the 43 grantees) report that approximately three-fourths of skill grant participants are employed workers upgrading their skills. In addition, the data from our survey show that the skill grants are reaching a wide range of ages, though focusing more heavily on ages 22 to 39, as shown in figure 1. Because many grantees chose to target employed individuals that want to upgrade skills or change careers, the participants often have some education beyond high school. Information on the educational background of participants in the first three rounds of grants reveals that most of the participants have some college education, many with at least a bachelor’s degree (see figure 2). In one case, a health care training program required that a participant be a registered nurse before receiving training as a nurse specialist in the operating room or critical care. Grantees reported that almost 5,000 participants were members of “underrepresented” groups. Underrepresented groups can include women, minorities, persons with disabilities, and older workers. Information gathered from grantees collecting gender, race, and ethnicity data indicates that a greater percentage of women and African Americans are training for IT occupations in this program than are working in IT occupations nationally. Grantees indicate that 40 percent of the skill grant participants in IT training were female as compared with 27 percent of computer scientists and systems analysts, and computer programmers in the U.S. workforce in 2001, according to Bureau of Labor Statistics data. Further, a higher portion of African Americans and about an equal portion of Hispanics were trained than were present in those key IT occupations, as shown in figure 3. In addition to participant demographic data, some grantees collected outcome data, although these data were limited and had not been standardized. In general, such data are not collected until after participants have ended their training. As of January 31, 2002, grantees reported that 7,646 had completed their entire training program. Most of the remaining participants were still in training; the rest were either waiting for training to start at the time of our survey or had left or dropped out of the program (see figure 4). Because grantees did not always collect outcome data, such as certifications obtained or wages that increased, the outcome data are not complete. The data we collected do not identify whether each participant achieved only one or more than one of the outcomes reported, thus the outcomes cannot be compared to the number of participants who completed their training. While limited, the outcomes reported indicate what the training programs achieved. Grantees reported that 1,796 participants were placed in new or upgraded positions; 1,571 participants increased their wages/salaries; 2,582 participants attained skill certifications, such as a Microsoft Certified Systems Engineer; and 1,870 participants attained industry-recognized skill standards. Grantees report a very low number of participants receiving a 2-year or 4-year college degree, which may be due to the 2-year time frame of the skill grant program. Because the program is flexible, grantees can choose to measure success with outcomes relevant to their service delivery option. For example, a grantee that is targeting unemployed individuals can measure job placements, while a grantee targeting employed individuals can measure wage gains or job retention. Outcomes measured included student or employer satisfaction, students’ continuation in school, job retention, job placements, wage gains, or upgraded positions. Only 1 of the 43 grantees is planning to measure reduced reliance on H-1B workers as an outcome. Employers and employees we interviewed reported that the training is valuable because it may contribute to an employee’s loyalty to the company or may provide a service within the company that would otherwise have been outsourced. For example, at one skill grant location, employees of a small nonprofit organization learned how to edit and upgrade the company’s website. By gaining the skills through existing staff, the company became more competitive and saved money. Even though grantees were interested in tracking outcomes of participants, and had attempted to do so, they encountered a number of challenges. Since the programs were largely based on the needs of employers, the purpose of the training was often to upgrade a worker’s skills, which is not necessarily connected to an easily measured outcome. For example, training that helps a registered nurse become an operating room specialist or helps an employee at an IT firm upgrade his or her skills to keep up with current technology may not be accompanied with a wage gain or promotion. A couple of grantees we visited said that the training helped employees avoid being laid off with the recent dip in the economy. In addition, some skill grantees said they had a difficult time collecting data from private industry employers who were reluctant to give personal information, such as wages, on their employees. Although grantees were required to outline a plan in their applications for sustaining their programs beyond the grant period, some skill grantees who were in their last year of funding had not identified definite future funding sources. During our site visits, grantees said that the H-1B grant provided funding to initiate programs. For example, one grantee said it gave their program the “shot in the arm” it needed to start a new and innovative training program. Some grantees hoped that continuing the program would be easier once the program was established. In their survey responses, grantees identified a wide variety of other funding sources they expected to use to sustain the training programs established under the skill grant. The most common sources of funds were other federal programs, WIA program funds (adult, dislocated workers, or youth program), H-1B employers, and tuition assistance/remission (see figure 5). However, several grantees we visited did not have definite plans for alternative funding beyond the program’s 2-year limit and may be unable to offer their program in the future. For example, one program that trained in IT areas had planned to seek funding from employers that were hiring graduates of the training program, but with the downturn in the IT industry, employers were not expected to want to contribute as readily. Some grantees were planning to apply for another H-1B skill grant to continue their programs, but whether they would be approved, was not known. In the recent grant solicitation, Labor has allowed grantees to reapply to continue a program but has required at least some expansion of the grantee’s program. Previous skill grant recipients were encouraged to apply for another H-1B grant to provide a different approach or scope to skills training, including the option to expand the existing training program. Labor did award one grantee from the first round of awards another H-1B grant in the fourth round to expand its initial IT training program. The grant administrator at this site commented that continued funding could only improve the training now that the infrastructure was in place. The scholarship grant program emphasizes the importance of attracting and retaining low-income students in computer science, engineering, and mathematics degree programs, primarily by providing them tuition funds and supplemental income to assist with living expenses. As of May 1, 2002, 7,706 students had received scholarships through the program. Scholarship program coordinators at sites we visited noted that students who meet the low-income requirement for this program typically have to work at least part-time, in addition to attending school. According to an NSF official, the scholarships, which are not restricted to tuition, can be used for any expenses related to school, such as housing, transportation, or childcare. School officials said that students could use the time that they would be working at a job to focus on schoolwork. One student said that the scholarship is helping her to finish the program faster because she is required to be a full-time student to receive the scholarship. Moreover, two students thought that the scholarship attracted them to these fields of study when they were debating what major to choose. One student told us that even though she excelled in math in high school, she only considered becoming a math major after she learned about the scholarship opportunity. On the basis of data collected by NSF on students who receive the scholarships, the program is attracting a higher proportion of women and minorities than have pursued degrees in computer science, engineering, and mathematics as a whole. As shown in figure 6, scholarship recipients include a greater portion of women and minorities than are included among computer science, engineering, and mathematics degree awardees. Approximately 37 percent of the students in the scholarship program are women, as compared with 24 percent of all students earning computer and information science, engineering and engineering related technologies, and mathematics bachelor’s degrees in 1999-2000, according to Department of Education statistics. Further, the percentage of minority students in the program was higher than the percentage of minority students earning comparable bachelor’s degrees nationally. During our visits we found that while the scholarship program is serving low-income students, some of the schools were having trouble filling their scholarship slots. An NSF program official agreed that some of the smaller schools were having trouble filling slots, and that one complaint heard from school representatives responsible for the program was the restrictive requirement that students be eligible for Pell grants to receive an award. Effective January 2002, NSF relaxed this criteria to require that students are federal financial-aid eligible, a less restrictive criteria. The NSF program official estimates that while enrollments appear to have increased since the criteria was relaxed, the effect of this change will not be known for another year; however, he believes the change has made it easier to recruit students. Moreover, since the start of the program, some schools have begun other initiatives to publicize the program to find more students that meet the eligibility requirements, which may help to increase the enrollments in the scholarship program. The skill grant training is based on local workforce needs and addresses occupations both below and at the bachelor’s degree level required for H-1B visas, whereas the scholarship program’s training is on the basis of national workforce needs and the jobs that many H-1B visa holders fill. The skill grant training is designed by grantees to address skill shortages in the local workforce. However, the programs, as permitted by law, do not always prepare participants for the specific kind of jobs held by H-1B visa holders. The scholarship program also focuses its efforts on attracting and keeping students in specific fields with national workforce shortages. As established by law, the skill grants were intended to provide technical skills training, but acceptable areas of training were not prescribed. Labor, in its solicitations for grant applications, stated that the funds were intended for skill training in high-skill occupations that are in demand by U.S. businesses. Its guidance stated that the overall goal of H-1B-financed training is to raise the skills of American workers so that they can fill high- skill jobs presently being filled by temporary H-1B workers. Labor also stated that one key indication of the occupations in demand is the number of employer applications for H-1B foreign workers, and noted that two industries appear to generate the most current H-1B demand—IT and health care. The solicitations included an appendix of specific occupations in which job openings were certified through these applications; the top two occupations by far that were listed were “occupations in systems analysis and programming” (an IT occupation) and “therapists” (a health care occupation). However, many applications were never filled with a foreign worker. INS data on the actual workers who eventually obtain visas indicate a different mix; the largest category is computer-related occupations, while medicine and health occupations represent a much smaller portion of the visas approved, as shown in table 1. Most of the skill grant programs funded with the first three rounds of grants distributed in 2000 were providing training for IT occupations. Several programs trained in a variety of areas, but of the 43 grantees selected in the first three rounds of grants, 35 provided training in IT and 19 of these trained exclusively in IT. The number of grantees who offered training in specific categories is shown in figure 7. As applicants for skill grants planned their programs, they used information that Labor supplied in the solicitation about occupations in demand and supplemented it with additional information about local labor market needs. Of the 43 grantees selected in the first three rounds, 33 tried to obtain H-1B visa data for their area to help them identify shortage areas being filled with foreign workers, but only 23 were successful. During our site visits, some grantees said they followed up with the employers identified as having H-1B visa workers and discussed their workforce needs. The surveyed applicants also used other approaches to identify local workforce needs: 42 reported using state and/or regional labor market information; 40 reported using information from employers on hiring demands; 19 reported using newspaper want ads; and 27 reported using at least one other approach, including working with industry groups, using others’ studies of local skills gaps, analyzing postings on Internet job sites, employer focus groups, and national studies. Grantees we visited commented that this process allowed the workforce investment boards to better understand industries and employers that employ higher skilled workers, with whom they had not previously had strong relationships. One grantee official noted that the grant had been useful in helping his organization look at broader labor market needs and focus on emerging trends, such as an anticipated shortage of nurses due to retirements. Another spoke of how this process helped to better understand the telecommunications/information technology industry. Several grantees noted that this grant gave them the opportunity to provide training that helped meet employers’ labor needs. Although the skill level of H-1B occupations is generally required to be at the bachelor’s degree level, the law governing the skill grants does not require that the grants, though funded with fees from H-1B workers’ employers, train at that same level. The goal of the skill grant programs was to provide technical skill training to workers, both for those who were employed as well as those who were unemployed. The American Competitiveness and Workforce Improvement Act that established the program does not refer to any particular occupations and did not elaborate on the nature of the training authorized. The American Competitiveness in the Twenty-First Century Act of 2000 did provide more specific direction, stating that this training is not limited to skill levels commensurate with a 4-year undergraduate degree, but should include preparing workers for a broad range of positions along a career ladder. Unlike some other fields, occupations in the IT field are difficult to classify as to the level of education degree they require. The Bureau of Labor Statistics in its Occupational Outlook Handbook has noted that some IT workers have a degree in computer science, mathematics, or information systems, while others have taken special courses in computer programming to supplement their study in other fields, such as accounting or other business areas. The National Workforce Center for Emerging Technologies has identified IT skill cluster titles and the education necessary for the occupations. For several of the occupations, workers can prepare academically with a range of training types, from a 1-year certificate program to a 4-year degree program. Labor, when issuing guidance in its solicitations for grant applications for various rounds, provided confusing language when describing the level of training that was appropriate. The solicitations state that the primary target served should be workers who can be trained and placed directly in the high-skill H-1B visa occupations. However, the solicitations also sometimes included other information that allowed training for lower level positions. For example: The first round’s solicitation also says grantees should reach out to high- and low-skilled workers to train for H-1B occupations related career paths. However, some grantees commented that raising a low-skilled worker to a baccalaureate level in the 2-year grant period could be difficult. The two most recent solicitations for applications mirror the change from the 2000 law. They state that the technical skills training is not limited to skill levels commensurate with a 4-year degree and should prepare workers for a broad range of positions along a career ladder. Although Labor’s solicitations were unclear as to the level of training that was acceptable, according to Labor officials, they avoided being overly prescriptive to allow grantees flexibility and encourage innovation. In addition, Labor stated that because this was a new program, it was difficult to determine where more clarification was needed until grantees began to ask similar questions. Labor did post some questions and answers about the H-1B skill grant program from two conferences for potential grant applicants on the H-1B Technical Skills Training Grant website. A Labor official also told us that Labor is developing a list of commonly asked grantee questions and answers to those questions, which should be posted in the near future. The 43 grantees from the first three rounds provided training for a range of levels of occupations. INS Adjudications Division staff, when asked to assess whether these occupations are equivalent to skill levels needed for H-1B positions, said that many of them could be acceptable H-1B positions, depending on the details of the job descriptions. The agency found that 25 (38 percent) of the 66 occupations in which training was provided could qualify for H-1B occupations, 30 (45 percent) would generally not qualify, and the remaining 11 occupations were too vague to be characterized either way. (See app. V for a full list of the occupations in which skill grant programs trained and INS’s assessment of how the occupations compared with H-1B occupations.) A few employers told us that in some cases the specific skills they needed could be obtained from an H-1B worker, or could be obtained by training a present employee, who already had some knowledge of processes, in specific higher-level skills. For example, a small nonprofit organization that had interviewed outside candidates, including an H-1B worker, for a networking position decided to use the skill grant funds to upgrade an employee’s skill sets instead. Similarly, the general manager at a manufacturing plant said that electronics technicians who were being upgraded to junior engineers would be able to do testing that previously was part of the responsibilities of senior engineers, some of whom were H-1B workers. Students receiving scholarship grants are enrolled in educational areas that prepare students for occupations frequently filled by H-1B visa holders, an indicator of national workforce needs. The law establishing the program stated that scholarship recipients must use the scholarship to enroll or continue enrollment at a school in order to pursue an associate, undergraduate, or graduate level degree in computer science, engineering, or mathematics. Although the students are pursuing a variety of specific course programs, such as automation robotics and actuarial science, their areas of study can be classified into broad categories as shown in figure 8. INS data on H-1B visa workers indicate that these majors would provide suitable training for positions these foreign workers often fill. As shown in table 1, the data on H-1B visa workers approved to begin work during fiscal year 2001, which reflect national workforce needs, indicate that 58 percent of them were for computer-related occupations. Training paid for in part by scholarship grants is for occupations with a similar level of complexity to those held by H-1B visa holders, who must have bachelor’s degrees or equivalent experience. Some students receiving scholarships are attending 2-year schools while others are in 4-year undergraduate programs or graduate programs. (About a quarter of the schools in the program are 2-year schools.) Some of those in 2-year programs plan to transfer into 4-year degree programs. For example, one program we visited at a 2-year community college was specifically preparing students for transfer to a nearby 4-year public university, a process that was simplified by the transfer agreements that the program advisor had arranged. While federal programs and initiatives are not coordinated to strategically address the national need for high-skill workers, local skill grant programs are more coordinated, though Labor has provided limited assistance to enhance these local efforts. There are multiple federal agencies and offices within agencies involved in efforts to address the need for high-skill workers, although coordination is limited. At the same time, local workforce officials said that as a result of implementing their skill grants they have increased coordination with partners and employers. Yet, skill grant representatives said they would have liked more assistance from Labor in obtaining information on companies needing H-1B workers and developing a national strategy to market the program. Labor and NSF provided few opportunities for grantees to share information and learn from each other. Multiple federal agencies and offices within agencies are involved in efforts to address shortages of high-skill workers and/or attract more students to high technology fields. Yet, these efforts are not focused on broadly coordinating across agencies to address national high-skill workforce needs in a strategic way. Within Labor, many of these efforts are discretionary grant programs operated by ETA through separate offices with limited coordination. For example, ETA’s Office of Policy and Research oversees the H-1B skill grant program, ETA’s Office of Adult Services oversees several discretionary grant programs that address employer skill shortages and a grant to the Information Technology Association of America to inform IT companies about the workforce investment boards’ role in local communities; and ETA’s Office of Apprenticeship Training, Employer and Labor Services oversees a grant to expand apprenticeship in the IT occupational area. In addition to the H-1B scholarship program, the NSF has other programs aimed at attracting and retaining students in high-skill degree programs. The Department of Commerce’s Office of Technology Policy within the Technology Administration, the Department of Education’s Office of Vocational and Adult Education, the Department of Health and Human Services’ Health Resources and Services Administration, also have initiatives and programs to research and/or address areas of high-skill needs and shortages. (A list of some key programs and initiatives that have a component addressing the need for high-skill workers is shown in app. VI.) The lack of coordination between federal agencies was evidenced within the two grant programs funded with H-1B fees. The Labor-administered skill grants and NSF-administered scholarship grant programs have had little coordination across agencies to address broader needs. According to a NSF official, while programs such as the scholarship grants are complementary to Labor’s workforce programs, NSF’s primary link to the workforce system has been with the Department of Education. At the local level, some of the skill grant representatives said they did not know about the scholarship grants and some of the colleges with scholarship grants did not know about the skill grants. Yet, local grant representatives of both programs were interested in learning more about each other and it appeared that there were some areas where they could have benefited from more coordination. For example, one university official overseeing the scholarship program mentioned that she would like more information on the skill grants because of the many requests about training programs from students who have degrees but still need additional training to be more marketable to employers. Within Labor, ETA oversees the WIA adult, dislocated worker, and youth programs and has some other initiatives to address high-skill workforce needs in addition to the skill grants; however, these efforts are not linked together to build on the lessons being learned. For example, ETA assigned regional staff from the Office of Apprenticeship Training, Employer and Labor Services (ATELS) to monitor the skill grants. ATELS also has a major initiative to develop apprenticeships in new and emerging industries such as IT and health care. Yet, according to a national ATELS official, a strong partnership between the skill grant program and ATELS did not develop, which could have led to building a broader infrastructure that connects the skill grants and apprenticeship efforts in high technology industries. A Labor official from the Division of One-Stop Operations within ETA said that a formal mechanism is not currently in place to share information among grant programs such as the skill grant program and other ETA grants and programs. However, these officials did say that the ETA leadership is interested in looking at the role of demonstration grants such as the skill grant program and how they fit into ETA’s ongoing employment and training programs. An example of this type of coordination was demonstrated by Labor’s Boston regional office that convened a series of 3 daylong conferences that focused on current worker training for H-1B grantees and other discretionary grants awarded by Labor. In addition, the Assistant Secretary of ETA recently announced the establishment of a Business Relations Group that will strive to better support business linkages with all components of the workforce system, such as apprenticeship programs and Job Corps. Labor involved Commerce in the skill grant program, as required by the American Competitiveness in the Twenty-First Century Act of 2000, but these efforts were limited and not part of a more comprehensive strategy to address high-skill needs across agencies. Labor consulted with Commerce while developing the initial solicitation for grant application for the skill grant program. The 2000 act mandated that role by requiring that Labor consult with Commerce in awarding the grants and requiring Commerce to complete a study of public and private sector high-tech workforce training programs. Commerce staff also served on some of the skill grant application review panels. Yet, Commerce expressed frustration in trying to obtain information from Labor on the skill grant program for their report on workforce training programs. At the same time, Commerce is leading several major initiatives addressing IT employers and employees, which are independent of Labor’s workforce programs. While some federal agencies are taking steps to more broadly address high-skill workforce needs and skill shortages, no agency has taken the lead in coordinating across education, economic development and workforce development programs to strategically focus on high-skill needs. The Secretary of Labor established a “21st Century Workforce Initiative” that includes the Office of the 21st Century Workforce, created by executive order on June 20, 2001, to provide information and forums on workforce issues. However, these efforts address the broad workforce and are not focused specifically on high-skill needs. The Secretaries of Labor and Health and Human Services are also working on a Memorandum of Understanding to support joint efforts to address the nation’s nursing shortage. Within Labor’s ETA, there are some efforts to take a more strategic role in identifying skill shortfalls in a few key industries, notably health care and IT. Yet, these efforts tend to be limited largely to one agency or targeted to one industry, without building on the lessons being learned across programs and initiatives addressing high-skill needs. Local workforce board representatives and program officials reported that the skill grants helped them advance key goals of the WIA workforce system, such as coordinating with new partners beyond local boundaries, building relationships with more employers, and linking to the one-stop system; however, they would have liked more assistance from Labor to enhance these local efforts. Survey respondents reported working with one-third more employers with high-skill needs since receiving the H-1B grants. Some workforce officials said that the skill grants enabled them to work with employers that would not have accessed the WIA workforce system otherwise. We also spoke with some employers who said they had not known of the services available or worked with the WIA workforce system before this grant. At the same time, 10 of the grantees said they had difficulty obtaining data on H-1B visa applications to identify employers who used H-1B workers in their areas. A number of grantees contacted Labor, INS, state workforce agencies, and even congressional offices to attempt to track down this information. While some grantees got information from Labor, others did not. Almost a quarter of the grantees said they would like more assistance from Labor in obtaining information on companies hiring H-1B workers or networking with H-1B employers. A number of grantees suggested that it would be beneficial for Labor to develop a national strategy to market the H-1B grant program to employers and to facilitate discussions with national employers who use H-1B workers. One of the national employers who participated in a H-1B skill grant program expressed interest in replicating its experiences and sharing information on a national level. Almost all (40) of the grantees reported that the one-stop centers, which are the cornerstone of the WIA workforce system, had a role in the grant and in some cases, increased visibility as a result of the grant. For many of the grantees, the one-stop centers served multiple functions with the most common being recruiting/referring participants, followed by conducting intake/assessment, identifying job openings for participants, and matching participants to job openings/employers. One of the grantees that worked with employers to upgrade the skills of current workers said that they used the one-stop centers to help backfill the lower-level positions vacated by employees who got the H-1B training and moved into higher-level positions. One employer we interviewed, who was not aware of the publicly funded workforce system before the H-1B grant, expressed interest in using the screening services available through the local one- stop center after learning about these services through the grant. Local workforce officials also mentioned how these training programs helped support other efforts under WIA to strengthen the workforce system. For example the skill grants helped the workforce investment boards think beyond local boundaries to regional and employer territories and develop a model for employer-driven training that can also be applied to other programs, such as those funded by WIA. A number of grantees commented on how the H-1B grant enhanced their capacity to work with community colleges and other partners to provide innovative, higher-skills training. At the same time, some grantees requested more technical assistance from Labor in such areas as learning more about national efforts to develop and define career ladders. As one grantee noted, information on career ladders is available in different areas, but is hard to track down; information developed by efforts such as the National Skill Standards Board could be useful, but this information does not always make its way to the local level. For both the skill grant and scholarship grant programs, grant recipients thought they could have benefited from sharing more information with one another about lessons learned and promising practices. Yet, Labor and NSF provided few opportunities for this type of information exchange. Labor has established a website with relevant information for the H-1B grants, conducted an early study of the program and a second study of exemplary practices of H-1B skill grants, and convened two national meetings for H-1B skill participants. However, grantees do not have a mechanism for ongoing information exchange with each other. In our mail survey and through site visits with grantees, 13 of the grantees noted that they would like to have more opportunities to network and share information among grantees. Some of the local grantees formed informal networks to share information and have relied on each other for technical assistance. Officials at scholarship programs we visited also said that they would like the opportunity to exchange information and promising practices with other schools. NSF plans to convene a meeting of the scholarship program coordinators from all the colleges awarded NSF scholarship grants in the spring of 2003. The schools we visited commended NSF for distributing information about the program and responding to questions in a timely fashion through e-mail. The H-1B skill grant and scholarship grant programs are two key programs that train high-skill workers and help address employers’ concerns about skill shortages in the United States—particularly in IT and health care fields. The skill grant program’s flexibility allows training at high-skill levels, often in IT-related occupations, while the scholarship program attracts and encourages students to stay in degree programs in the computer science, engineering, or mathematics. Both programs respond to workforce shortages in either the local or national economies. Both programs have encountered challenges during their early implementation. Labor’s confusing guidance on the skill grant program has resulted in uncertainty about the type of training that should be provided. Further, Labor’s new reporting requirements, with the first quarterly report due September 30, 2002, do not require grantees to collect data on individual participants or the level of training being provided. Without these data, Labor cannot identify whom the program is serving or whether the training prepares participants for H-1B level jobs or career ladders leading to those jobs. This limits the ability of Labor to adequately assess the program’s effectiveness and limits the ability of Congress to determine whether the program is accomplishing its goals. The local scholarship grant programs struggled initially with recruiting enough students to fill all available spaces in their programs. However, it appears that this may no longer be a problem now that NSF broadened the program’s financial eligibility requirements. Skill and scholarship grantees have had limited opportunities for sharing information on best practices or how they overcame challenging problems. While Labor recently published a report on exemplary practices of H-1B training programs and has convened two national meetings of grantees, there is no mechanism for grantees to exchange information on lessons learned with each other on an ongoing basis. On the basis of our site visits, the scholarship program grantees also expressed interest in having the opportunity to share information with each other. The skill grant and scholarship programs could also benefit from better communication with one another. For example, local one-stop systems could have helped colleges with scholarship grants recruit potential students for the scholarship program. On the other hand, skill grant programs could have benefited by knowing of scholarship programs in their community, since they could be another resource for participants who had trained through the skill grant program but wanted to continue to work toward a college degree in computer science, engineering, or mathematics. While many efforts to train high-skill workers are underway by different agencies, these efforts are not coordinated across agencies to build on lessons learned and maximize their impact. The progress made at the local level by the skill grant program in building relationships with employers and identifying skills needed has broader implications for enhancing national efforts to meet high-skill needs. At the national level, Labor has initiated some promising efforts such as analyzing workforce needs in health care and IT, two industries in which employers have expressed concerns about labor shortages. In addition, the partnership between Labor and Health and Human Services to support joint efforts to address the nation’s nursing shortage is a positive example of bridging initiatives across agencies. While these efforts by Labor and other agencies are moving in the right direction, a more broad-based, comprehensive approach would help the United States address its high-skill labor needs in a more strategic way. To ensure that the skill grant program can assess its effectiveness and that information about grantees’ successful approaches are shared throughout the program, the Secretary of Labor should implement the new quarterly reporting requirements and expand these requirements to also include information on individual participants and the level of training that is being provided so they can better measure whether the program is achieving its goals and establish ongoing mechanisms to share successful strategies among grantees and encourage networking. To ensure that the scholarship program improves its ability to attract and retain students to computer science, engineering, and mathematics fields, the Director of NSF should establish mechanisms to share successful strategies and encourage networking among the postsecondary schools that are grantees. In addition, in a more overarching effort to be responsive to workforce development needs, the Secretary of Labor should be proactive in building a comprehensive approach within the Department and across federal agencies to address high-skill workforce needs across the country. The Department of Labor, the National Science Foundation, and the Department of Commerce commented on a draft of this report (see apps. VII, VIII, and IX). In general, Labor agreed with our recommendations, although Labor believed that their new reporting requirements will be sufficient to provide needed information to evaluate the program. NSF generally agreed with the report, and provided technical comments. While Commerce raised concerns about the design of our study, Commerce did not take issue with our recommendations. Commerce was more interested in the recent grants awarded than in the implementation of the first three rounds of grant awards that was the focus of our study. The recent grant awards were so new that information was generally not available on participant characteristics or program operations. Because Congress asked us to focus our study on how H-1B programs are operating, we reviewed programs that were already in place. Overall, Commerce’s comments appear consistent with our findings that Labor has not collected sufficient data on the program to judge its effectiveness. The Department of Labor supported our recommendation that the Secretary of Labor take a proactive approach to addressing high-skill workforce needs across the country. Regarding the recommendation about reporting requirements, Labor pointed out that ETA has recently developed a standard format for the quarterly report. However, we believe that the new reporting requirements need to include additional information on participants’ demographic characteristics and the level of training to ensure that Labor and others can evaluate who is being served and how the training relates to occupations that H-1B visa workers fill. Labor concurred with our recommendation that the Department establish mechanisms for grantees to share successful strategies. In fact, Labor noted that ETA has provided grantees with two studies that include information about grantees’ best practices and also plans to provide additional technical assistance support to the H-1B program that will include information sharing. Commerce, in commenting on the draft, was critical of our decision to focus on the skill grants distributed in the first three rounds of grant awards and not on the more recent grantee selections. Commerce notes that the changes in the law in 2000 governing the skill grants and Labor’s program implementation and grantee selection have had an impact on the composition of the training offered. We focused our work on the first rounds of grants because we wanted to obtain information on how grantees were implementing programs. Grantees from the more recent awards begun in December 2001 could have provided little, if any, information on actual participants and training. Commerce was also concerned about our presentation of information on identifying the occupations for which grantees should be training. Commerce states that we drew conclusions by comparing labor condition application data and visa petition data from different years. Our report, however, does not compare these two sources of information, but rather points out that the most recent information available on H-1B visa petitions approved provides a different picture of H-1B workers’ occupations than was identified through the labor condition application data. Further, as we noted in the report, grantees began their analysis of workforce needs with data on H-1B occupations from labor condition applications, but their decisions about occupations in which to train were based on local labor market conditions and employers’ needs. Regarding our reporting on educational requirements for H-1B workers in IT occupations, Commerce commented that we failed to contrast others’ data on the high portion of workers in IT who have a bachelor’s or higher degree with the education profile of participants at grantees we surveyed. The education data we present on participants reflect their education profiles when they entered the programs. Participants may achieve degrees as a result of the training. Further, we believe that at the time of our survey it was too early to evaluate the number of degrees participants attained because many longer programs were not yet completed. We agree with Commerce’s comment that we provide limited information on the level of training being provided; however, this information is the most extensive data grantees could provide and was not available from any other sources prior to our study. Consequently, we have included a recommendation to Labor regarding data collection. Commerce also noted that individual duties could vary within the same occupational title. We recognize in the report that some occupation titles are vague, but believe that the INS analysis that we present is helpful to identify those occupations that could qualify as H-1B occupations, while recognizing that some are too vague to categorize. In addition, Commerce said we imply that a specific company’s training of junior engineers might reduce this firm’s need for an H-1B worker. This example was included to point out only that these workers trained with H-1B grants could perform some duties otherwise performed by an H-1B worker. Commerce also comments that we should have explored the implementation of the career ladder concept with grantees. Our discussions of career ladders focused on the level of training provided and led to our discussion in the report about grantees’ desire to have more assistance in developing and defining career ladders. Commerce also expressed some concerns regarding our review of the NSF scholarship program. However, the additional areas that they believe we should have explored, such as whether the scholarships are attracting students who would otherwise not have pursued degrees in these disciplines, would have required resource-intensive approaches, such as surveying schools and scholarship recipients, and were beyond the scope of this study. Because much information was available directly from NSF’s program database, we chose to rely on this participant data for our study. All three agencies provided technical comments, which we incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Secretary of Labor, the Director of NSF, the Secretary of Commerce, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on 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) 512-7215 or Joan T. Mahagan at (617) 565-7532. Other key contributors to this assignment are listed in appendix X. We took several steps to determine how the skill grant and scholarship grant programs are being administered and the areas and skill levels in which they train. We judgmentally selected 12 grantees (see table 2) from the skill grant program to visit from the first 3 rounds (43 grants) funded within the skill grant program. Those selected represented various geographic locations; rural and urban service delivery; participation from all three grant rounds; and a mixture of areas of training. For each grant, we met with key individuals, such as representatives from the workforce investment boards and for most grants, employers, participants, and training providers. We discussed their objectives; their decisions on the occupational areas in which to train, level of training, and methods of delivering training; their outreach to potential training participants and employers; and their views on the benefits and challenges of operating these programs. We also surveyed all 43 of the round 1, 2, and 3 grantees to obtain specific data, such as the kinds of participants they were serving, the types of training they offered, and their sources for data on workforce needs. While all 43 grantees returned their surveys, as noted in the report, some could not provide information to all questions, particularly those requesting detailed participant demographics. Because this survey was sent to all 43 grant recipients, there is no sampling error, but the practical difficulties of administering any questionnaire may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted by a survey respondent could introduce unwanted variability in the questionnaire’s results. We took steps in developing the questionnaire, the data collection, and the data editing and analysis to minimize nonsampling errors. (The survey instrument is provided in app. II.) We obtained Immigration and Naturalization Service (INS) Adjudications Division’s views on how the occupations for which the grant programs trained compared with H-1B visa workers’ occupations. In addition, we analyzed descriptions of programs funded with more recent skill grants. We also visited six colleges (see table 3) that received scholarship grants, selected to give us a mix of publicly funded and privately funded schools, 2-year and higher-degree granting schools, and geographic representation. We discussed with program officials their outreach to students, support services to students, and views on the benefits and challenges of the program. To obtain specific information on the grantees and students, we analyzed the National Science Foundation (NSF) database of participants and schools. To provide views on the overall programs and the extent to which these programs are coordinated with other workforce development programs designed to meet high-skill training needs, we discussed these programs with officials from the Department of Labor, NSF, the Department of Commerce, the National Association of Workforce Boards, and groups representing industry. We also performed an extensive Internet search to identify programs that key agencies are sponsoring to meet high-skill training needs. The survey mailed out to the 43 grantees that received skill grants in the first three funding rounds provided much data on those programs. The tables below provide data from the surveys beyond the data provided in the report. This table provides additional data on the students in the Computer Science, Engineering, and Mathematics Scholarship Program. This table presents data on occupations for which the grantees train, as provided by the 43 grantees that received skill grants in the first three funding rounds. The following programs and initiatives were identified as having at least a component that addresses the need for high-skills in the following ways: training; education and scholarships; recruitment to high-skill fields; collaborative efforts within/among agencies; and resources and information related to high-skill areas. This list is not comprehensive, but serves as an illustration of various efforts and resources that currently exist. 21st Century Workforce Initiative–mission to ensure that all American workers have as fulfilling and financially rewarding a career as they aspire to have and make sure no worker gets left behind in the limitless potential of the dynamic, global economy of this new millennium. Office of the 21st Century Workforce–created by executive order June 20, 2001, to gather and disseminate information relating to workforce issues by conducting summits, conferences, meetings, and other appropriate forums. The executive order also established the President’s Council on the 21st Century Workforce to provide information and advice on issues affecting the 21st century workforce. A Memorandum of Understanding is under development between the Department of Labor and the Department of Health and Human Services to address issues such as the nursing shortage. H-1B Technical Skill Training Grants–provides grants for technical skills training to employed and unemployed individuals in occupations that are in employer demand. Grants are provided to local workforce investment boards, private industry councils or regional consortia, and to partnerships that consist of at least two businesses or a business- related nonprofit organization. Information Technology Industry Outreach Initiative–Grant awarded to the Computer Technology Industry Association in 5/01 and ends in 12/02–to expand apprenticeship in the IT occupational area. This includes developing and testing an IT apprenticeship model in five pilot sites and creating a structure to market and support IT apprenticeships. Serves as the One-Stop office within ETA (national and regional offices) for any issues related to WIA and provides support to state and local officials as they build One-Stop systems. Also fosters partnerships on workforce issues with other federal agencies such as the Department of Education, the Department of Health and Human Services, and the Department of Housing and Urban Development. WIA Adult and Dislocated Worker Programs–provide three levels of services to adults 18 years and older. These services include: core services (job search and placement assistance, etc.); intensive services (comprehensive assessments, case management, etc.); and training services (occupational skill training, skill upgrading, etc.). Program/initiative Discretionary grants that relate to H-1 B skill grants: Information Technology Association of America Grant–conduct a series of targeted activities to inform IT companies about the role of workforce investment boards in local communities. Skills Shortages, Partnership Training/System Building Demonstration Program–awarded grants to 11 states and the District of Columbia to help establish regional partnerships to respond to employers’ identified skill shortages. Minority Colleges and Universities Workforce Partnerships and Training Strategies to Address Skill Shortages Demonstration Program–awarded grants to 13 minority colleges and universities to develop new systems to train workers for high-skill jobs in areas where companies are facing labor shortages. Incumbent/Dislocated Worker Skill Shortage II Demonstration Program–awarded grants to 19 communities to create projects or industry-led consortia to upgrade current workers, design/adapt training curricula in skill shortage occupational areas, and recruit/retrain workers in this area. Occupational Information Network–database accessible from any Web browser that contains comprehensive information on job requirements and worker competencies. Computer Science, Engineering and Mathematics Scholarships– grants to postsecondary schools that distribute the funds as scholarships for academically talented, low-income students in computer science, computer technology, engineering, engineering technology, or mathematics. Program for Gender Equity in Science, Mathematics, Engineering and Technology–grants to support research, demonstration, and dissemination projects that broaden the participation of girls and young women in science, mathematics, engineering, and technology education. Addresses middle school, high school, and undergraduate education. Science, Technology, Engineering, and Mathematics Talent Expansion Program–planning and pilot grants to academic institutions to increase the number of students (U.S. citizens or permanent residents) pursuing and receiving associates or baccalaureate degrees in science, technology, engineering, and mathematics. Noyce Scholarship Supplements–institutions of higher education that lead or are partnering in other NSF grants can receive supplemental funding for scholarships to encourage science, engineering, and mathematics majors and professionals to become K-12 mathematics and science teachers. Advanced Technological Education–grants to promote improvement in technological education at the undergraduate and secondary school levels by supporting curriculum development; preparation and professional development of college faculty and secondary school teachers; internships and field experiences for faculty, teachers, and students, and other activities. National Medal of Technology–presidential award to individuals, teams, or companies for accomplishments in the innovation, development, commercialization, and management of technology. First awarded in 1985. Review and study of high-tech workforce training programs in the United States–authorized by the American Competitiveness in the 21st Century Act of 2000. Work Force Reports–The Digital Work Force: Building Infotech Skills at the Speed of Innovation—a report on the demand for highly skilled information technology workers and its August 2000 Update, and Digital Workforce State Data and Rankings. Go 4 IT! Web site–maintains this site to provide information on IT education, employment, and training programs. GetTech–partnership developed by the Department of Commerce’s Office of Technology Policy and the National Association of Manufacturer’s Center for Workforce Success to encourage young people, particularly those in middle school, to prepare for careers in mathematics, science, and technology. Manufacturing Extension Partnership–nationwide network of not-for- profit centers in over 400 locations nationwide to provide assistance to small and medium-sized manufacturers. If this assistance includes obtaining new equipment, these centers may provide training on the new equipment. Technology-Led Economic Development–Web site that identifies federal, state, and local initiatives related to technology-led economic development. Agency/office Department of Education Office of Vocational and Adult Education (OVAE) Preparing America’s Future–initiative that provides a framework to connect OVAE’s activities to support education reform and prepare the 21st century workforce. This effort organized three teams, High School Excellence Team; Community and Technical Colleges Team; and Adult Learning Team, to develop a coherent strategy for preparing America’s future with implications for policy and practice. Carl D. Perkins Vocational-Technical Education Act Amendments of 1998–provides federal funding for vocational and technical education programs and services to youth and adults. The majority of the funds are awarded as grants to state education agencies as State Basic Grants and Tech Prep Grants. Career clusters–established 16 broad career clusters that consist of entry level through professional-level occupations in a broad industry area. Each cluster includes academic and technical skills and knowledge needed for further education and careers. IT Career Cluster Initiative–partnership of the Education Development Center, Inc., the Information Technology Association of America, and the National Alliance of Business to create a national model and career cluster curricular framework for IT careers. This initiative is sponsored by the Department of Education and National School-to- Work Office. Community Technology Centers program–grants to create or expand community technology centers that will provide disadvantaged residents of economically distressed urban and rural communities with access to information technology and related training. Grants to address emerging nursing shortage include: Advanced Education Nursing Traineeship grants. Advanced Education Nurse Anesthetist Traineeship grants. Geriatric Nursing Knowledge and Experiences in Long-Term Care Facilities grants. Nurse Faculty Development in Geriatrics grants. Cooperative agreements for health workforce research—available for state or local governments, health professions schools, schools of nursing, academic health centers, community-based health facilities, and other appropriate public or private nonprofit entities, including faith-based organizations to conduct research that will contribute to (1) the development of information describing the current status of the health professions workforce and (2) analysis of fundamental health workforce related issues. Information Communications Technology Voluntary Partnership– sponsoring research for the development of skill standards and the potential alignment of industry-based certifications in the Information Technology and Telecommunications sector. In addition to those named above, Laura J. Heald, Carol L. Patey, and Tatiana Winger made important contributions to this report. Stuart M. Kaufman, Corinna A. Nicolaou, and Beverly Ross also provided key technical assistance. | In recent years, U.S. employers have complained of shortages of workers with higher-level skills in information technology, the sciences, and other fields. To find workers with these skills, employers often turn to foreign workers who enter the United States with H-1B visas to work in specialty occupations. Despite the recent economic downturn, employers report that they continue to need higher-skilled workers. Congress passed the Workforce Investment Act of 1998 to create a system connecting employment, education, and training services to better match workers to labor market needs. In 1998, Congress passed legislation raising limits on the number of high-skilled workers entering the United States and imposing a $500 fee on employers--which was later raised to $1000--for each foreign worker for whom they applied. Most of the money collected is to be spent on training that improves the skill of U.S. workers. The National Science Foundation (NSF) receives 22 percent of the funds to distribute as scholarship grants to post-secondary schools that distribute the funds as scholarships for low-income students in computer science, engineering, and mathematics degree programs. The grantees operating skill grant programs use the flexibility allowed by the Department of Labor to administer training through a variety of service delivery options to individuals whose skills need to be upgraded, whereas NSF's scholarship grant programs provide scholarships to low-income students for college degree programs. The training offered by the skill grant programs is based on local workforce needs, although sometimes for lower-skill jobs than those filled by H-1B visa holders, and the scholarship program's training is based on national workforce needs and the types of jobs that many H-1B visa holders fill. Although federal initiatives are not coordinated to strategically address high-skill needs at a national level, local skill grant programs increased coordination, though Labor provided limited assistance to enhance these efforts. |
This section describes TVA’s (1) legislation and governance, (2) operations and planning, (3) debt ceiling, and (4) retirement system. TVA is an independent federal corporation established by the TVA Act. The act established TVA to improve the quality of life in the Tennessee River Valley by improving navigation, promoting regional agricultural and economic development, and controlling the floodwaters of the Tennessee River. To those ends, TVA built dams and hydropower facilities on the Tennessee River and its tributaries. From its inception in 1933 through fiscal year 1959, TVA received annual appropriations to finance its cash and capital requirements. In 1959, however, Congress amended the TVA Act and provided TVA with the authority to finance its power program through revenue from electricity sales and borrowing and required it to repay a substantial portion of the annual appropriations it had received to pay for its power facilities. Under the TVA Act, TVA must design its rates to cover all costs but also keep rates as low as feasible. TVA must charge rates for power that will produce gross revenues sufficient to provide funds for its costs including operating, administrative and maintenance costs. TVA can borrow by issuing bonds and notes, an authority set by Congress that cannot exceed $30 billion outstanding at any given time. Legislation also limits competition between TVA and other utilities. When the TVA Act was amended in 1959, it prohibited TVA, with some exceptions, from entering into contracts to sell power outside the area where it or its distributors were the primary source of power supply on July 1, 1957. This is commonly referred to as the “fence,” because it limits TVA’s ability to expand substantially outside its service area. In addition, the Federal Power Act includes a provision that helps protect TVA’s ability to sell power within its service area. This provision, called the “anti- cherrypicking” provision, exempts TVA from being required to allow other utilities to use its transmission lines to deliver power to customers within its service area. The anti-cherrypicking provision reduces TVA’s exposure to loss of customers and competition from other utilities. A nine-member Board of Directors nominated by the President and confirmed by the U.S. Senate administers TVA. The board sets TVA’s goals and policies, appoints the CEO, develops long-range plans, seeks to ensure those plans are carried out, and approves TVA’s budget. The board also approves rate changes and has the sole authority to set wholesale electric power rates and approve the retail rates charged by TVA’s distributors. TVA’s board approves the agency’s strategic plan which outlines TVA’s broad goals, priorities, and performance measures. TVA’s most recent strategic plan covers fiscal years 2014 through 2018 and outlines its “strategic imperatives”—namely, to “maintain low rates, live within our means, manage our assets to meet reliability expectations and provide a balanced portfolio, and be responsible stewards of the region’s natural resources.” In August 2013, TVA’s board approved the goal to reduce TVA’s debt to about $22 billion by fiscal year 2023. TVA developed this goal during its fiscal year 2014 long-term financial planning process, but TVA updates its long range financial plan each year. The TVA board approves the budget each fiscal year, and the board is updated at least semi-annually on the long-range financial plan. TVA uses a 10-year long-range financial plan to determine the amount of funds that will be available for capital investment. Operating priorities are detailed in business unit plans, such as the power supply plan, the transmission assessment plan, and the coal and gas operations asset plan. In addition, TVA files publicly available quarterly and annual financial reports with the Securities and Exchange Commission. TVA also submits a budget proposal and management agenda (performance report) to Congress and a performance budget (performance plan) to OMB. To meet demand for electricity, utilities can construct new plants, upgrade existing plants, purchase power from others, and provide incentives to customers to reduce and shift their demand for electricity through energy efficiency or demand-response programs. Since its establishment, to meet the subsequent need for more electric power, TVA has expanded beyond hydropower to other types of power generation such as natural gas, coal, and nuclear plants. In fiscal year 2016, TVA provided nearly 159 billion kilowatt-hours to customers from its power generating facilities and purchased power, as shown in figure 1. To guide TVA decisions about the resources needed to meet future demand for electricity and determine the most cost-effective ways to prepare for the future power needs of its customers, TVA periodically develops an integrated resource plan (IRP). TVA’s 2015 IRP found no immediate needs for new baseload plants—plants that generally have been the most costly to build but have had the lowest hourly operating costs—beyond the completion of the Watts Bar Unit 2 nuclear plant in Tennessee and the expansion of capacity at the Browns Ferry nuclear plant in Alabama. In October 2016, TVA completed Watts Bar Unit 2— the first nuclear unit to enter commercial operation in 20 years. Beyond those projects, the 2015 IRP found that TVA could rely on additional natural gas generation, greater levels of cost-effective energy efficiency, and increased contributions from competitively priced renewable power. TVA develops forecasts of demand for electricity that help it make resource planning decisions, such as how much and what kind of capacity to build, how much power to buy from other sources, or how much to invest in energy efficiency. To forecast the demand for electricity in its service area for the next 20 or more years, TVA employs a set of models but forecasting beyond a few years into the future involves great uncertainty. Utilities deal with uncertainty partly by producing a range of forecasts based on demographic and economic factors, and by maintaining excess generating capacity, known as reserves. Models help utilities choose the least-cost combination of generating resources to meet demand. If demand forecasts are unreasonably high or low, a utility could end up with more or less generating capacity than it needs to serve its customers reliably, or it could end up with a mix of generating capacity that is not cost effective. These outcomes can affect electricity rates as well as the utility’s financial situation. TVA experienced less than anticipated electricity demand growth over the past 20 years and now forecasts little, if any, growth in demand for electricity in the upcoming years. Congress increased TVA’s debt ceiling four times from 1966 to 1979, from $750 million to $30 billion. In the years following these increases, TVA’s financial condition worsened, largely as the result of construction delays, cost overruns, and operational shutdowns in its nuclear program. In the late 1960s and 1970s, TVA started construction on 17 nuclear units but completed only 7 because of lower-than-anticipated demand for electricity, resulting in billions of dollars of debt. In February 2001, we reported that TVA had about $6.3 billion in unrecovered capital costs associated with uncompleted and nonproducing nuclear units. In fiscal year 2016, TVA had about $1.1 billion in unrecovered costs associated with uncompleted nuclear units. While the debt ceiling has not been changed since 1979, TVA’s business and operations have grown along with the power needs of the Tennessee Valley. TVA has continued to add generating capacity to the system, as its customer base has increased, and environmental spending requirements have increased. TVA generally uses debt financing for capital investments in new generation capacity and environmental controls and uses revenues for operation and maintenance of the power system. TVA can borrow funds at competitive interest rates as a result of its triple-A credit rating which is based, in part, on its ownership by the federal government. Appendix I includes historical data on TVA’s debt and other selected financial data. TVA’s board established TVARS in 1939. TVARS is a separate legal entity from TVA and is administered by a seven-member Board of Directors. The TVARS board manages the retirement system, including decision-making on investment portfolios, the interest rate or rates used in actuarial and other calculations, and benefits. The Rules and Regulations of the TVA Retirement System (TVARS Rules) establish how the retirement system is administered and what benefits are payable to participants. The TVARS Rules establish the minimum amount TVA must contribute to the system each year. The TVARS board can amend the TVARS Rules, but TVA has veto power and amendments proposed by the TVARS board become effective only if TVA does not exercise its veto within 30 days. As a governmental plan, TVA’s plan is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans in the private sector. As of September 30, 2016, the defined benefit pension plan (which we refer to as the pension plan in this report) had about 34,000 participants, of whom about 24,000 were retirees; it is a “mature” plan, in that there are more than twice as many retirees and beneficiaries as employees participating in the plan. To meet its goal to reduce its debt from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023, TVA plans to increase revenue through rate increases, limit the growth of operating expenses, and reduce capital expenditures. TVA’s plans assume the completion of capital projects will occur on time and within budget. TVA’s plans also include costs for investigating the development of new nuclear technology but do not include capital costs for construction. According to TVA officials, TVA aims to increase its overall financial flexibility over the long term to ensure sufficient room under the debt ceiling so it can access capital for future investments to meet its mission. TVA plans to gradually decrease debt through 2023 (see fig. 2). To meet its goal to reduce its debt to about $22 billion by fiscal year 2023, TVA’s plans include the following. Rate increases. TVA’s plans include annual rate increases not to exceed 1.5 percent of the retail rate as needed to maintain its debt reduction trajectory. According to TVA officials and documents, TVA’s plans included rate increases of 1.5 percent for about $200 million in annual revenue. TVA can use increased revenue to refinance existing debt or to fund certain expenditures rather than taking on new debt, but TVA’s board must approve rate increases. TVA increased rates each fiscal year from 2014 through 2017. According to TVA officials, annual rate increases through 2023 could result in the reduction of debt to about $19.8 billion by fiscal year 2023, which would exceed the agency’s debt reduction goal. Limits in the growth of operating expenses. TVA plans to continue evaluating its operations and to limit the growth of its operating expenses. Having fewer operating expenses frees up revenue from rates that TVA can use to repay outstanding debt or fund certain expenditures without taking on new debt. In fiscal year 2016, TVA’s O&M expenses totaled about $2.8 billion—a reduction of about 18 percent from $3.4 billion in fiscal year 2013. As part of its cost-reduction initiatives, TVA eliminated 2,200 positions through attrition and elimination of vacant positions. TVA plans to pursue additional workforce reductions to offset increases in retirement benefit and labor costs. According to TVA documents, reductions in expenses associated with coal plant closures will offset some of the increase in labor-related costs but other reductions will be required. TVA officials said that additional reductions could involve contract labor in its nuclear group. In July 2016, TVA offered a voluntary reduction-in-force program to all 3,500 employees in its nuclear group, providing an opportunity to retire or depart; as of January 2017, TVA officials had not provided information on the number of employees participating in this program. In fiscal year 2016, TVA’s workforce included 10,691 employees and 12,729 contractors. According to TVA documentation, as a major component of its O&M costs, TVA continuously evaluates its staffing levels, both employees and contractors. TVA plans are being finalized, over the next several years, to decrease the overall workforce through various mechanisms as TVA aligns its workforce with changes to its generating assets; these mechanisms may include reductions-in-force, attrition, and elimination of vacant positions. However, early retirements and severance associated with workforce reductions could also pose additional expenses. Reductions in capital expenditures. TVA plans to reduce its capital expenditures through fiscal year 2023. Over the past decade, TVA’s capital expenditures increased by over 180 percent—from about $1.2 billion in fiscal year 2006 to about $3.4 billion in fiscal year 2015. TVA aims to decrease capital expenditures to about $1.8 billion by fiscal year 2023 (see fig. 3). Based on its electricity demand forecast, TVA does not anticipate the need for additional baseload capacity until the 2030s beyond completion of Watts Bar Unit 2—which cost about $4.7 billion—and capacity expansion at three nuclear units. TVA’s capital expenditure plan from fiscal years 2016 through 2023 includes a total of about $17.4 billion; about $8.3 billion for base capital projects to maintain the current operational state, about $5.2 billion for capacity expansion projects, and about $3.9 billion for environmental and other projects. Under TVA’s financial guiding principles, TVA may issue debt for new assets, including capacity expansion and installation of environmental controls, but, according to TVA officials, TVA plans to primarily fund capital expenditures with revenue, as opposed to issuing new debt, to reach its debt goal. TVA increased construction expenditures from fiscal years 2006 through 2016 from about $1.4 billion ($1.6 billion in 2016 dollars) to about $2.7 billion while reducing the amount of new debt issued (see fig. 4). According to TVA officials, TVA’s plans assume that the completion of capital projects will occur on time and within budget. TVA’s plans included the assumption that it would complete construction of a new nuclear unit—Watts Bar Unit 2—in 2016. Watts Bar Unit 2 began commercial operation in October 2016. By completing construction of this unit in 2016, a key assumption underlying TVA’s debt reduction plans was met. However, TVA’s plans include other key capital projects such as the construction of two natural gas plants, modification of a coal plant to install clean air controls, and two smaller nuclear projects. Information about these two nuclear projects follow. Browns Ferry extended power uprate (EPU). TVA’s capital plans include a project that aims to increase generation capacity at the Browns Ferry nuclear plant’s three existing units. TVA began the project in 2001 and anticipated completion within 2 to 4 years but the project remains incomplete. As of September 30, 2016, TVA reported that it anticipates completion of the project by 2024 at a total estimated cost of about $475 million—an increase of 25 percent from an estimated $380 million in fiscal year 2014. According to TVA documentation, the agency spent about $191 million on the project through fiscal year 2016. The project involves engineering analyses and modification and replacement of certain existing plant components to enable the units to produce additional power. To allow operation at the higher power level, the license for each unit requires modification that would occur in parallel with the NRC license amendment review process. TVA originally submitted the licensing amendment requests to NRC in June 2004. However, TVA withdrew these requests in September 2014 and submitted a new request in September 2015. According to NRC, it is planning to complete its review by fall 2017. Watts Bar Unit 2 steam generator replacement. TVA’s capital plans include about $438 million to replace steam generators at the newly operational unit. The existing generators prematurely developed leaks and other problems occurred at nuclear plants, including Watts Bar Unit 1 which required replacement of the generators 9 years into operation. According to TVA officials, TVA has completed steam generator replacements at other nuclear units without significant cost overruns or schedule delays. Given historical trends in nuclear construction, TVA’s estimated capital costs may be optimistic and could increase. Any cost overruns or delays on its nuclear or other capital projects could require adjustments to its future financial plans. TVA’s history of cost overruns and schedule delays includes the construction of Watts Bar Unit 2 which began commercial operation in October 2016 after decades of construction (see table 1). TVA did not complete another nuclear project. TVA auctioned off the 1,400 acre site of the Bellefonte nuclear plant in Alabama, including two unfinished nuclear units, in November 2016 for $111 million—a fraction of the approximately $5 billion TVA had spent on the plant. TVA began building the plant in 1974, but several stops and starts in construction occurred primarily as a result of lower-than-anticipated growth in electricity demand. According to TVA officials, TVA decided again to complete unit 1 in 2011 but stopped work in 2013 because of reduced electricity demand, Watts Bar Unit 2 concerns, and anticipated increases in construction costs. In 2013, TVA estimated that the cost to complete the unit had grown from its prior approved cost of $4.9 billion to at least $7.5 billion or more. TVA stated that it wanted to complete Watts Bar Unit 2 and await the results of its IRP process. Based on the 2015 IRP, TVA decided not to complete construction of Bellefonte. According to TVA documentation, TVA spent about $10 million to $12 million annually maintaining the Bellefonte site. TVA’s plans do not anticipate any such events occurring with its current projects that would interfere with timely completion within budget. TVA’s plans include costs for investigating the development of new nuclear technology but do not include capital costs for construction of the technology. Specifically, TVA is assessing the potential of its Clinch River site in Tennessee for the construction of small modular reactors (SMR). According to TVA documentation, these efforts include research and development activities that support its technology innovation mission. In 2016, TVA submitted an early site permit application to NRC to assess the suitability of the site for construction and operation of SMRs at its 1,200-acre Clinch River site. An early site permit is valid for up to 20 years and would address site safety, environmental protection, and emergency preparedness associated with any of the light-water reactor SMR designs under development in the United States. According to TVA documentation, TVA has not selected a technology and has not entered into any contracts for design work. If TVA decides to construct SMRs, its costs are uncertain but could total about $3 billion after cost sharing through public-private partnerships but expenditures prior to a construction decision would be a very small portion of this cost, according to TVA documentation. The total estimated costs for TVA to develop, submit, and support the NRC application and review include about $72 million, according to an interagency agreement with DOE, and TVA is responsible for half of these costs. According to TVA documentation, the agency spent about $23 million on SMR activities through fiscal year 2015 and estimates spending about $5 million in fiscal year 2016. According to TVA, it spends about $10 million to $15 million on research and development activities each year as part of its technology innovation organization (not including spending on SMRs). TVA officials said that the agency will not decide whether or not to construct SMRs for at least 5 years. However, TVA is investigating SMRs even though its 2015 IRP found that TVA does not need additional baseload power plants beyond the projects currently under way and that SMRs are cost-prohibitive. TVA’s debt reduction plans and performance information are not reported in a manner consistent with GPRAMA requirements. GPRAMA requires agencies, including TVA, to report major management challenges that they face, and for each major management challenge that agencies develop and report performance information—including performance goals, measures, milestones, and planned actions to resolve the challenge. TVA identifies managing debt and its unfunded pension liabilities as major management challenges but TVA has not reported required performance information in its annual performance plan or report on these challenges. For managing debt, TVA’s CEO stated a goal for debt reduction by 2023 during a congressional hearing in April 2015 and the goal is reported in internal documents and Board presentation slides available on TVA’s website. In addition, according to TVA’s 2016 performance report, its strategic objectives include “effectively manage debt to ensure long-term financial health.” TVA’s 2016 performance report includes a goal related to total financing obligations for fiscal years 2016 and 2017, but the goal shows these obligations increasing, and the report does not include information on planned actions to resolve the challenge. Although TVA established a goal to reduce its debt, it has not documented in its annual performance plan or report strategies for how it will meet its goal, as required by GPRAMA, thereby reducing transparency and raising questions about how the agency will meet its goal. For TVA’s unfunded pension liabilities, TVA officials have stated a goal to eliminate the pension funding shortfall (about $6 billion at the end of fiscal year 2016) by 2036, but TVA has not identified such a goal or milestones in its performance plan or report. As of September 30, 2016, TVA’s pension plan was about 54 percent funded with a funding shortfall of about $6 billion (plan assets totaled $7.1 billion and liabilities $13.1 billion). While TVA’s debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years (see fig. 5). Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. According to a joint American Academy of Actuaries and Society of Actuaries task force, a pension plan needs to be evaluated as part of a plan sponsor’s overall enterprise; an analysis that looks at the pension plan as a self-standing entity is incomplete and too narrow. However, TVA officials told us that because TVA uses revenue from the rates it charges customers to fund the pension, and not debt in the form of bonds, unfunded pension liabilities would not affect TVA’s debt reduction plan. In addition, TVA defers pension costs as “regulatory assets”— incurred costs deferred for recovery through rates in the future—in accordance with accounting standards and with TVA board approval. However, because TVA will need to recover these costs through rates in the future, this affects its financial health and operations. If TVA uses revenue from rate increases to close the pension shortfall, this could decrease its ability to fund other activities such as capital projects with revenue from rates. This could, in turn, require TVA to rely on debt to fund certain capital projects and interfere with efforts to meet overall debt reduction goals. Alternatively, further rate increases could interfere with TVA’s objective of keeping rates as low as feasible. Without the Board of Directors ensuring that TVA better document and communicate information about its goals to reduce debt and unfunded pension liabilities in its performance plan and report, including strategies for achieving its goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. Several factors could affect TVA’s ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. In addition, TVA aims to eliminate its $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but no mechanism is in place to ensure TVA fully funds the liabilities if, for example, plan assets do not achieve expected returns. Several factors could affect TVA’s ability to meet its debt reduction goals, including regulatory pressures that could require additional capital investment, changes in demand for electricity, technological innovations, or unforeseen events that could affect revenues or require additional investments. TVA’s fossil fuel and nuclear power plants are, or potentially will be, affected by existing and proposed environmental and other regulations, and the implementation of these regulations may require TVA to make additional capital investments. For example, TVA estimates it will spend about $2 billion on environmental expenditures and compliance with regulations from 2017 through 2023 but, according to a TVA document, this estimate could change as additional information becomes available and regulations change. TVA spent about $977 million to eliminate the wet storage of coal combustion residual, commonly called coal ash, to assist in meeting EPA and Tennessee Department of Environment and Conservation environmental requirements. As part of these efforts, TVA prepared a June 2016 environmental impact statement on the approach it planned to take for closing coal ash impoundments at its coal plants, which involved converting all its wet storage to dry storage. According to a TVA document, the agency anticipates spending about an additional $1.2 billion in related coal ash costs through 2022. While the status of the Clean Power Plan that EPA issued in 2015 is unclear, TVA continues to assess the plan and its status. According to TVA documentation, TVA is well positioned to meet carbon emission guidelines for existing fossil fuel plants under the plan. Specifically, in April 2011, TVA agreed to retire 18 of its 59 fossil fuel units by the end of 2017 for several reasons, including the cost of adding emission control equipment and other environmental improvements to the units. As of September 2016, TVA had retired 14 of the 18 units and reported that it would continue to evaluate the appropriate asset mix, given the costs of continuing to operate its coal plants, including adhering to environmental regulations. With regard to TVA’s nuclear power plants, TVA also faces potential costs related to proposed regulations. For example, in May 2014, NRC notified certain nuclear power plant licensees of the results of seismic hazard screening evaluations performed following the Fukushima nuclear accident. Based on the screening results, TVA must conduct additional seismic risk evaluations of all three of its nuclear plants—Browns Ferry, Sequoyah, and Watts Bar—by 2019. According to TVA, NRC is developing a rule anticipated in mid-2017 for nuclear plants to mitigate the effects of events, such as seismic events, that exceed plant design standards that could require TVA to modify one or more of its nuclear plants. According to TVA documents, plant modification costs will be unknown until the rule is finalized, but they could be substantial. Reductions in demand for electricity could affect TVA’s revenues; alternatively, increases in demand could generate additional revenue but require investment in additional capacity or purchased power. The expanded use of distributed generation and increased energy efficiency and conservation could reduce demand for electricity in TVA’s service area and affect its revenues. As the amount of distributed generation grows and renewable generation and energy efficiency technologies improve and become more cost-effective, TVA projects sales of electricity will see little, if any, growth in upcoming years. According to several representatives from industry and stakeholder groups, distributed generation could increase competition from end-use customers— consumers who typically buy power from the local power companies that obtain power from TVA—if they adopt on-site power generation. According to EIA’s Annual Energy Outlook 2016, annual electricity demand for the average household will decline by 11 percent from 2015 to 2040. EIA reported that factors contributing to a decline in household demand include efficient lighting technologies and increased distributed generation, particularly rooftop solar. According to TVA documents, the agency cannot predict the financial impact from future growth of distributed generation but TVA has taken steps to anticipate the changes in the electricity market that distributed generation could bring. For example, in 2016, TVA announced a new business unit focused on distributed energy resources and the energy delivery marketplace, and according to a TVA official, it also formed information exchanges to provide forums to discuss implementation issues related to distributed generation and energy efficiency. Other technological developments in the electric utility industry could change TVA’s operating costs or requirements. For example, several representatives we interviewed from industry and stakeholder groups said that energy storage technology could become more cost-effective and change the way utilities operate. While the added capacity provided by energy storage could delay or alleviate the need for TVA to build additional power plants, TVA officials said that there are still several unknowns about the technology though they do not believe integration of battery storage into the system would be problematic. Finally, unforeseen events could also affect TVA’s ability to meet debt reduction goals. For example, the 2008 Kingston coal ash spill cost about $1.2 billion to remediate—costs TVA is still recovering. TVA plans to make annual contributions of $300 million to the pension plan, or more if required by the TVARS Rules, for up to 20 years. According to TVA’s analysis, there is a 50 percent chance that annual contributions of $300 million could eliminate the $6 billion funding shortfall at the end of 20 years and a 50 percent chance that a funding shortfall would remain. TVA’s analysis assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. According to TVA officials, the pension plan asset performance is critical to TVA’s ability to close the pension funding shortfall. TVA officials have stated a goal to fully fund the pension plan within 20 years. However, if market conditions over the next 20 years are not favorable enough to fully fund the pension liabilities, which TVA’s analysis assigns a 50 percent chance, TVA would need to contribute more than $300 million per year to make up the difference if it aims to eliminate the funding shortfall. Other factors that could affect TVA’s pension liabilities include greater than expected increases in retiree lifespans and declining bond yields. In a 2010 report, the TVA OIG found that a combination of factors— including market conditions and TVA actions—resulted in a significant shortfall between pension plan assets and projected liabilities. These factors included: (1) TVA not making contributions to TVARS for 6 years, (2) the addition of significant retirement benefits to the plan when the funded status was better, (3) the establishment of TVARS Rules that had the effect of enticing employees to retire, and (4) the economic downturn in 2008 and 2009. The TVARS pension plan’s funded status decreased from about 92 percent in 2007 to about 55 percent in 2016 (see fig. 6). In December 2015, TVA proposed changes to the TVARS Rules to reduce the obligations of the pension plan and commit to making consistent contributions. The TVARS board approved amendments that reduced TVA’s pension liabilities by about $960 million, reduced future benefit accruals, and added a minimum contribution requirement of $300 million to the existing requirement for a period of 20 years. However, the amended TVARS Rules do not adjust TVA’s annual contribution requirement to ensure TVA will fully fund its pension liabilities. The TVARS Rules require that for a period of 20 years, or until the plan is deemed fully funded, TVA’s annual contribution equal the greater of (1) a formula-based contribution or (2) $300 million. To the extent that a $300 million contribution proves inadequate because of plan experience, the formula-based contribution would determine the amount TVA must contribute each year. The formula uses a 30-year “open amortization method,” meaning that the amortization period is reset to 30 years each fiscal year, so the end of the amortization period (i.e., paying off the unfunded liability) may never be achieved. A Blue Ribbon Panel commissioned by the Society of Actuaries believes that plans’ risk management practices and their ability to respond to changing economic and market conditions would be enhanced through the use of amortization periods shorter than the 30-year period commonly used today. The panel recommended amortization periods of no more than 15 to 20 years for gains and losses. According to the panel’s 2014 report, the panel believes that fully funding pension benefits of public employees over their average future service reasonably aligns the cost of today’s public services with the taxpayers who benefit from those services. In addition, according to the American Academy of Actuaries, funding rules should include targets based on accumulating the present value of benefits for employees by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a defined and reasonable time period. In the private sector, ERISA generally requires a 7-year amortization of shortfalls for private sector single- employer pension plans. Unlike an open amortization period, a closed, or fixed, amortization period is generally maintained until the original unfunded liability amount is fully repaid. Thus, a closed amortization period would be a better practice if the goal is to fully fund pension liabilities. Table 2 compares the amortization of $6 billion in unfunded liabilities using open and closed amortization methods, assuming assets return 7 percent, as TVA expects. The closed amortization method would extinguish the unfunded liability in 30 years, whereas more than $4 billion in unfunded liability would remain under the open amortization method (see table 2). As we mentioned earlier, TVA assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. If the return on investment was lower than expected, the unfunded liabilities would be greater, and TVA would need to contribute more than $300 million per year to make up the difference. The open amortization period utilized by the TVARS formula-based contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and does not ensure full funding of the pension liabilities. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. TVA officials told us that the agency does not plan to contribute more than the TVARS Rules require and that it plans to continue to treat its unfunded pension liabilities as regulatory assets, deferring pension costs for recovery through rates in the future. However, the TVARS Rules do not provide for fully funding pension benefits over the service of TVA employees covered by the plan, which would align the cost of services provided by covered employees with the rates paid by customers who benefit from the services of covered employees. The deferral of contributions necessary to close the funding shortfall reduces future financial flexibility and may result in the need for rate increases during a period of declining demand for electricity. If TVA needs to use revenue originally targeted for debt reduction to pay for greater than estimated pension expenses, this could interfere with TVA’s debt reduction goal and additional rate increases may be required which could interfere with TVA’s ability to keep rates low. Alternatively, less flexibility could lead to pressure to reduce the pay or benefits of future TVA employees. Since fiscal year 2013, TVA reduced its O&M costs by about 18 percent while completing construction of the first nuclear unit to enter commercial operation in 20 years. However, since the late 1970s, TVA’s financial condition worsened largely as a result of delays, cost overruns, and operational shutdowns in its nuclear program, and the agency continues to invest in nuclear projects while deferring full recognition and funding of pension liabilities. TVA generally aims to reduce its debt to increase its financial flexibility over the long term to ensure sufficient room under its debt ceiling so it can access capital for future investments to meet its mission. However, retirement benefit and labor costs and cost overruns or delays on nuclear capital projects could put pressure on TVA’s plan, along with other factors including future demand for electricity or unforeseen events. GPRAMA requires agencies to report major management challenges that they face and report performance information—including performance goals, measures, milestones, and planned actions needed to resolve them. However, TVA is not fully meeting this requirement, thereby reducing transparency and raising questions about how it will meet its goals of managing debt and reducing its unfunded pension liabilities. TVA’s unfunded pension liabilities affect TVA’s financial health and operations especially if TVA will need to fund them through rate increases in the future. Without better documentation and communication of TVA’s goals to reduce debt and unfunded pension liabilities in its performance plan and report, including the strategies for achieving these goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. TVA aims to eliminate $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but factors such as market conditions could affect TVA’s progress and no mechanism is in place to ensure the pension plan is fully funded. The TVARS Rules do not adjust TVA’s required contributions to ensure pension liabilities will be fully funded and TVA plans to contribute no more than the rules require and to defer the remaining pension liability. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. We recommend that the Board of Directors ensure that TVA take the following two actions: better document and communicate its goals to reduce its debt and unfunded pension liabilities in its performance plans and reports, including detailed strategies for achieving these goals. propose, and work with the TVARS board to adopt, funding rules designed to ensure the plan’s full funding. We provided a draft of this product to TVA for comment. In its comments, reproduced in appendix II, TVA agreed with our first recommendation and stated that it will incorporate additional details in the next iteration of its performance plan and report to enhance transparency. TVA neither agreed nor disagreed with our second recommendation. However, TVA said that it is committed to working with the TVARS Board to ensure a fully funded system. It did not specifically state whether it would consider proposing, and working with the TVARS Board to adopt, funding rules designed to ensure the pension plan’s full funding. As TVA states in its comments, it worked with the TVARS Board to implement plan amendments that were effective October 1, 2016. TVA states that those amendments have placed the retirement system on a path toward achieving full funding in 20 years. We continue to believe that the action we recommended is needed and, as discussed in the report, that the open amortization period used in the TVARS Rules to determine TVA’s minimum contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and, therefore, does not ensure full funding of the pension liabilities. In addition, we received technical comments, which we have incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, TVA’s board of directors, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix III. The Tennessee Valley Authority (TVA) reports on debt using a measure of total financing obligations that includes bonds and notes, which TVA considers “statutory debt,” and other financing obligations which include lease-leaseback obligations, energy prepayment obligations, debt related to variable interest entities, and membership interests issued in connection with a lease financing transaction. As table 3 shows, in fiscal year 2016, TVA’s $26 billion in debt included about $24 billion in bonds and notes and $2 billion in other financing obligations. Table 4 shows selected data from TVA’s financial statements including revenues, expenses, and other data. Table 5 shows TVA’s pension liabilities, assets and funded status. Table 6 shows TVA’s regulatory assets—incurred costs deferred for recovery through rates in the future—by major category. Frank Rusco, (202) 512-3841 or [email protected]. In addition to the contact named above, Michael Hix (Assistant Director), Janice Ceperich, Philip Farah, Kirk Menard, and Joseph Silvestri made key contributions to this report. Also contributing to this report were Antoinette Capaccio, Cindy Gilbert, Steve Lowrey, Alison O’Neill, Karissa Robie, Dan C. Royer, Barbara Timmerman, and Jacqueline Wade. | TVA, the nation's largest public power provider, is a federal electric utility with revenues of about $10.6 billion in fiscal year 2016. TVA's mission is to provide affordable electricity, manage river systems, and promote economic development. TVA provides electricity to more than 9 million customers in the southeastern United States. TVA must finance its assets with debt and operating revenues. TVA primarily finances large capital investments by issuing bonds but is subject to a statutorily imposed $30 billion debt limit. In fiscal year 2014, TVA established a debt reduction goal. GAO was asked to review TVA's plans for debt reduction. This report examines (1) TVA's debt reduction goal, plans for meeting its goal, and key assumptions; (2) the extent to which TVA reports required performance information; and (3) factors that have been reported that could affect TVA's ability to meet its goal. GAO analyzed TVA financial data and documents and interviewed TVA and federal officials and representatives of stakeholder and industry groups. To meet its goal to reduce debt by about $4 billion—from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023—the Tennessee Valley Authority (TVA) plans to increase rates, limit the growth of operating expenses, and reduce capital expenditures. For example, TVA increased rates each fiscal year from 2014 through 2017 and was able to reduce operating and maintenance costs by about 18 percent from fiscal year 2013 to 2016. TVA's plans depend on assumptions that future capital projects will be completed on time and within budget, but TVA's estimated capital costs may be optimistic and could increase. TVA's debt reduction plans and performance information are not reported in a manner consistent with the GPRA Modernization Act of 2010. Specifically, TVA identifies managing its debt and its unfunded pension liabilities as major management challenges but has not reported required performance information in its performance plans or reports on these challenges, thereby reducing transparency and raising questions about how it will meet its goal. As of September 30, 2016, TVA‘s pension plan was about 54 percent funded (plan assets totaled about $7.1 billion and liabilities $13.1 billion). While TVA's debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years, as shown below. Tennessee Valley Authority's Debt and Unfunded Pension Liabilities, Fiscal Years 2006 through 2016 Several factors could affect TVA's ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. Also, TVA aims to eliminate its unfunded pension liabilities within 20 years, according to TVA officials. However, factors such as market conditions could affect TVA's progress, and no mechanism is in place to ensure it fully funds the pension liabilities if, for example, plan assets do not achieve expected returns. The TVA retirement system rules that determine TVA's required annual pension contributions do not adjust TVA's contributions to ensure full funding and TVA does not plan to contribute more than the rules require. Without a mechanism that ensures TVA's contributions will adequately adjust for actual plan experience, unfunded liabilities could remain and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. GAO recommends that TVA (1) better communicate its plans and goals for debt reduction and reducing unfunded pension liabilities in its annual performance plan and report and (2) take steps to have its retirement system adopt funding rules designed to ensure the pension plan's full funding. TVA agreed with the first recommendation and neither agreed nor disagreed with the second. GAO believes that action is needed as discussed in the report. |
OMB Policy Letter 89-1, “Conflict of Interest Policies Applicable to Consultants,” issued by the Office of Federal Procurement Policy, establishes federal policy relating to OCI standards for persons who provide consulting services, including advisory and assistance services, to the government. The federal government obligated about $14 billion for consulting and advisory and assistance services in fiscal year 1994. They included activities such as special studies and analyses and professional, administrative, and management support services. The policy letter defines a conflict as a condition or circumstance in which a person is unable or potentially unable to render impartial assistance or advice to the government because of other activities or relationships with other persons or organizations, or where a person has an unfair advantage in competing for a federal contract. The policy letter also provides examples of potential OCI situations. One could include a situation where a contractor is providing advice and assistance to an agency where such advice and assistance could benefit the contractor’s other clients. Another situation could include a contractor hired to evaluate a third party’s products or services when the contractor is or was substantially involved in the development or marketing of those products or services. To help avoid conflicts of interest, the policy letter states that for contracts over $25,000, contractors must submit to the agency a certificate describing the nature of the services to be rendered and a statement that (1) no actual or potential organizational conflict of interest exists, or (2) any actual or potential conflict has been communicated in writing to the contracting officer. In addition, the policy letter requires agency officials to evaluate the potential for a conflict of interest and to determine whether an actual conflict exists before a contract is awarded. In carrying out this responsibility, information from the contractor’s certificate and any other available information may be used. The provisions of the OMB policy letter are implemented by the Federal Acquisition Regulation (FAR). The FAR sets forth governmentwide regulations and requirements, including requirements for avoiding and mitigating organizational conflicts, for all types of procurement by contract. For example, the FAR requires agencies to determine whether an OCI exists before awarding a contract for all types of services, including advisory and assistance services as well as others not covered by the policy letter. The FAR lists certain sources of information that may be used to help identify conflicts. These include sources within the government, such as personnel within the contracting office and other contracting offices, and nongovernment sources, such as publications and credit rating services. We reviewed instructions for identifying organizational conflicts of interest contained in the FAR and in OMB Policy Letter 89-1. We also reviewed agency-specific procurement regulations at the agencies selected for review—DOE, EPA, and Navy. To determine whether agencies were complying with the requirements, we reviewed a sample of advisory and assistance service contracts from a fiscal year 1992 contract universe provided by the Federal Procurement Data Center for DOE, EPA, and Navy. Fiscal year 1992 was the most recent year for which data were available when we began our work. We generated a random list of contracts identified by the Federal Procurement Data Center as being for advisory and assistance services and selected 102 contracts for review from the above agencies (DOE-36, EPA-26, Navy-40). Our sample included DOE contracts administered by the agency’s Washington, D.C., headquarters and field locations in Colorado. Navy contracts included contracts from that agency’s headquarters as well as field locations in California. EPA contracts included contracts administered at its Washington, D.C., headquarters and at a Pennsylvania field location. Because of travel costs and other considerations, our sample was of a limited size and was not designed to be projectable. We reviewed contract files to determine compliance with contractor certification requirements and to obtain documentation on the nature and extent of agency OCI reviews. The Navy did not consider the contracts selected to be for advisory and assistance services, but to be for routine technical and engineering services which are not subject to contractor certification requirements in the policy letter. Rather than resample Navy contracts to test compliance with the certification requirements, we relied on a DOD IG report, Organizational and Consultant Conflicts of Interest (Report No. 94-174, August 10, 1994). We discussed the report with DOD IG officials and reviewed the supporting working papers. We reviewed the 40 Navy contracts we had selected, however, to test compliance with the OCI evaluation requirements set forth in the FAR. We discussed OCI review procedures with agency officials. To do this, we judgmentally selected 32 contracts from our sample and identified a total of 66 procurement, program, and General Counsel officials who were responsible for them. We interviewed these officials to obtain an understanding of the steps followed as well as the types of external sources of information such as contractor annual reports and marketing brochures used in making OCI determinations. We also discussed OCI training with these 66 officials to, among other things, obtain (1) information on the extent that they had received OCI training and (2) their views on the value of additional training. We reviewed available training material at DOE and EPA to determine the content and nature of training provided. We reviewed an April 1993 survey report prepared by the PCIE on the implementation of OMB Policy Letter 89-1. We also discussed the report with PCIE officials and reviewed PCIE workpapers. We did our work at the agencies’ headquarters in the Washington, D.C., area and selected field locations between April 1993 and July 1995 in accordance with generally accepted government auditing standards. We requested oral comments on a draft of this report from the Secretaries of DOD, Navy, and DOE, the Administrator of EPA, and the Director of OMB or their designees. Their comments are discussed on pages 15 to 17.. Agency compliance with the requirement for obtaining contractors’ OCI certifications or advisory and assistance service contracts has varied. At two of the three agencies we reviewed—EPA and DOE—we found certificates in contract files in almost all cases in which they were required. For example, 19 of the 26 EPA contracts we selected were subject to the certification requirement because they had been awarded after the issuance of OMB Policy Letter 89-1. We found certificates for 18 of them. Of 36 DOE contracts, 26 were subject to the certification requirement. Certificates had been filed for 25 of them. Officials at both agencies believed that the two missing certifications had been received but had not been included in the contract file. To check Navy’s compliance with the certification requirement, we relied on the 1994 DOD IG study. This study was done to determine whether DOD contracting offices had effectively implemented FAR OCI policies and procedures when planning procurements and awarding contracts. The IG study included 46 contracting activities in the Army, Navy, Air Force, the Defense Supply Service - Washington, the Advanced Research Projects Agency, and the Defense Nuclear Agency. The IG reported that, in most cases, DOD contracting officers failed to obtain the OCI certificates required by the FAR. Of 101 contracts reviewed, the IG determined certificates were required for 28 contracts. Certificates were not, however, obtained for 25 of the 28 contracts. Twelve of the 28 contracts requiring certificates were Navy contracts. Certificates were only obtained for two of them. Contracting officers at five contracting activities told the IG that contractors probably ignored the applicable FAR provisions. The IG concluded that certificates were not being submitted because they were not requested or required by contracting offices. The IG recommended that service procurement officials take steps to ensure compliance with the FAR requirements concerning OCI contractor certificates. In July 1994, the Director of Defense Procurement requested defense agencies to remind contracting officers to obtain the certificates. In addition, in September 1994, the Navy reemphasized to Navy contracting offices the importance of obtaining the required contractor certificates. The PCIE had also reviewed agency compliance with the certification requirements. Its April 1993 report stated that of 19 agencies reviewed, contractors’ certifications were obtained only at 9 of them. EPA, one of the agencies we reviewed, did not provide information on the number of certificates because it was not available from agency records. EPA conducted its own sample and found that the certificates had been filed. DOE and DOD did not participate in the PCIE study. The PCIE report did not cite a reason for the noncompliance, but indicated that agency officials generally believed contractors’ self-certification would do little to deter dishonest contractors. While contractor certifications are important controls required by the FAR and the OMB policy letter, the perceptions of agency contracting officials that contractors’ self-certifications have limitations appear to have merit. For example, it is possible that even if a contractor made a good faith effort to identify and report potential conflicts of interest, some might be missed or go unreported because of different interpretations of the policy letter and what constitutes a conflict. Consequently, independent efforts by agencies to obtain additional information to use in identifying and evaluating potential conflicts are, in our view, particularly important supplementary controls. Policy Letter 89-1 and the FAR require that contracting officers, prior to contract award, evaluate and identify the potential for such conflicts that could be prejudicial to the interest of the federal government with regard to persons who provide advisory and assistance services and take steps to avoid or mitigate any conflicts believed to exist. We reviewed 62 advisory and assistance service contracts at DOE and EPA. Our review showed that contracting officials had conducted the required evaluations before awarding the contracts. We also reviewed case files for the 40 Navy contracts we had selected. As discussed on page 5, these contracts were identified by Navy officials as involving routine engineering and technical services rather than advisory and assistance services, and were consequently not subject to Policy Letter 89-1. However, the FAR still requires agencies to evaluate such acquisitions for potential conflicts of interest prior to contract award. Our contract file review found little documentation of such evaluations and contracting officials whom we spoke with said they were not frequently done. However, during our review, corrective action was taken in the form of various directive memorandums to reemphasize the need for contracting officials to comply with the FAR’s requirements on conflict of interest evaluations. The DOE and EPA contracts we reviewed included such advisory and assistance services as health and safety assessments, environmental studies and audits, assistance in developing regulations, and analyses of the impact of regulations. The nature of potential conflicts involved contractors performing work that could benefit the contractor or other clients of the contractor, or evaluating products or services in which the contractor had a financial interest. Both DOE and EPA have agency-specific instructions and guidance that supplement Policy Letter 89-1 and the FAR. For example, a DOE order outlines the responsibilities of contracting personnel and describes OCI procedures. DOE procedures include controls such as (1) requiring the technical representative or contract specialist to complete an OCI abstract that focuses on specific questions to be asked for each procurement and (2) requiring contractors to complete an OCI questionnaire. EPA has a procurement policy notice that describes similar procedures. Our review of 36 advisory and assistance service contract files at DOE and 26 contract files at EPA indicated that evaluations aimed at identifying potential conflicts of interest, as called for by the policy letter and the FAR, had been made. The files generally included the types of documentation called for by agency-specific procedures. In addition, the files often included other sources of information for use by contracting officials in making OCI determinations. These included contractor marketing brochures, resumes of contractor personnel, and lists of a contractor’s other contracts. Such sources can provide important information to contracting officials in making OCI determinations. The following two examples—both at EPA—illustrate the importance of agencies’ reviews to identify and evaluate potential conflicts of interest. Case 1. In this case, EPA awarded a $23 million contract in February 1993 for the study of the economic and environmental impacts of the Clean Air Act’s provisions regulating acid rain. In August 1992, before the contract award, program officials who reviewed the contractor’s proposal discovered the potential for a conflict and expressed their concern. The contractor had several contracts with electric utilities and a coal company. These industries have been identified as prime contributors to acid rain. The officials believed that such industry ties could possibly impair the contractor’s objectivity in evaluating the Clean Air Act’s provisions regulating acid rain. Also, two of the contractor’s subsidiaries had contracts with third parties that could cause potential conflicts of interest. One subsidiary had contracts of its own with electric utilities. The other subsidiary owned the licensing rights of various technologies that the contractor was to evaluate under the EPA contract. The contractor acknowledged in a September 1992 letter to the pre-award contracting officer that the appearance of a conflict existed. The contractor pointed out that “the electric utility industry is the principal constituent of the acid rain program’s regulated community, and the mere fact of providing professional services under contract both to the regulated community and to the community of regulators can create the appearance of potential conflict of interest.” After examining the potential conflicts of interest, EPA had the contractor prepare a conflict avoidance plan and awarded the contract. Among other things, the plan prohibited the employees of the contractor who had worked on other projects that could cause a conflict situation from taking part in the EPA work. We did not evaluate the reasonableness of the avoidance plan. Case 2. This case involved the award by EPA of a $50 million contract in March 1994 for the identification of parties responsible for pollution at Superfund sites in one of EPA’s regions. Under the Superfund law, parties responsible for contaminated sites may be required to clean them up or to reimburse EPA for the cleanup it performs. As instructed by EPA, the contractor searched EPA’s list of potential polluters in the region to identify any party on the list with which the contractor could have a conflict of interest. The contractor reported that it had business relationships with approximately 40 parties on EPA’s list of potential polluters, but did not believe they would constitute a conflict of interest. The contractor certified to EPA that it was unaware of any potential conflict of interest. According to the pre-award contract officer, he and the technical evaluation panel reviewed the identified relationships and found no apparent conflict. He pointed out, however, that it was difficult to determine whether the business relationships constituted a conflict because actual work assignments and pollution sites had not been identified. He said that the subject contract was essentially considered a contract vehicle with no specific requirements. After the contract was entered into, work assignments were issued with specific requirements to be performed under the contract at specifically identified pollution sites. Another contracting officer was responsible for the post-award contract. He identified 410 potential polluters for a site in a work assignment he issued. Out of the 410, the contractor had identified approximately 40 with which it had 500 to 1,000 contractual relations. The contracting officer reviewed the contractual relationship with each of the potential polluters and determined that four would be in conflict with the efforts to be performed under the work assignment. The work assignment was issued after the investigative activities to be performed by the contractor, which were considered most susceptible to conflicts of interest, were deleted. The 40 Navy contracts that we selected primarily involved routine engineering and technical services. They did not fall into the category of advisory and assistance services that were subject to the contractor certification requirement. According to section 9.504 (a) of the FAR, however, all contracts are to be reviewed for potential conflicts of interest prior to award. Our review of the contract files showed that with the exception of 10 contractor officials’ resumes and 5 lists of other contracts in which the contractors were involved, the 40 contract files we reviewed included no documentation to indicate that any type of pre-award evaluation had been made to disclose the possibility of an OCI or a situation of an unfair advantage and contracting officials told us that evaluations were not frequently done. Some of their comments are summarized below. Officials at the Naval Air Weapons Station, China Lake, California, agreed that pre-award analysis to help detect potential conflicts of interest would be helpful. An official at the Naval Regional Contracting Center, San Diego, California, acknowledged that contract personnel do not generally examine past contracts held by a prospective contractor, or other financial relationships in which the contractor may be involved. The official said that he sporadically examines industry financial reports or corporate credit ratings, but not on a routine basis. An official at the Naval Command and Control and Ocean Surveillance installation, San Diego, California, said there was no screening of historic data about a contractor to detect OCI situations. While the Navy did not routinely conduct OCI evaluations before awarding these contracts, contracting officials pointed out that they concentrate on the possibility of future benefits that may accrue to a contractor and use contract clauses to prevent the possibility of such future conflicts. Our review of the contract files supported this. For example, one contract we reviewed contained a conflict of interest clause in which the contractor agreed not to supply DOD for a period of 2 years after completion of the contract with any major component which the contractor might suggest DOD purchase. We also discussed the apparent lack of pre-award evaluations with DOD and Navy procurement officials. They agreed that the Navy should comply with the FAR requirement to evaluate the potential for conflict of interest situations prior to contract award. They provided us with documentation that showed that corrective action had been taken to reemphasize the need for contracting officials to comply with the FAR’s requirements on conflict of interest evaluations. During our work we identified two opportunities to help agencies meet the objective of OMB’s policy letter regarding the avoidance of OCI situations. These include ensuring that all appropriate agency officials receive OCI training. Among other things, such training could emphasize the availability and usefulness of possible sources of information—such as annual reports and marketing brochures—that can assist contracting officials in understanding the business relationships of potential contractors and identifying possible OCI situations. In addition, we identified the potential for the FAR to be interpreted to imply that if certificates had been obtained from contractors, agencies should not obtain other information in conducting an evaluation of the potential for conflicts of interest. OMB could provide clarification to avoid such an interpretation. Officials at the three agencies we visited received varying amounts of OCI awareness and detection training. DOE and EPA offered formal in-house OCI training. The Navy did not have an OCI training course. However, some Navy officials received training from other sources. In none of the three agencies had all of the officials received training. We asked 66 procurement officers at the three agencies (DOE-27, EPA-15, and Navy-24) whether they had received 1 day or more of OCI training, less than 1 day of training, or no training. We also asked them how they believed the OCI screening process could be improved. Several of the officials said the process could be improved with more training. The results of our discussions are shown in Table 1. As shown, 44 of 66 contracting officers reported receiving some OCI training. (Sixteen reported receiving more than 1-day of OCI training and 28 reported receiving less than 1-day of OCI training.) However, 22 (one-third) of the officers reported receiving no training. Nineteen of the 66 officers expressed the belief that more training would improve the OCI screening process. We reviewed EPA’s and DOE’s OCI training materials. EPA’s material discussed Policy Letter 89-1 and FAR requirements, procedures to follow if the existence of an OCI were to be identified, and basic steps in making an OCI decision. The training materials also emphasized basic information in making OCI determinations, including whether the work to be performed by the contractor was related to work the contractor was also doing for the industry and how much work was performed for commercial clients over the last 3 years. DOE’s training materials covered similar subjects. In addition, DOE’s training emphasized the availability of a variety of sources of information such as annual reports that could (1) be used by contracting officials to understand the business relationships of a contractor, (2) assist in verifying the information in the contractor’s certificate that no actual or potential conflict of interest exists, and (3) help identify potential conflicts of interest. To identify the extent that agencies used such independent sources of information in examining for potential contracts, we asked 57 contract and program personnel at the 3 agencies (DOE-26, EPA-11, Navy-20) whether they were using selected external sources of information. Table 2 shows the results of our discussions. As shown, DOE contracting officials most frequently cited using the full range of information sources. DOE procurement officials attributed such widespread use to its training courses. Officials at DOE, EPA, Navy, and OMB generally agreed about the importance of ensuring that contracting officials receive sufficient conflict of interest training. EPA officials also pointed out that subsequent to our interviews with procurement officials additional training had been provided. OMB officials said that they believed agency procurement staff needed to be reminded of the importance of conflict of interest training and they thought it would be helpful for OMB to remind agencies to ensure that their staffs are adequately trained in this area. “(a) If information concerning prospective contractors is necessary to identify and evaluate potential organizational conflicts of interest or to develop recommended actions, and no organizational conflicts of interest certificates have been filed contracting officers should first seek the information from within the Government or from other readily available sources. Government sources include the files and the knowledge of personnel within the contracting office, other contracting offices, the cognizant contract administration and audit activities and offices concerned with contract financing. Non-Government sources include publications and commercial services, such as credit rating services, trade and financial journals, and business directories and registers.” (Underscoring added) In our opinion, this language could be interpreted to indicate that such external sources of information should not be sought in instances where contractor certificates have been obtained. However, OMB’s policy letter provides that in evaluating the potential for conflicts of interest, contracting officers may use any substantive information that is available whether or not the certificates have been provided. Officials at DOE, Navy, and OMB generally agreed that there was a need to clarify the FAR. EPA officials said they were not sure such clarification may be needed. They said that contractors’ certifications should, in most cases, be sufficient to protect the government’s interests. OCI situations can be detrimental to the interests of the federal government and, as a matter of policy, are to be identified, avoided, and/or mitigated. As shown by a 1993 PCIE study, however, agencies’ implementation of OCI requirements for advisory and assistance services has varied. Although two of the three agencies covered in our review appeared to be complying, the third agency—Navy—was reported by the DOD IG as not ensuring that contractor certificates were received prior to contract award. Corrective action, however, was taken during our review that reemphasized the need for contracting officials to obtain such certificates. We also noted that Navy contracting officials were not routinely evaluating contracts prior to award for potential conflicts of interest. However, corrective action was also taken during our review that reemphasized the need for contracting officials to comply with the conflict of interest policies and procedures set forth in the FAR. One-third of the agency contracting officials we spoke with indicated that they had received no OCI training. About 19 (29 percent) believed that additional training could help improve OCI screening. Each of the agencies included in our review agreed on the importance of OCI training and OMB suggested it would be helpful if OMB reminded agencies to ensure that training is provided. The importance of the OCI requirements of the OMB policy letter are reflected by their inclusion into the FAR as federal regulation. Unfortunately, the FAR could be interpreted to suggest that if OCI certifications have been obtained from contractors, agencies should not obtain additional information in conducting an evaluation of the potential for conflicts of interest. In actuality, whether or not OCI certifications have been obtained, contracting officials should be encouraged to obtain any additional information they believe is necessary and appropriate in order for them to identify and evaluate the potential for conflicts of interest. We recommend that the Director, OMB (1) emphasize to heads of agencies the importance of ensuring that contracting officials receive sufficient training to help them to identify and to avoid and mitigate OCI situations and (2) take steps to avoid the possibility that the FAR might be interpreted to imply that if certificates have been obtained from contractors, agencies should not obtain other information in conducting an evaluation of the potential for conflicts of interest. One way of accomplishing both recommendations without going through the formal process of modifying the FAR would be by issuing a new policy letter or supplement to Policy Letter 89-1. DOE, EPA, DOD, Navy, and OMB officials reviewed a draft of this report. Comments were provided on various dates between September 7 through 20, 1995, by the Deputy Assistant Secretary for Procurement and Assistance Management and the Acting Director, Office of Headquarters Procurement Operations, DOE; the Director, Office of Acquisition Management, EPA; the Director, Defense Procurement, DOD; the Special Assistant for Management and Administration, Navy; and the Deputy Administrator and the Deputy Associate Administrator, Office of Federal Procurement Policy, OMB. Each of the agencies agreed with our observations and recommendation to OMB regarding the need to emphasize the importance of ensuring that contracting officials receive sufficient conflict of interest training. DOE, DOD, Navy, and OMB agreed with our recommendation to OMB regarding the need to take steps to avoid the possibility that the FAR could be misinterpreted. EPA officials, however, said they interpreted section 9.506 of the FAR as providing guidance to contracting officials in those instances when contractors’ certificates are not required. When a certificate is required by the FAR, the officials believed that the certificate itself will provide the primary source of information on potential conflicts. They said that the contracting officer may choose to seek additional information, as he or she sees fit. We do not disagree with EPA’s view that when a certificate is required under the FAR, the contracting officer may choose to seek additional information in order to evaluate the potential for conflicts of interest. Our point, however, is that the current wording in the FAR could be interpreted as indicating that such information should be sought only in instances when contractor certificates have not been obtained. To avoid this possibility, we believe the FAR should be clarified. EPA officials also said they believed that our suggested approach to accomplishing both recommendations to OMB through issuing a new policy letter or supplement to Policy Letter 89-1 could lead to conflicting guidance on the subject since the FAR language would remain the same. We provided this suggestion as a possible alternative to modifying the FAR. If OMB chooses, the FAR could be modified. In its comments, OMB suggested another possible means to implement the recommendations—sending a memorandum to senior agency procurement officials. We believe the manner of implementation should be up to OMB’s discretion. OMB officials also suggested that it might be beneficial for us to address our recommendations to the Administrator, Office of Federal Procurement Policy, rather than to the OMB Director. Our usual practice is to address the recommendations to the agency head. The Director, of course, could delegate the responsibility to implement the recommendations to the Administrator. DOD and Navy officials agreed that the Navy should comply with the FAR requirement to evaluate the potential for conflict of interest situations prior to contract award. They pointed out that corrective action had been taken during the course of our review, in the form of various directive memorandums, to reemphasize the need for contracting officials to comply with the FAR’s requirements. Because of the action taken, we are not making a recommendation on this issue. As agreed with your office, unless you publicly announce the contents earlier, we plan no further distribution until 30 days from the date of this report. At that time, we will send copies of this report to the Director of the Office of Management and Budget, the Secretaries of Energy, Defense, and Navy, and the Administrator of the Environmental Protection Agency. We will also provide copies to the Chairman, Subcommittee on Post Office and Civil Service, Senate Committee on Governmental Affairs, and other appropriate congressional committees. Copies will be made available to other interested parties upon request. Richard Caradine, William Bosher, and Carolyn Samuels of our General Government Division and Ronald Belak of our Denver Regional Office were major contributors to this report. If you have any questions about this report, please call me on (202) 512-3511. Timothy P. Bowling Associate Director Federal Management and Workforce Issues 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 legislative requirement and a congressional request, GAO reviewed three federal agencies' implementation of the Office of Management and Budget's (OMB) policies on conflicts of interest, focusing on: (1) whether the agencies have complied with existing requirements to identify and evaluate potential organization conflicts of interest (OCI); and (2) ways that agencies could improve their screening for such conflicts. GAO found that: (1) although the Environmental Protection Agency (EPA) and the Department of Energy (DOE) obtained contractors' OCI certifications in almost all of the cases reviewed, the Navy failed to obtain OCI certifications in most cases, mainly because contracting officers did not request or require them; (2) the Navy has since stressed the importance of obtaining OCI certifications; (3) a 1993 Presidential council report showed that only 9 of 19 agencies reviewed obtained OCI certifications; (4) many agency officials did not believe the certifications were an effective deterrent; (5) self-certifications have limitations because differences of opinion or interpretation cause potential OCI underreporting; (6) the OMB requirement that agencies evaluate the potential for OCI is an important supplemental control; (7) DOE and EPA have conducted preaward evaluations for potential OCI; (8) although the Navy has not routinely conducted required preaward OCI evaluations, it has tried to prevent future conflicts of interests; and (9) agencies could improve their screening for OCI by ensuring that all responsible officials receive OCI training to avoid misinterpretation. |
The demands on judges’ time are largely a function of both the number and complexity of the cases on their dockets. To measure the case-related workload of district court judges, the Judicial Conference has adopted weighted case filings. The purpose of the district court case weights was to create a measure of the average judge time that a specific number and mix of case filed in a district court would require. Importantly, the weights were designed to be descriptive not prescriptive—that is, the weights were designed to develop a measure of the national average amount of time that judges actually spent on specific cases, not to develop a measure of how much time judges should spend on various types of cases. Moreover, the weights were designed to measure only case-related workload. Judges have noncase-related duties and responsibilities, such as administrative tasks, that are not reflected in the case weights. With few exceptions, such as cases that are remanded to a district court from the court of appeals, each civil and criminal case filed in a district court is assigned a case weight. For example, in the 2004 case weights, drug possession cases are weighted at 0.86 while civil copyright and trademark cases are weighted at 2.12. The total annual weighted filings for a district are determined by summing the case weight associated with all the cases filed in the district during the year. A weighted case filings per authorized judgeship is the total annual weighted filings divided by the total number of authorized judgeships. For example, if a district had total weighted filings of 4,600 and 10 authorized judgeships, its weighted filings per authorized judgeships would be 460. The Judicial Conference uses weighted filings of 430 or more per authorized judgeship as an indication that a district may need additional judgeships. Thus, a district with 460 weighted filings per authorized judgeship could be considered for an additional judgeship. However, the Judicial Conference does not consider a district for additional judgeships, regardless of its weighted case filings, if the district does not request any additional judgeships. In our 2003 report, we found the district court case weights approved in 1993 to be a reasonably accurate measure of the average time demands a specific number and mix of cases filed in a district court could be expected to place on the district judges in that court. The methodology used to develop the weights used a valid sampling procedure, developed weights based on actual case-related time recorded by judges from case filings to disposition, and included a measure (standard errors) of the statistical confidence in the final weight for each weighted case type. Without such a measure, it is not possible to objectively assess the accuracy of the final case weights. At the time of our 2003 report, the Subcommittee on Judicial Statistics of the Judicial Conference’s Judicial Resources Committee had approved the research design for revising the 1993 case weights, with a goal of having new weights submitted to the Resources Committee for review in the summer of 2004. The design for the new case weights relied on three sources of data for specific types of cases: (1) data from automated databases identifying the docketed events associated with the cases; (2) data from automated sources on the time associated with courtroom events for cases, such as trials or hearings; and (3) consensus of estimated time data from structured, guided discussion among experienced judges on the time associated with noncourtroom events for cases, such as reading briefs or writing opinions. According to the FJC, the Subcommittee wanted a study that could produce case weights in a relatively short period of time without imposing a substantial record-keeping burden on district judges. The FJC staff provided the Subcommittee with information about various approaches to case weighting, and the Subcommittee chose an event-based method—that is, a method that used data on the number of and types of events, such as trials and other evidentiary hearings, in a case. The design did not involve the type of time study that was used to develop the 1993 case weights. Although the proposed methodology appeared to offer the benefit of reduced judicial burden (no time study data collection), potential cost savings, and reduced calendar time to develop the new weights, we had two areas of concern—the challenge of obtaining reliable, comparable data from two different data systems for the analysis and the limited collection of actual data on the time judges spend on cases. First, the design assumed that judicial time spent on a given case could be accurately estimated by viewing the case as a set of individual tasks or events in the case. Information about event frequencies and, where available, time spent on the events would be extracted from existing administrative data bases and report and used to develop estimates of the judge-time spent on different types of cases. For event data, the research design proposed using data from two data bases (one of which was new and had not been implemented in all district courts) that would have to be integrated to obtain and analyze the event data. The FJC proposed creating a technical advisory group to address this issue. Second, the research design did not require judges to record time spent on individual cases. Actual time data would be limited to that available from existing data bases and reports on the time associated with courtroom events and proceedings for different types of cases. However, a majority of district judges’ time is spent on case-related work outside the courtroom. The time required for noncourtroom events would be derived from structured, guided discussion of groups of 8 to 13 experienced district court judges in each of the 12 geographic circuits (about 100 judges in all). The judges would develop estimates of the time required for different events in different types of cases within each circuit using FJC-developed “default values” as the reference point for developing their estimates. These default values would be based in part on the existing case weights and in part on other types of analyses. Following the meetings of the judges in each circuit, a national group of 24 judges (2 from each circuit) would consider the data form the 12 circuit groups and develop the new weights. The accuracy of judges’ time estimates is dependent upon the experience and knowledge of the participating judges and the accuracy and reliability of the judges’ recall about the average time required for different events in different types of cases—about 150 if all the case types in the 1993 case weights were used. These consensus data could not be used to calculate statistical measures of the accuracy of the resulting case weights. Thus, the planned methodology did not make it possible to objectively, statistically assess how accurate the new case weights are—weights whose accuracy the Judicial Conference relies upon in assessing judgeship needs. We noted that a time study conducted concurrently with the proposed research methodology would be advisable to identify potential shortcoming of the event-based methodology and to assess the relatively accuracy of the case weights produced using that methodology. In the absence of a concurrent time study, there would be no objective statistical way to determine the accuracy of the case weights produced by the proposed event-based methodology—a major difference with the methodology used to develop the 1993 case weights. The principal quantitative measure the Judicial Conference uses to assess the need for additional courts of appeals judgeships is adjusted case filings. The measure is based on data available from standard statistical reports for the courts of appeals. The adjusted filings workload measure is not based on any empirical data regarding the time that different types of cases required of appellate judges. The Judicial Conference’s policy is that courts of appeals with adjusted case filings of 500 or more per three-judge panel may be considered for one or more additional judgeships. Courts of appeals generally decide cases using constantly rotating three-judge panels. Thus, if a court had 12 authorized judgeships, those judges could be assigned to four panels of three judges each. In assessing judgeship needs for the courts of appeals, the Conference may also consider factors other than adjusted filings, such as the geography of the circuit or the median time from case filings to disposition. Essentially, the adjusted case filings workload measure counts all case filings equally, with two exceptions. First, cases refilled and approved for reinstatement are excluded from total case filings. Second, pro se cases— defined by the Administrative Office of the U.S. Courts as cases in which one or both of the parties are not represented by an attorney—are weighted at 0.33, or one-third as much as other cases, which are weighted at 1.0. For example, a court with 600 total pro se case filings in a year would be credited with 198 adjusted pro se case filings (600 x 0.33). Thus, a court of appeals with 1,600 filings (excluding reinstatements)—600 pro se cases and 1,000 non-pro se cases—would be credited with 1,198 adjusted case filings (198 discounted pro se cases plus 1,000 non-pro se cases). If this court had 6 judges (allowing two panels of 3 judges each), it would have 599 adjusted case filings per 3-judge panel, and, thus, under Judicial Conference policy, could be considered for an additional judgeship. The current court of appeals workload measure represents an effort to improve the previous measure. In our 1993 report on judgeship needs assessment, we noted that the restraint of individual courts of appeals, not the workload standards, seemed to have determined the actual number of appellate judgeships the Judicial Conference requested. At the time the current measure was developed and approved, using the new benchmark of 500 adjusted case filings resulted in judgeship numbers that closely approximated the judgeship needs of the majority of the courts of appeals, as the judges of each court perceived them. The current courts of appeals case-related workload measure principally reflects a policy decision using historical data on filings and terminations. It is not based on empirical data regarding the judge time that different types of cases may require. On the basis of the documentation we reviewed for our 2003 report, we determined that there is no empirical basis or assessing the potential accuracy of adjusted case filings as a measure of case-related judge workload. In the past decade the Judicial Conference has considered a number of proposals for developing a revised case-related workload measure for the courts of appeals judges, but has been unable to reach a consensus on any approach. As part of its assistance to the Conference in this effort, the FJC in 2001 compiled a document that reviewed previous proposals to develop some type of case weighting measure for the courts of appeals. Table 1 outlines some of these proposals and their advantages and disadvantages, as identified by the FJC. Generally, methods that rely principally on empirical data on actual case characteristics and judge behavior (e.g., time spent on cases) are more appropriate than those that rely principally on qualitative data because statistical methods can be used to estimate the accuracy of the resulting workload measure. We recognize that a methodology that provides greater empirical assurance of a workload measure’s accuracy will require judges to document how they spend their time on cases for at least a period of weeks. However, we believe that the importance and cost of creating new federal judgeships requires the best possible case-related workload data using sound research methods to support the assessment of the need for more judgeships. In our 2003 report we recommended that the Judicial Conference of the United States update the district court case weights using a methodology that supports an objective, statistically reliable means of calculating the accuracy of the resulting weights; and develop a methodology for measuring the case-related workload of courts of appeals judges that supports an objective, statistically reliable means of calculating the accuracy of the resulting workload measures and that addressed the special case characteristics of the Court of Appeals for the D.C. Circuit. Neither of these recommendations has been implemented. With regard to our 2003 recommendation for updating the district court case weights, the FJC agreed that the method used to develop the new case weights would not permit the calculation of standard errors, but that other methods could be used to assess the integrity of the resulting case weight system. In response, we noted that the Delphi technique to be used for developing out-of-court time estimates was most appropriate when more precise analytical techniques were not feasible and the issue could benefit from subjective judgments on a collective basis. More precise techniques were available for developing the new case weights and were to be used for developing new bankruptcy court case weights. The methodology the Judicial Conference decided to begin in June 2002 for the revision of the bankruptcy case weights offered an approach that could be usefully adopted for the revision of the district court case weights. The bankruptcy court methodology used a two-phased approach. First, new case weights would be developed based on the time data recorded by bankruptcy judges for a period of weeks—a methodology very similar to that used to develop the bankruptcy case weights that existed in 2003 at the time of our report. The accuracy of the new case weights could be assessed using standard errors. The second part represents experimental research to determine if it is possible to make future revisions of the weights without conducting a time study. The data from the time study could be used to validate the feasibility of this approach. If the research determined that this were possible, the case weights could be updated more frequently with less cost than required by a time study. We believe this approach would provide (1) more accurate weighted case filings than the design developed and used for the development of the 2004 district court case weights, and (2) a sounder method of developing and testing the accuracy of case weights that were developed without a time study. With regard to our recommendation improving the case-related workload measure for the courts of appeals, the Chair of the Committee on Judicial Resources commented that the workload of the courts of appeals entails important factors that have defied measurement, including significant differences in case processing techniques. We recognize that there are significant methodological challenges in developing a more precise workload measure for the courts of appeals. However, using the data available, neither we nor the Judicial Conference can assess the accuracy of adjusted case filings as a measure of the case-related workload of courts of appeals judges. That concludes my statement, Mr. Chairman, and I would be pleased to respond to any questions you or other members of the Committee may have. 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: Ann Laffoon, Assistant Director; John Vocino, Analyst-in-Charge, and Laura Kaskie, Communications Analyst. 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. | Biennially, the Judicial Conference, the federal judiciary's principal policymaking body, assesses the need for additional judges. The assessment is based on a variety of factors, but begins with quantitative case-related workload measures. This testimony focuses on (1) whether the judiciary's quantitative case-related workload measures from 1993 were reasonably accurate; and (2) the reasonableness of any proposed methodologies to update the 1993 workload measures. The comments in this testimony are based on a report GAO issued in May 2003. In 2003, GAO reported that the 1993 district court case weights were reasonably accurate measures of the average time demands that a specific number and mix of cases filed in a district court could be expected to place on the district judges in that district. At the time of GAO's 2003 report, the Judicial Conference was using case weights approved in 1993 to assess the need for additional district court judgeships. The weights were based on data judges recorded about the actual in-court and out-of-court time spent on specific cases from filing to disposition. This methodology permitted the calculation of objective, statistical measures of the accuracy of the final case weights. In 2003, GAO reviewed the research design the Judicial Conference's Subcommittee on Judicial Statistics had approved for updating the 1993 district court case weights, and had two concerns about the design. First, the design assumed that the judicial time spent on a case could be accurately estimated by viewing the case as a set of individual tasks or events in the case. Information about event frequencies and, where available, time spent on the events would be extracted from existing databases and used to develop estimates of the judge-time spent on different types of cases. However, for event data, the research design proposed using data from two data bases that had yet to be integrated to obtain and analyze the data. Second, unlike the methodology used to develop the 1993 case weights, the design for updating the case weights included limited data on the time judges actually spent on specific types of cases. Specifically, the proposed design included data from judicial databases on the in-court time judges spent on different types of cases, but did not include collecting actual data on the noncourtroom time that judges spend on different types of cases. Instead, estimates of judges' noncourtroom time were derived from the structured, guided discussions of about 100 experienced judges meeting in 12 separate groups (one for each geographic circuit). Noncourtroom time was likely to represent the majority of judge time used to develop the revised case weights. The accuracy of case weights developed on such consensus data cannot be assessed using standard statistical methods, such as the calculation of standard errors. Thus, it would not be possible to objectively, statistically assess how accurate the new case weights are--weights on whose reasonable accuracy the Judicial Conference relies in assessing judgeship needs. The case-related workload measure for courts of appeals judges is adjusted case filings in which all cases are considered to take an equal amount of judge time except for pro se cases--those in which one or more of the parties is not represented by an attorney--which are discounted. In our 2003 review, we found no empirical basis on which to assess the accuracy of this workload measure. Although a number of alternatives to the adjusted filings measure have been considered, the Judicial Conference has been unable to agree on a different approach that could be applied to all courts of appeal. |
WIA specifies separate funding streams for each of the act’s main client groups—adults, youths, and dislocated workers. A dislocated worker is an individual who (1) has been terminated or laid off, or who has received a notice of termination or layoff, from employment; is eligible for or has exhausted entitlement to unemployment insurance; or who is not eligible for unemployment insurance but has been employed for a sufficient duration to demonstrate attachment to the workforce and who is unlikely to return to his or her previous industry or occupation; (2) has been terminated or laid off, or who has received a notice of termination or layoff, from employment as a result of any permanent plant closure of, or substantial layoff at, a plant, facility, or enterprise; (3) was self-employed but is unemployed as a result of general economic conditions in the community in which the individual resides or because of natural disasters; or (4) is a displaced homemaker. Under WIA, dislocated workers can receive three levels of service—core, intensive, and training. Core services include job search and placement assistance, the provision of labor market information, and preliminary assessment of skills and needs. These services are available to anyone seeking such assistance, whether or not that person is a dislocated worker. Intensive services are provided to dislocated workers needing additional services to find a job. Intensive services include comprehensive assessments, development of an individual employment plan, case management, and short-term prevocational services. Dislocated workers can also receive training services, including occupational skills training, on-the-job training, skill upgrading, and entrepreneurial training. The Secretary of Labor retains 20 percent of dislocated worker funds in a national reserve account to be used for national emergency grants, demonstrations, and technical assistance and allots the remaining funds to each of the 50 states, the District of Columbia, and Puerto Rico according to a specific formula. In a previous report, GAO identified several issues with the formula to allocate dislocated worker funds that limit Labor’s ability to allocate funds to states according to their need. For example, one problem we identified is that the formula allocates funds based on factors, such as the number of long-term unemployed in each state, that are not clearly aligned with the program’s target population. During program years 2000-2002, Labor was allotted about $4.7 billion for dislocated worker activities. For program year 2003, approximately $1.4 billion was allotted for dislocated worker activities, of which about $272 million was reserved by the Secretary of Labor. Of the amount reserved by the Secretary in any program year, not more than 10 percent can be used for demonstrations and pilot projects relating to the employment and training needs of dislocated workers. Such projects can include those that promote self-employment, promote job creation, and avert dislocations. In addition, not more than 5 percent can be used for technical assistance to states that do not meet performance measures established for dislocated worker activities. At least 85 percent of the Secretary’s 20 percent funds must be used for national emergency grants (see fig.1). National emergency grant funds are used for several different types of grants, including Regular grants. These provide employment and training assistance to workers who lost their jobs because of layoffs and plant closings. Disaster grants. These provide temporary employment to workers affected by natural disasters and other catastrophic events. Dual enrollment grants. These provide supplemental assistance to workers who have been certified by Labor to receive services under the Trade Adjustment Assistance Reform Act of 2002. Workers eligible under dual enrollment grants are typically workers who have lost their jobs because of increased imports from, or shifts in production to, foreign countries. Grantees apply for national emergency grants when their dislocated worker formula funds are insufficient to meet the needs of affected workers. Entities that are eligible to receive regular national emergency grants are: the designated state WIA program agency, a local workforce investment area agency, a consortium of local workforce investment boards for adjoining areas, a designated organization receiving funds through the Native American program provision of WIA. For regular national emergency grants covering more than one state, eligible grantees are limited to a consortium of local workforce investment boards for adjoining local areas or a consortium of states. For disaster and dual enrollment grants, eligible grantees are limited to states. For national emergency grants awarded from program years 2000 to 2002, 241 grants were awarded to states and 6 grants were awarded to local areas. National emergency grants are discretionary awards by the Secretary of Labor that are intended to temporarily expand service capacity at the state and local levels by providing time-limited funding assistance in response to major layoffs. National emergency grant funds may be used to provide core, intensive, and training services. For disaster-related projects, funds may be used for temporary employment assistance on projects that provide food, clothing, and shelter, as well as on projects that perform demolition, cleaning, repair, renovation, and reconstruction. According to Labor, projects funded by national emergency grants must be designed to achieve performance outcomes that support the performance goal commitments by the Secretary under the Government Performance and Results Act. Labor will provide target performance levels for national emergency grant projects through separate policy guidance. Beginning July 1, 2004, national emergency grant projects will be subject to the common measures for employment and training programs, including entered employment, job retention, and earnings increase. Participants in temporary disaster projects are expected to receive necessary assistance to return to the workforce. Between July 1, 2000, and June 30, 2003 (covering program years 2000, 2001, and 2002), Labor distributed about $600 million from the dislocated worker reserved funds for national emergency grants to 46 states, the District of Columbia, Guam, and the Federated States of Micronesia (see fig. 2). California, Massachusetts, Ohio, Oregon, Pennsylvania, Texas, Virginia, Washington, and Wisconsin received the largest amount of grant funds, at least $20 million each. Appendix II lists the amount of funds Labor distributed to each state for regular, disaster, and dual enrollment national emergency grants between July 1, 2000, and June 30, 2003. Nearly two-thirds of the 247 grants awarded and about 60 percent of the funds awarded were for regular grants (see fig. 3). According to Labor officials, no grant applications received between July 1, 2000, and June 30, 2003 are still pending. In any program year, the Secretary can only award national emergency grants from funds available for that program year. That is, funds reserved for national emergency grants in program year 2002 must be awarded by June 30, 2003—the last day of program year 2002. The current system for submission and review of grant applications is manual and paper-based. States and local areas submit an application via mail or fax. Each national emergency grant application generally contains information on key aspects of the proposed project, such as amount of funds requested, planned number of participants, planned starting and end dates, planned expenditures by type of program activity, and expected performance outcomes, including how many participants they believe will become employed and what they believe their new wages will be. Labor officials review the application and draft a decision memorandum that contains their recommendation as to whether the grant should be awarded and, if so, at what amount. The decision memorandum is forwarded to the Secretary, who makes the final award decision. After the Secretary’s award decision, Labor notifies the appropriate congressional office and issues the award letter to the grantee. National emergency grant awards can be disbursed in a single payment or in increments. In most cases, the initial increment will be for 6 months to enable a project to achieve full enrollment. For grants disbursed in more than one payment, grantees are required to submit supplemental information along with their requests for future incremental payments. This information generally includes the actual number of participants, performance outcomes, and expenditures. Grantees provide information to Labor on their use of grant funds through periodic progress reports. Grantees submit periodic progress reports on their use of national emergency grant funds to Labor regional offices that monitor and oversee the grants. Grantees are required to submit the reports on a quarterly basis for regular and dual enrollment grants and on a biweekly basis for disaster grants. Progress reports generally contain information on the number of participants who registered for the program and received various services. They also contain the number of participants who entered employment, which Labor uses to assess grantees’ performance. States are required annually to submit to a national database, called the Workforce Investment Act Standardized Record Data (WIASRD), information on WIA participants who have left the program, including those who have left national emergency grant–funded programs. The WIASRD contains information on the types of services that each WIA participant receives, such as intensive or training services. For participants that received training, the WIASRD also contains information on the types of training activities they participated in, such as on-the-job training, adult education or basic literacy activities, or occupational skills training. Labor’s grant process is not as effective as it could be because most grants are not awarded in a timely manner, and as a result, services to workers in some states have been delayed, interrupted, or denied. During program years 2000-2002, Labor’s goal was to approve national emergency grants within 30 calendar days of receiving a complete application. On average, 92 days elapsed between the date Labor received a regular national emergency grant application and the date the award letter was signed. Labor was more likely to award grants toward the end of the program year, with nearly 40 percent of the grant awards made in the final month. Twenty-five of the 38 states responding to our survey reported that as a result of delays in receiving grant funds, services to dislocated workers were delayed, interrupted, or denied. The way Labor measures its progress toward meeting its timeliness goal does not reflect the full process for awarding national emergency grants. During program years 2000-2002, Labor’s goal was to approve national emergency grants within 30 calendar days of receiving a “complete” application. Labor contends that states, in their haste, often submit applications that require additional work and that the requests for funds cannot be processed until shortcomings are addressed. As a result, states may turn in their applications several times before Labor starts counting the days elapsed toward meeting its timeliness goal. Labor ends its counting once the Secretary approves the grant, although additional time is required to notify the appropriate congressional office and issue the award letter. For our analysis, we began counting on the first day Labor received a state’s application and continued even if states had to make revisions for the application to be considered complete by Labor. We did not stop counting until award letters were sent. Our counting more accurately reflects the grantee’s perspective: It begins at the first request for funds and ends at the point that funds can be obligated. Figure 4 compares the points at which Labor starts and stops counting the days elapsed toward meeting its 30-day goal and the points at which GAO started and stopped counting the days in our analysis. We found that, on average, Labor took 92 days from the time an application was received to send a grant award letter. Nearly 90 percent of the regular grants awarded from July 1, 2000, to June 30, 2003 took more than 30 days to award. Approximately 11 percent of the regular grants awarded during program years 2000-2002 took 30 or fewer days to award, whereas nearly half took more than 90 days (see fig. 5). Labor took less time to award disaster and dual enrollment grants than it did to award regular grants. Dual enrollment grants, which represent about a third of the funds awarded during program years 2000-2002, took an average of 20 days to award, and disaster grants, which represent less than 10 percent of the funds awarded, took an average of 48 days. The amount of time Labor took to award regular grants appeared to be related to the quarter in which the application was received. For example, regular grant applications received in the first quarter of a program year took longer to award than applications received in the second, third, and fourth quarters (see table 1). Labor awards most of the regular grants later in the year. Nearly 60 percent of all regular grants were awarded in the fourth quarter of the program year, representing nearly two-thirds of the regular grant funds awarded. This trend exists despite the fact that about the same proportion of applications are received in the second, third, and fourth quarters of the program year: Over 30 percent of the applications were submitted during the second quarter of the program year, and about 27 percent were submitted in the third and fourth quarters (see fig. 6). Although applications were received at a steady rate throughout the last three quarters of the program year, about 40 percent of the regular grants were awarded in June, the final month of the program year, representing about one-half of the regular grant funds awarded. Moreover, the percentage of applications submitted by month during the program year did not significantly increase as the year went on, with October (the fourth month of the program year), being the month when the largest percentage of applications was submitted (see fig. 7). June was the most prevalent month for awarding other types of grants as well. About 42 percent of the disaster grants and 90 percent of the dual enrollment grants were awarded in the last month of the program year. Award dates were more closely linked to application dates for dual enrollment grants because, according to Labor officials, grantees apply for these grants near the end of the program year, when Trade Act funds become exhausted. The vast majority (92 percent) of the dual enrollment applications were submitted in the last 2 months of the program year. Approximately 80 percent of the incremental payments made during program years 2000-2002 took longer than 30 days for Labor to award (see fig. 8). On average, Labor took 83 days to award incremental payments, which is 9 days quicker than the average number of days Labor took to make initial regular grant awards. Labor officials attributed delays to grantees submitting incomplete requests that require additional work. On the other hand, some state officials said that they were unclear about the requirements for requesting an incremental payment because of lack of guidelines on how to submit a request. During program years 2000-2002, Labor awarded 43 incremental payments totaling about $84 million. According to Labor, grantees should expect that all grant awards will be funded incrementally. Thirty-three of the 38 states that responded to our survey said that the amount of time it took to receive regular grant funds was a major problem. Eight of these states were awarded five or more regular grants during program years 2000-2002, and Labor averaged between 51 and 103 days to award grants to these states (see fig. 9). Twenty-five states said that because of the delays in receiving grant funds, local areas had to delay or deny services to dislocated workers. In most of these states, the delays affected local areas’ ability to place dislocated workers in training. Twenty of these states reported that local areas had to delay or cancel training for dislocated workers because, while waiting for national emergency grant funds, they did not have funds available to enroll workers in training. For example, Massachusetts officials noted that workers in one local area were placed on waiting lists for 3 to 4 months before they received training. Similarly, Nevada officials reported that a local area cancelled training for more than 300 workers because of a delay in receiving grant funds. Six states also reported that local areas could not provide intensive services, such as case management, to workers because of delays in receiving grant funds. For example, Kentucky reported that while waiting to receive national emergency grant funds, local areas could only provide workers with core services and could not provide workers with job training, career counseling, case management, or supportive services, such as assistance with transportation and child care. Labor has taken steps that may improve the process for awarding national emergency grants, but additional actions are needed to better manage the grant award process. Labor is moving from a paper-based system for reviewing grant applications to an electronic system that will enable states or local areas to apply for grants online. Labor has also documented its goal to make an award decision within 30 business days of receiving a complete application. However, some weaknesses still remain in Labor’s planned changes that could prevent Labor from accurately assessing how long it takes to make grant awards and incremental payments. Labor has made a number of changes intended to improve the efficiency of the application process by helping applicants submit applications that are as close to being complete as possible. Labor has clarified its application requirements in guidance issued on January 26, 2004. In addition, Labor has conducted training for states on providing an integrated service response for dislocated workers, including training on the requirements for receiving national emergency grants. Labor also plans to provide technical assistance and work with states on an individual basis to help them fully integrate services available to dislocated workers through the one-stop service delivery system. Furthermore, Labor plans to implement a new electronic system by July 1, 2004, that would allow applicants to submit applications electronically. The new system will automatically check applications for missing or inconsistent information, such as blanks that should be filled in or numbers that do not add up correctly. If any problems are found, the system notifies applicants. Only when the system no longer finds problems with the application will it allow the application to go forward. In doing so, the system ensures that each required field contains information and that information in different fields is consistent, but it cannot check the quality of the information submitted. The electronic system will also replace Labor’s paper-based system for managing the application review process. The electronic system will count how many days have elapsed since the application was submitted and track the progress of various steps of the review. Specifically, the system automatically assigns applications to staff for review within a day of submission, reassigns an application to another staff person if the staff originally assigned is not available, gives each staff person a deadline for completing his or her part of the review, tracks the date that staff complete their responsibilities, automatically transfers information from the application into the enables managers to check on the progress of the review, including how long specific parts of the review are taking. As part of a reengineering project, Labor contracted with IBM to review Labor’s grant award process. IBM reviewed Labor’s current grant award process as well as the new electronic system to determine whether any further improvements would be needed. In addition, IBM is planning to conduct further review of other areas such as staffing levels, skills, and workflow patterns. Finally, Labor is planning to issue guidelines that document its timeliness goal. As stated in the proposed guidelines, the goal will be to make a grant award decision within 30 business days of receiving a complete application. These guidelines had not been issued as of April 6, 2004. Some weaknesses still remain in Labor’s planned changes that could prevent Labor from accurately assessing how long it takes to make grant awards and incremental payments. First, the way Labor has defined its 30- day goal allows the agency to stop counting the number of days elapsed if it finds problems with the grant application. For example, if Labor finds a major problem, such as with a planned expenditure for a program activity, it will stop the electronic system’s counting of days elapsed and ask the state or local area to revise the application. After the state or local area submits a revised application, Labor will start the counting at day one (see fig. 10). However, if Labor finds a minor problem with the application, such as insufficient justification in the narrative explanation for the proposed number of dislocated workers to be enrolled, it will stop the counting and, once the state or local area submits a revised application, will restart the counting from the day it left off. Because of Labor’s ability to stop its counting of days elapsed, its tracking system may not accurately reflect the number of days it takes Labor to award grants or allow Labor to identify how long particular steps in the process contribute to the amount of time it takes to award grants. A second problem is that Labor’s timeliness goal still only includes the days up to the Secretary’s award decision, leaving the agency unable to identify delays that occur after the award decision. Labor’s proposed guidelines specify a goal to approve or disapprove applications within 30 business days from receipt of a complete and responsive application. As stated, the goal would not include the steps between the Secretary’s approval and the issuance of the award letter, such as the notification of congressional offices of the award, the preparation of the award letter, and the preparation for the disbursement of funds. With some grants awarded in program years 2000 to 2002, 20 or more calendar days passed between the date the Secretary approved the grant by signing the decision memorandum and the date Labor issued the award letter to the grantee. For example, for a grant awarded to Missouri, 34 days passed between the date the Secretary signed the decision memorandum and the date the award letter was sent. Such delays can interfere with a state or local area’s ability to take steps necessary to begin to provide services such as entering into contracts with training providers or hiring staff. A third weakness is that Labor’s proposed guidelines do not establish a timeliness goal for awarding incremental payments, despite stating that most grants will be awarded incrementally. Labor has stated that the amount of time to approve incremental payments should be no longer than the time required to review the original application—30 business days. However, this goal has not been formally documented in the proposed guidelines. In addition, the electronic system does not allow grantees to apply for incremental payments online, and it will not track the progress of the review of requests for incremental payments. Labor plans to use a manual process to track its progress toward meeting its 30-day goal for incremental payments. Little is known on a national level about how national emergency grant funds are used because of weaknesses in two data sources, and although Labor is taking steps to improve the data collected, these steps may not go far enough to ensure the data’s reliability. Data in progress reports submitted by grantees to Labor could not be analyzed on a national level because the reports’ data elements vary from grantee to grantee and the information is not available electronically. Furthermore, the reliability of information contained in Labor’s national database on participants served by WIA funds, including national emergency grants, cannot be ensured because the data are incomplete and unverified. Labor’s steps to address some of these issues may not go far enough to rectify data problems. For progress reports, Labor has not issued detailed guidance to ensure that data elements are defined consistently. In addition, although Labor has checked states’ most recent submissions to the national participant database to identify whether data are missing, Labor does not have specific plans to check states’ future submissions to ensure that data are complete. Neither of the two primary data sources on the national emergency grant program—progress reports and WIASRD—can be used to provide accurate national-level information on the use of national emergency grant funds. Largely because of a lack of clear guidance, grantees are not submitting reliable information to both data sources. Data in progress reports cannot be summarized to provide a national picture of how grant funds are used because not all states reported the same data. Labor has not issued guidance under WIA on the submission of national emergency grant progress reports, and as a result, the data submitted in reports vary from grantee to grantee. For example, while most of the 13 states that we obtained sample reports from provided information on the number of people enrolled in training, only about half reported the number enrolled in core and intensive services, and just one reported expenditures by type of service (see table 2). In addition, grantees may interpret the data elements in different ways. For example, according to Labor regional officials, states vary in how they define “entered employment.” Some states use the WIA definition, which calculates entered employment using quarterly unemployment insurance wage reports that may not be available until several months after the person has started a job. Other states use the definition under the Job Training Partnership Act (JTPA) program that WIA replaced, which calculates the number using information gathered by the caseworker at the time the person is placed in employment. A grantee that uses the WIA definition may appear to place workers in employment less effectively than a grantee that uses the JTPA definition because the grantee using the WIA definition must wait several months before reporting that a participant entered employment. Furthermore, the data in progress reports are not electronically available or stored in a central location because Labor does not have an electronic system through which grantees can submit the reports. Instead, grantees submit the reports to the appropriate regional office by e-mail or as paper documents, making analysis of the data cumbersome. Labor’s guidance is not as clear as it could be about whether states are required to submit to WIASRD data on participants served with national emergency grant funds. One part of the WIASRD reporting instructions says that states are required to provide data for participants who exited WIA Title I-B services, which are services offered by the adult, dislocated worker, and youth formula funds programs. A Labor official and a manager of the WIASRD database stated that this part of the guidance could be interpreted by states to mean that they are not required to submit data to WIASRD for other programs, such as national emergency grants. In addition, some Labor officials we spoke with believed that states were not required to submit WIASRD data on all national emergency grant participants. Either because the data were not submitted or were submitted incorrectly, WIASRD does not contain data for all states that received national emergency grants. The program year 2001 WIASRD contained no data for five states that collectively received 16 grants in program year 2000, constituting 23 percent of the grants awarded in that year (see table 3). In addition, it contained few data for Rhode Island, although a Rhode Island official said that 210 participants exited national emergency grant programs in program year 2001. However, even if the data submitted to WIASRD on national emergency grants were complete, questions about their accuracy would persist. In its review of state-reported WIA performance data, Labor’s Office of Inspector General (OIG) concluded that little assurance exists that the data are accurate or verifiable because of inadequate oversight of data collection and management at the federal, state, and local levels. A recent GAO report confirmed the OIG’s findings. Labor has developed a standard reporting form and electronic system for national emergency grant progress reports and plans to implement these changes in July 2004. Labor’s proposed guidelines require grantees to use a particular reporting form to submit information on a quarterly basis on the number of participants receiving intensive services, training, and other services, as well as expenditures on these various services, the number of participants who exited the program, and the number of participants who entered employment. A standard reporting form is likely to increase the consistency of grantee-reported data by ensuring that grantees submit information on the same data elements. However, Labor has not yet issued guidance informing grantees how to define data elements such as the number of participants who have entered employment. Without common definitions, grantees may submit inconsistent data based on their different interpretations of data elements. In addition, Labor’s electronic system for managing the grant application process will enable grantees to submit their progress reports electronically. The system will compile the data into an electronic dataset, facilitating analysis of the data. Labor is also taking steps to improve the completeness and accuracy of WIASRD data on national emergency grant participants. In guidance issued on November 13, 2003, for the submission of program year 2002 data, Labor specified that states are required to include participants who exited from national emergency grant programs. According to Labor officials, the agency also plans to clarify the WIASRD reporting requirements for national emergency grants in new guidance on performance measures to be issued by July 2004. In addition, for the program year 2002 WIASRD, Labor checked states’ submissions to determine whether data had been submitted for all grants awarded. For states whose submissions were missing data, Labor requested that they send in a revised submission that included data on national emergency grants. However, managers of the WIASRD database said that some states were not able to send in data on national emergency grant participants, and as a result, the program year 2002 WIASRD will not have complete data. Although Labor does not have specific, written plans to check states’ future WIASRD submissions to identify missing data, a Labor official believes the agency will continue to check submissions. Labor is also planning to implement a data validation program to ensure the accuracy of state-reported data on national emergency grant participants. According to Labor officials, this program is in the early planning stages and no date has been set for its implementation. With nearly 7 million workers losing their jobs in the few years since the turn of the century, increasing importance has been placed on programs intended to help dislocated workers. When major layoffs and disasters occur, states and local areas need to respond quickly to ensure that workers facing unemployment receive the services they need to re-enter the workforce at a comparable wage. Unfortunately, their dislocated worker formula funds are often insufficient to adequately meet the needs of the large number of workers losing their jobs. In previous work, we found that the formula used to allocate dislocated worker funds does not always result in states receiving the amount of funds they need. Accordingly, states and local areas turn to Labor for additional funds, such as those reserved by Labor for national emergency grants. Timely awarding of national emergency grants is imperative for states and local areas to provide services when they are most needed. Therefore, it is important that Labor consider the length of time it takes to complete the full process for awarding grants. Although Labor is making changes to the award process, some concerns remain. Labor does not have a timeliness goal for the full award process or for incremental payments. In addition, the proposed guidelines do not require the continuous counting of days from the time the application is received until the grant is awarded—Labor can stop the clock if officials feel the application is incomplete. As a result, Labor may appear to meet its timeliness goal even though, from a grantee’s perspective, the grant funds were received months after the application was filed. Neither of the two primary data sources on the national emergency grants provides reliable national-level information on how these funds are used. Reliable information on how national emergency grant funds are used is essential for Labor to effectively manage the program and report on a national level how grant funds are being used. In order for Labor to better manage the grant award process and to accurately assess how long it takes to make grant awards and incremental payments, we recommend that the Secretary of Labor take additional actions. In particular, Labor should set timeliness goals for the full process—from the receipt of the application until the award letter is sent—for initial grant awards and incremental payments; and continuously track the number of days that have passed, beginning when applications are first submitted and until the award letter is sent, including days grantees spend revising their applications. In addition, to ensure that information relating to national emergency grants is accurate and complete, we recommend that Labor develop specific reporting guidance on progress reports to ensure that grantees define data elements consistently, and ensure that all states submit WIASRD data on participants exiting from services provided with national emergency grants (for grantees that are not states, ensure that they submit WIASRD data on national emergency grants to states for submission to Labor). We provided a draft of this report to officials at Labor for their review and comment. In its comments, Labor took issue with the report’s methodology, said it believes that the report makes assertions not supported by empirical evidence, and disagreed with our conclusions. Labor stated that timeliness of national emergency grants has been a concern dating back to JTPA and that the current administration set a goal of 30 working days to provide states with an answer to a complete application. Labor also contends that the weaknesses in the improvements being undertaken in the grant award process that we cite in the report are subjective and inaccurate. Finally, Labor listed reforms that are under way or have been implemented, including business process mapping, an electronic application tool, policy guidance, regional forums, and technical assistance to states. We disagree with Labor’s characterization of the report’s methodology and conclusions. As stated in the report, our analysis looked at the complete application process from a grantee’s perspective. We reviewed files for every regular grant that was awarded between July 1, 2000, and June 30, 2003, for which complete information was available and compared the date that Labor received the application with the date Labor issued an award letter to the grantee. States and local areas apply for national emergency grants when a major layoff occurs, and it is imperative that grantees receive funds in a timely manner to provide assistance when it is most needed. Accordingly, we believe that the date the application is received is an appropriate starting point for the grant award process. If applications are incomplete, then this issue should be addressed and the application moved forward in a timely manner. We recognize a shared responsibility to ensure that grant applications are complete and accurate, and as pointed out in our report, Labor has taken steps to assist grantees in submitting applications that are as close to being complete as possible. We also believe that the ending date should be when the grantee is notified of the award rather than at an interim departmental approval point. As we reported, the final steps after Labor has stopped the clock on the award process have taken an additional 20 or more days in some cases. Delays in grant awards have had effects on the ability of local areas to provide services to workers who have lost their jobs, as reported by 25 states that responded to our survey on national emergency grants. For Labor to have set a goal for the award process is commendable, but the emphasis needs to be on awarding national emergency grants as quickly as possible to allow local areas to meet the needs of dislocated workers. We also disagree that the stated weaknesses in the improvements being undertaken in the grant award process are subjective and inaccurate. Rather these weaknesses are based upon Labor’s proposed guidelines and discussions with Labor officials. First, Labor’s proposed guidelines state that Labor is committed to making a decision to approve or disapprove an application within 30 working days of receiving a complete application. As pointed out in our report, there are steps that follow this decision that have taken another 20 days in some cases, and Labor’s counting of days elapsed may not always be continuous. We believe the 30-day goal should include the entire process. Second, the proposed guidelines do not relate the 30-day goal to incremental payments, and Labor officials confirmed that incremental payments are not yet included in the new electronic system. Third, while the proposed guidelines provide a form for progress reports, Labor officials acknowledged that data element definitions have not yet been developed. Finally, while a Labor official speculated that checking the completeness of states’ submissions to the WIASRD database would continue, no such plans have been documented. We believe that to better manage the national emergency grant award process, these additional actions should be implemented. In regard to the reforms cited by Labor in its comments, our report identified all of these efforts except for the proposed technical assistance. We have added a statement to the report to indicate that Labor plans to provide technical assistance and work with states on an individual basis to help them fully integrate services available to dislocated workers through the one-stop service delivery system. Labor’s comments are in appendix IV. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from its issue date. At that time, we will send copies of this report to relevant congressional committees and other interested parties and will make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215. Other major contributors to this report are listed in appendix V. We were asked to determine (1) the effectiveness of the overall process for awarding national emergency grant funds, (2) whether Labor’s proposed changes will improve the grant award process, and (3) what is known about how grant funds are being used. To respond to these issues, we interviewed Labor officials at both headquarters and regional offices, reviewed Labor files for all grants awarded during program years 2000 through 2002, and surveyed officials in the 39 states that had received at least one regular national emergency grant during that period. We also reviewed Labor’s two data sources that contain information on the use of national emergency grants. We conducted our work from March 2003 to March 2004 in accordance with generally accepted government auditing standards. We obtained from Labor a listing of all national emergency grants awarded between July 1, 2000, and June 30, 2003. We then reviewed files maintained by Labor to identify when the original application was submitted and received and the date the award letter was signed. For those grants funded incrementally, we also identified when the incremental funding request was submitted and received and the date the incremental award letter was sent. We limited our analysis to those grants funded with the Secretary’s reserve from the dislocated worker funds under the Workforce Investment Act (WIA). For some grants, documentation on when the application was received was not in the files (see table 4). Using information contained in the files, for each grant we calculated the number of calendar days between the date Labor received the original grant application and the date of the grant award letter. For 16 grants for which 150 or more calendar days elapsed between the date the original grant application was received and the date the award letter was sent, we conducted a detailed review of the grant files to determine how long various steps of the review process took. We identified dates that applicants submitted additional information, dates that Labor received the additional information, dates of the decision memorandum, dates that the Secretary signed the decision memorandum, and dates that various Labor staff approved the award letter. We then calculated the number of calendar days that elapsed between each of these dates. To obtain information on states’ experiences with the process for receiving national emergency grants, we conducted an e-mail survey of officials in 39 states that received at least one regular grant in program years 2000 to 2002 (see figure 11). We received responses from 38 states (a 97 percent response rate). We limited the survey to regular grants because they constituted about 60 percent of the grants awarded, representing about 64 percent of the funds, in that time period. Although Labor also awarded four regular grants to local areas in program years 2000 to 2002, we limited our survey to state officials because the number of local grantees was too small to be meaningful. We identified the states that received regular grants from a list that Labor provided of grants awarded in program years 2000 to 2002 and the state in which they were awarded. In developing our survey, we conducted pretests with three states. We contacted respondents to clarify information when needed. We analyzed the survey data by calculating descriptive statistics, as well as performing content analysis of the responses to open-ended survey questions. To determine whether progress reports might be a viable source of data to determine how national emergency grant funds are used at the national level, we obtained progress reports from 1 to 3 states from each of the Labor regional offices. We analyzed the reports to determine how consistent the data elements were from state to state. To determine whether the Workforce Investment Act Standardized Record Data (WIASRD) might be a viable source of data to determine how national emergency grant funds are used at the national level, we reviewed guidance issued by Labor and reports issued by Labor’s Office of Inspector General (OIG), state agencies, and Labor contractors. We also interviewed the OIG official responsible for an audit of WIA’s performance data and the officials from Social Policy Research Associates, the Labor contractor responsible for compiling the WIASRD. In addition, we performed electronic tests of the program year 2001 WIASRD data, including conducting frequencies and cross-tabulations, comparing results with those in published reports and identifying missing or incorrect values. To determine the completeness of data on national emergency grants in the WIASRD, we compared states’ data in the program year 2001 WIASRD against a list of states that had received one or more regular, dual enrollment, or disaster grants at least one year prior to the end of the reporting period for the 2001 WIASRD or by June 30, 2001. This analysis assumes that some participants in a grant program begun in program year 2000 would have exited during program year 2001. For states for which the 2001 WIASRD did not contain data on grant participants although they had received grants in program year 2000, we contacted the states to confirm that participants served with grants had exited in program year 2001. We determined that the WIASRD data elements pertinent to this report were not sufficiently reliable for our purposes. We have discussed the data reliability issues throughout the body of the report. To obtain information on the process for awarding national emergency grants, we conducted interviews with Labor officials in the Office of National Response and Office of Grants and Contracts Management. We also interviewed officials in the Employment and Training Administration’s (ETA) Office of Technology to obtain information on the electronic system for managing the grant process. To obtain information on reporting requirements and monitoring and oversight practices for the national emergency grant program, we interviewed officials in the Office of Field Operations. We also interviewed officials in all six Labor regions who are responsible for monitoring and oversight of national emergency grants. In Region 1, we interviewed both the Boston office and the New York office. To obtain information on Labor’s data validation initiative for national emergency grants, we interviewed an official in ETA’s Performance and Results Office and a contractor developing the technical components of the initiative. We also attended a training session on the WIA data validation initiative held in Labor’s San Francisco office for states and local areas in Region 6. The amounts shown include national emergency grant funds awarded during program years 2000-2002. This includes all initial grant awards and incremental payments made during this time, including incremental payments made for grants initially awarded prior to July 1, 2000. For example, Arizona and North Dakota each received an incremental payment for a regular grant awarded under the Job Training Partnership Act (JTPA). Alaska, Delaware, Hawaii, and Wyoming did not receive any regular, disaster, or dual enrollment national emergency grants during program years 2000-2002. Yunsian Tai made significant contributions to this report in all aspects of the work. In addition, Angela Anderson collected financial and program oversight information from Labor headquarters and regional offices; John Smale, Stuart Kaufman, and William Bates assisted in designing and analyzing the national survey; Barbara Johnson and Paula Bonin assisted in data reliability assessments; Jessica Botsford and Richard Burkard provided legal support; and Corinna Nicolaou provided writing assistance. Workforce Investment Act: Labor Actions Can Help States Improve Quality of Performance Outcome Data and Delivery of Youth Services. GAO-04-308. Washington, D.C.: February 23, 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. National Emergency Grants: Services to Dislocated Workers Hampered by Delays in Grant Awards, but Labor Is Initiating Actions to Improve Grant Award Process. GAO-04-222. Washington, D.C.: November 14, 2003. Workforce Investment Act: Potential Effects of Alternative Formulas on State Allocations. GAO-03-1043. Washington, D.C.: August 28, 2003. 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. Workforce Investment Act: Exemplary One-Stops Devised Strategies to Strengthen Services, but Challenges Remain for Reauthorization. GAO-03-884T. Washington, D.C.: June 18, 2003. Workforce Investment Act: Issues Related to Allocation Formulas for Youth, Adults, and Dislocated Workers. GAO-03-636. Washington, D.C.: April 25, 2003. Multiple Employment and Training Programs: Funding and Performance Measures for Major Programs. GAO-03-589. Washington, D.C.: April 18, 2003. Workforce Training: Employed Worker Programs Focus on Business Needs, but Revised Performance Measures Could Improve Access for Some Workers. GAO-03-353. Washington, D.C.: February 14, 2003. Older Workers: Employment Assistance Focuses on Subsidized Jobs and Job Search, but Revised Performance Measures Could Improve Access to Other Services. GAO-03-350. Washington, D.C.: January 24, 2003. Workforce Investment Act: States’ Spending Is on Track, but Better Guidance Would Improve Financial Reporting. GAO-03-239. Washington, D.C.: November 22, 2002. Workforce Investment Act: Interim Report on Status of Spending and States’ Available Funds. GAO-02-1074. Washington, D.C.: September 5, 2002. Workforce Investment Act: Better Guidance and Revised Funding Formula Would Enhance Dislocated Worker Program. GAO-02-274. Washington, D.C.: February 11, 2002. | The Department of Labor (Labor) awards national emergency grants to states and local areas to provide assistance to workers who lose their jobs because of major economic dislocations or disasters. Most grants awarded are regular grants to assist workers affected by plant closings or mass layoffs. Questions have been raised about whether grant funds are getting to states and local areas quickly enough. GAO was asked to assess the effectiveness of the process for awarding national emergency grants, whether Labor is planning changes that will improve the grant award process, and what is known about how grant funds are used. Labor does not award most national emergency grants in a timely manner, and as a result, services to workers have been delayed, interrupted, or denied. Labor's goal is to make award decisions within 30 calendar days of receiving a complete application. However, nearly 90 percent of regular grants took longer than 30 days to award. On average, Labor took 92 days to award regular grants. For grants disbursed in more than one payment, Labor took on average 83 days to award the additional increments. Twenty-five of 38 states responding to our survey reported that because of grant award delays, local areas had to delay or deny services to workers. Labor is taking some steps, such as implementing an electronic system to better manage its award process and incorporating its 30-day goal in new guidelines, that may improve the timeliness of grant awards. However, some weaknesses still remain in Labor's planned changes that could prevent Labor from accurately assessing how long it takes to make grant awards and incremental payments. For example, Labor plans to stop counting the days elapsed if it finds problems with an application, and Labor's proposed guidelines do not establish a timeliness goal for incremental payments. Little is known on a national level about how national emergency grant funds are used because of weaknesses in two primary data sources. Because of the lack of clear guidance, states report inconsistent data in progress reports, and some states have not reported data on national emergency grants to a national database covering Workforce Investment Act (WIA) programs. To address these problems, Labor is implementing a standardized electronic form for grantees to submit progress reports, issued guidance requiring states to submit data on national emergency grant participants to the national WIA database, and checked states' latest submissions to identify if data were missing. However, Labor's guidance still is not sufficiently clear to ensure that states will report data in progress reports consistently, and Labor does not have specific plans to continue checking states' data submissions to ensure that data are complete. |
Although typically organized as a corporation, a mutual fund’s structure and operation differ from those of a traditional corporation. In a typical corporation, the firm’s employees operate and manage the firm, and the corporation’s board of directors, elected by the corporation’s stockholders, oversees its operations. Mutual funds also have a board of directors that is responsible for overseeing the activities of the fund and negotiating and approving contracts with an adviser and other service providers for necessary services. Unlike a typical corporation, a typical mutual fund has no employees; it is created and operated by another party, the adviser. The adviser is an investment adviser/management company that manages the fund’s portfolio according to the objectives and policies described in the fund’s prospectus. The adviser contracts with the fund, for a fee, to administer its operations. These fees are typically based on the size of assets under management. In managing the fund’s assets, the adviser owes a fiduciary duty to the investors in the mutual funds to act for the benefit of the investors and not use the fund’s assets to benefit itself. Mutual funds are subject to SEC oversight and are regulated primarily under the Investment Company Act of 1940 (1940 Act) and the rules it has adopted under that act. SEC has authority under this act to promulgate rules to address a constantly changing financial services industry environment in which mutual funds and other investment companies operate. The advisory firms that manage mutual funds are regulated under the Investment Advisers Act of 1940 (Advisers Act), which requires certain investment advisers to register with SEC and conform to SEC regulations designed to protect investors. In addition to its rulemaking authority, SEC carries out its mutual fund oversight responsibilities through examinations. SEC’s Office of Compliance Inspections and Examinations (OCIE) establishes examination policies and procedures and has primary responsibility for conducting mutual fund company examinations. SEC is vested with the authority to bring civil enforcement actions against individuals and companies that violate provisions of the 1940 Act, the Advisers Act, and other federal securities laws and regulations. While SEC has civil enforcement authority only, it works with various federal and state criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action. SEC carries out its enforcement activities through Enforcement. Enforcement identifies potential securities laws violations through referrals from SEC examiners or other regulatory organizations such as NASD, tips from securities industry insiders or the public, the press, and its own surveillance of the marketplace. After conducting an investigation, Enforcement staff present their findings to the Commission for its review and approval. The Commission can authorize staff to bring an enforcement action in federal court or through administrative proceedings. When bringing a civil enforcement action in federal court, SEC files a complaint with a U.S. District Court that describes the misconduct, identifies the laws and rules violated, and identifies the sanction or remedial action that is sought. Administrative proceedings differ from civil enforcement actions brought in federal court in that they are heard by an administrative law judge (ALJ), who is independent of SEC. The ALJ presides over a hearing and considers the evidence presented by Enforcement staff, as well as any evidence submitted by the subject of the proceeding. SEC may also enter into settlements with defendants who choose not to contest the charges against them. In a typical settlement of an administrative proceeding, the defendant neither admits nor denies the violation of the securities laws and agrees to the imposition of sanctions. According to senior Enforcement staff, both SEC and the defendants have an incentive to avoid litigation and seek a settlement, as litigation is costly and time-consuming. SEC can seek a variety of sanctions against defendants in federal court or as part of administrative proceedings. These include officer and director bars and monetary sanctions, such as disgorgement and penalties. The amount of disgorgement SEC seeks in a particular case is usually determined by the amount of monetary gain, if any, realized from the violative conduct. SEC can use these funds to compensate investors harmed by the misconduct. Penalties, on the other hand, are intended to punish wrongdoing and deter others from engaging in similar misconduct. The Sarbanes-Oxley Act of 2002 (SOX) authorizes federal courts and SEC to establish “fair funds” to compensate victims of securities violations. Section 308(a) of SOX provides that if in an administrative or a civil proceeding involving a violation of federal securities laws an order requiring disgorgement is entered, or if a person agrees in settlement to the payment of disgorgement, any penalty assessed against such person may, together with the disgorgement amount, be deposited into a fair fund and disbursed to victims of the violation pursuant to a distribution plan approved by SEC. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (Remedies Act) amended existing federal securities laws to authorize SEC and federal district courts to impose penalties for securities violations other than insider trading, for which penalties were already authorized. The Remedies Act specifies the maximum penalty that SEC can seek in administrative proceedings from a firm or individual in noninsider trading cases according to a three-tier framework, which allows for increasing penalties based on the presence of fraud and harm to investors (see table 1). For example, if SEC finds that a firm’s securities law violations did not involve fraud or cause substantial harm to investors, a tier one penalty may be appropriate. In that case, the maximum penalty SEC can seek would be $65,000 per violation. However, if SEC finds that a firm’s misconduct involved fraud and caused substantial harm to investors, it can apply the third tier maximum penalty— $650,000 per violation. Although the Remedies Act requires that in order to impose a penalty in an administrative proceeding SEC must find that the penalty is in the public interest, the act did not impose criteria that SEC must consider in making this determination. Instead, the Remedies Act provides a nonexclusive list of factors that SEC may consider, such as whether the conduct involved fraud or directly or indirectly resulted in harm to other persons. Enforcement staff told us that over the years SEC has internally developed more extensive criteria based on this guidance, case law, and policy directives from the Commission, which are documented for Enforcement staff in internal division memorandums. These criteria include the egregiousness of conduct—whether it involved fraud, and if so, the degree of scienter present; the degree of harm to investors resulting from the conduct; the extent of the defendant’s cooperation; whether the defendant derived any economic benefit from the conduct; the duration of the conduct; whether the defendant is a recidivist; the seniority of individuals that participated in the conduct; the need for deterrence; the defendant’s ability to pay; the size of the firm or net worth of the individual; and the penalties obtained in cases involving the same or a similar scheme. When negotiating settlements on behalf of the Commission, SEC Enforcement staff apply these factors to the facts and circumstances of each case when determining what penalty to seek. These criteria are similar to the criteria other financial regulators use in their penalty-setting process, including CFTC, OCC, and NASD. One key factor for SEC in effectively fulfilling law enforcement objectives such as penalty-setting is the implementation of appropriate internal controls. According to the Standards for Internal Control in the Federal Government, internal controls (also called management controls) comprise the plans, methods, and procedures used to meet missions, goals, and objectives and, in doing so, support performance-based management. They are a major part of managing an organization. Among other things, they should promote the effectiveness and efficiency of operations, including the use of the entity’s resources, and the agency’s compliance with applicable laws and regulations. They should also be designed to provide reasonable assurance that the objectives of the agency are being achieved. SEC has responded to the widespread trading abuses in the mutual fund industry by bringing 14 enforcement actions against investment advisers and 10 enforcement actions against broker-dealer, brokerage-advisory, and financial services firms that conducted or facilitated the illicit trading. Penalties SEC has obtained in settlements with these firms have included some of the highest in the agency’s history and are consistent with other penalties obtained in cases of similarly egregious and pervasive misconduct. Further, SEC has held individuals, many of them high- ranking, responsible for their role in the misconduct and also obtained historically high penalties in settlements with several of them. In reviewing a selection of 11 out of the 14 enforcement actions SEC brought against investment advisers and their associated individuals, we found that SEC consistently applied its penalty-setting process and that this process contained various levels of review to help ensure that no one individual or group of individuals had disproportionate influence on penalty decisions. Additionally, SEC coordinated penalties and disgorgements (which force firms to give up ill-gotten gains) with interested states in the majority of cases, although some states obtained additional monetary sanctions. Since NYSOAG announced its discovery of the trading abuses in the mutual fund industry in September 2003, SEC has brought 14 enforcement actions against investment advisers primarily for market timing abuses and 10 enforcement actions against broker-dealer, brokerage-advisory, and financial services firms for market timing abuses and late trading. SEC has entered into settlements in all 14 investment adviser cases and obtained penalties ranging from $2 million to $140 million (see fig. 1). These penalties are among the highest SEC has ever obtained for securities laws violations. Before January 2003, penalties SEC obtained in settlement were generally under $20 million. In contrast, 11 of the 14 penalties obtained in the investment adviser cases are over $20 million, with 8 penalties at $50 million or more. Pursuant to the fair fund provision of SOX, SEC plans to use the penalties and disgorgement moneys, a total of about $800 million and $1 billion, respectively, to provide restitution to harmed investors. In addition to settling with investment advisers, as of February 28, 2005, SEC has settled with two broker-dealers, two insurance companies, and one brokerage-advisory firm, with penalties totaling $17.5 million. The penalties SEC obtained in the 14 investment adviser cases are also consistent with penalties obtained in settled enforcement actions in two types of cases that senior Enforcement staff identified as being as egregious as the mutual fund trading abuses—the recent corporate accounting fraud and investment banking conflict-of-interest cases. The recent, large corporate accounting frauds surfaced in late 2000 and concerned publicly traded companies that allegedly used fraudulent accounting techniques to inflate their revenues and drive up stock prices. The investment banking analyst cases involved several investment firms that settled enforcement actions brought by SEC in 2003 for allegedly producing securities research that was biased by investment banking interests. Table 2 compares the range of penalties and average penalties SEC obtained from settlements of enforcement actions brought against firms for mutual fund trading abuses, corporate accounting fraud, and investment banking conflicts of interest. Although particular penalties reflect the facts and circumstances of each case, table 2 shows that the average penalties among the three types of cases have generally been consistent (when excluding the record $2.25 billion penalty obtained in a corporate accounting fraud case), particularly when compared with the lower penalties obtained in past years. In a public speech, the Director of Enforcement said that the comparatively large penalties in these cases represented an effort to increase accountability and enhance deterrence in the wake of such extreme misconduct in the securities industry and noted that such penalties create powerful incentives for firms to institute preventative programs and procedures. Others, however, including two members of the Commission, have questioned the appropriateness of these relatively large penalties, particularly for public companies, arguing that the cost of penalties are borne by shareholders who are frequently also the victims of the corporate malfeasance. Further, the penalties SEC has obtained in the mutual fund and other recent scandals are generally higher than those obtained in settlement by NASD and other federal financial regulators. For example, NASD has also brought nine enforcement actions against broker-dealers for market timing and late trading abuses and obtained penalties ranging from $100,000 to $1 million. Similarly, CFTC and OCC have obtained consistently lower penalties in settlement. For example, as of December 2004, the highest penalties OCC and CFTC obtained were for $25 million and $35 million, respectively. In addition to bringing enforcement actions against firms, SEC has held individuals responsible for their roles in the trading abuses. As of February 28, 2005, SEC had brought enforcement actions against 24 individuals and settled with 18, obtaining penalties and industry bars in all cases and disgorgement from some (see table 3). Almost all of these settled enforcement actions involved high-level executives, including eight chief executive officers (CEO), chairmen, and presidents. Penalties SEC obtained in these settlements ranged from $40,000 to $30 million. The penalties obtained from 3 individuals are among the four highest in SEC’s history—one for $30 million (the highest) and two for $20 million. SEC also obtained a combined $150 million in disgorgement from these three individuals. In addition, as part of its settlements, SEC permanently barred 5 individuals, including the 3 mentioned above, from association with investment advisers, investment companies, and in some cases other regulated entities, and barred the remaining 13 for various periods from their industries. In reviewing 11 of the 14 settled enforcement actions related to the investment adviser cases, we found that SEC followed a similar penalty- setting process in each of them. SEC regional staff in the six offices that were part of our review generally began their penalty analysis by determining the amount of money earned by the firms and individuals from the abusive market timing and the economic harm such trading caused to investors. For example, as a measure of monetary gain, staff determined the fees the firms earned on the assets market timers invested short-term for market timing purposes. As a measure of harm to fund investors, staff determined the amount of dilution to fund shares that occurred as a result of this improper trading, using the same methodology for each case. SEC’s Office of Economic Analysis, which determined this methodology, assisted staff with these analyses. Staff assessments of monetary gain and harm caused were also used to help them determine appropriate disgorgement. After establishing the economic benefit and harm caused, staff generally then determined the monetary range within which they could seek a penalty by calculating the maximum penalty that applied to their particular case. According to SEC staff at several regional offices, the penalty statutes did not limit them from seeking penalties they thought appropriate, largely because the statutes leave it up to SEC to define the term “violation.” Staff did not necessarily seek the statutory maximum in these cases because they considered SEC criteria for assessing the relative egregiousness of the misconduct and in some cases concluded that it warranted a lesser penalty, and also because they considered the risk that the case would be litigated instead of settled. For example, in one case where staff could have argued a statutory maximum of $1 billion based on the hundreds of improper trades found, staff said they could not have made a convincing argument for such a high penalty based on the relatively small amount of economic harm and level of scienter involved (scienter refers to the requisite degree of knowledge that makes a person’s actions culpable). These staff told us that even if they disregarded SEC criteria and sought the maximum it was very unlikely that they would have achieved an amount close to it. The staff said that the firm involved would never have settled and it was unlikely that the judge or ALJ assigned to the case would have found staff’s underlying rationale for the penalty recommendation credible. As judges and ALJs make independent determinations of the facts when determining whether a penalty or other sanctions are warranted, staff said that they may decide on a lesser penalty than what staff recommended. For that reason, staff said that while the penalty statutes provide a baseline for their analysis, they seek penalties in settlement that reflect the facts and circumstances of the case and the penalties obtained in similar cases. To determine a penalty appropriate to the facts and circumstances of each case, SEC staff used the criteria discussed earlier to establish the egregiousness of the case relative to that of other market timing and late trading cases—considering, for example, the level of scienter involved, the amount of harm caused and benefit gained, the level of cooperation, and the seniority of the individuals involved. We found that staff sought penalties that reflected these differences. Barring the presence of aggravating or mitigating factors, conduct perceived as more egregious received relatively greater penalties. For example, the highest penalty that SEC obtained from an individual in the market timing and late trading cases was from the former founder and chairman of an investment adviser who SEC found to have market timed the funds he managed for his own personal gain. Regional staff said that this individual’s $30 million penalty was merited because as the most senior official in the firm, he was duty- bound to protect the interests of all fund investors and should have set an example in proper ethical conduct for the rest of the firm’s employees. Instead, SEC found that he continued his market timing activities even after compliance officials at the firm detected his improper trading and counseled him to cease. Further, this was the second time he had been the subject of an SEC enforcement action—in 1994, SEC charged him with improper personal trading in the fund’s portfolio securities. Finally, they said he cooperated very little in the investigation. In some cases we found that where SEC perceived a high level of egregiousness, the presence of other factors mitigated a more severe penalty determination, such as the degree of cooperation or the firm’s ability to pay. For example, staff required firms that argued they could not pay the penalty initially sought to provide documentation of any financial constraints and the financial consequences of paying the higher penalty. Regional staff regularly consulted with senior Enforcement staff in preparing their penalty recommendations. Enforcement’s Office of the Chief Counsel is responsible for reviewing all sanction recommendations, including penalties, for consistency with penalties recommended in analogous cases. This office reviewed all of the penalty and other sanctions recommended in the 11 cases we reviewed. Additionally, staff shared information about penalty-setting in the market timing and late trading settlements with a range of agency officials outside of Enforcement. Once staff had negotiated with the defendant the amount of the disgorgement and penalties and the application of other sanctions they believed were appropriate for a case and obtained a formal offer of settlement from the defendant, staff prepared a memorandum for the Commission describing the settlement offer and their rationale for recommending that the Commission accept it. For example, the memorandums explained how the disgorgement figure related to any calculations of economic benefit or harm and discussed the factors most relevant to the penalty analysis. Before sending the memorandum to the Commission for review and approval, other interested SEC divisions and offices, such as Investment Management, Corporation Finance, and the Office of the General Counsel, first reviewed it. Enforcement staff said that by asking staff from other areas of SEC to review their sanction recommendations, they help ensure that no one individual or small group has a disproportionate influence over the penalty recommended to the Commission and that the penalty reflects the Commission’s policy goals. The Commission either approved the settlement terms outlined in the memorandum or advised Enforcement as to any adjustments they wanted made, which staff then renegotiated with the defendants. SEC coordinated penalties and disgorgements with interested states in many of the settled enforcement actions related to late trading and market timing. For example, in 11 cases, three states (New York, Colorado, and New Hampshire) coordinated their settlement negotiations with SEC, agreeing to seek the same disgorgement and penalty amounts and requiring in their individual settlement orders that the payments be remitted to and administered by SEC pursuant to the related SEC settlement order. As a result of this collaboration, the penalty moneys collected in these cases can be used to compensate harmed investors, under the fair fund provision of SOX. In one case, a state required a separate, duplicative payment from one firm of disgorgement and penalties, but SEC noted in its own settlement order that it had considered this fact when seeking penalties against the subject firm. While in most cases states agreed to the same penalty and disgorgement as SEC and to have the payments made directly to SEC, some states, most notably New York, obtained additional monetary sanctions. In addition to disgorgement and penalties, NYSOAG ordered most of the investment advisers with whom it settled to reduce the fees that they charge mutual fund investors over the next 5 years. The value of these reductions totaled about $925 million and in some cases more than doubled the value of the disgorgement and penalties SEC obtained in an individual case. According to NYSOAG, these investment advisers did not just allow improper market timing and late trading, but they had also charged mutual fund investors significantly more in fees than institutional investors for similar services. NYSOAG said that the SEC settlements focusing on disgorgement and penalties for trading abuses did not compensate investors who were overcharged and that the fee reductions it obtained provided this needed restitution. In conjunction with the settlement order related to one investment adviser case, the Commission issued a public statement on its position regarding fee reductions. The Commission stated that it did not seek fee reductions with this investment adviser because this sanction did not serve its law enforcement objectives. First, the Commission said that there were no allegations that the fees charged by the adviser in question were illegally high. Fee reductions would provide compensation to investors who were not harmed by the market timing abuses SEC set forth in the settlement order. Second, they said that mandatory fee discounts would require that customers do business with the firms to receive the benefits of the fee reductions (meaning that prior customers that received allegedly illegal prices but already redeemed their shares would not benefit). For those reasons, the Commission said that their efforts focused on addressing the market timing abuses by providing full compensation to investors harmed by this activity and a significant up-front penalty. In addition to NYSOAG, Colorado and New Hampshire also obtained additional monetary sanctions in its settlements in three investment adviser cases. Colorado required the firms involved in two cases to pay $1 million and $1.5 million, respectively, to reimburse its costs and for consumer and investor education and future enforcement activities within that state. New Hampshire required the firm involved in another case to pay $1 million for investor education and protection purposes and an additional $100,000 to defray the costs of the investigation. After NYSOAG announced its discovery of mutual fund trading abuses in September 2003, officials from that office, DOJ, and SEC told us that they met to discuss potential criminal violations in cases involving these abuses and clarify subsequent investigative responsibilities and coordination. Other state officials told us they also reviewed cases involving mutual fund trading abuses for criminal potential. These officials said that the criminal prosecution of market timing is complicated by the fact that market timing conduct itself is not illegal. DOJ officials told us that they have brought criminal charges in cases where late trading occurred, primarily because late trading is a clear violation of federal securities laws and authorities can readily prosecute cases once evidence of late trading is established. Officials from DOJ, NYSOAG, and the Wisconsin Attorney General’s Office told us that they have declined to bring criminal charges for market timing conduct, largely because market timing itself is not illegal. In instituting administrative proceedings in the 14 investment adviser cases discussed above, SEC alleged that the undisclosed market timing conduct involved constituted securities fraud, conduct expressly prohibited under federal securities laws. According to DOJ officials, although state and federal criminal prosecutors can also seek criminal sanctions for securities fraud, such prosecutions may be more difficult to prove than civil actions. DOJ officials told us that criminal prosecutors must be able to prove beyond a reasonable doubt that the defendant committed fraud, whereas civil authorities generally need only show that a preponderance of the evidence indicated a fraudulent action. According to DOJ and NYSOAG officials, for a variety of reasons their review of cases involving market timing arrangements concluded that they did not warrant criminal fraud prosecutions. For example, in commenting on one case involving an investment adviser’s undisclosed market timing arrangement, the Wisconsin Attorney General stated that the risk in trying to convince a jury beyond a reasonable doubt that the particular behavior was criminal motivated his office and other state prosecutors to instead pursue a civil enforcement action. According to a recent law journal article, the ambiguous nature of some funds’ prospectus language may have further weakened the ability of federal and state prosecutors to bring criminal charges against investment advisers that allowed favored investors to market time. The article stated that it is often unclear whether and to what extent a fund prohibits market timing. For example, many mutual funds merely “discouraged” market timing to the extent that it caused “harm” to the funds. According to the article, such language is subject to various interpretations as to what constitutes discouraging and what constitutes harm to fund performance. Further, it stated that even prospectus disclosures that allow a specific number of exchanges can be ambiguous because the term “exchange” is subject to various interpretations. Such ambiguities may hamper criminal prosecutors’ efforts to prove that the market timing arrangements constituted a willful intent to defraud. As of March 31, 2005, federal prosecutors have brought one criminal case involving abusive market timing. However, this case involved a broker- dealer’s alleged efforts to facilitate and conceal short-term trading by its customers despite warnings from mutual fund companies that such trades would not be accepted, as opposed to allegations of undisclosed arrangements between a mutual fund company and favored customers. In that case federal prosecutors filed a criminal complaint alleging securities fraud and conspiracy charges against three top executives at this firm. The complaint alleges that these individuals devised and executed a number of deceptive practices to circumvent market timing restrictions placed on their firm by mutual funds companies. These deceptive practices allegedly included creating and using multiple account numbers for the same client and executing trades through multiple clearing firms. As of March 31, 2005, these individuals were awaiting trial. NYSOAG and DOJ have brought at least 12 criminal prosecutions against individuals for charges that include late trading. The individuals charged included high-level executives, traders, and other employees of three broker-dealers, two banking-related organizations, and one hedge fund who allegedly either conducted or facilitated late trading for others in mutual fund shares. In one case, NYSOAG charged a former executive and senior trader of a prominent hedge fund with conducting late trading on behalf of that firm through certain registered broker-dealers in violation of New York’s state securities fraud statute. This individual pleaded guilty in the New York State Supreme Court. In another case brought by DOJ, prosecutors charged several broker-dealers with conducting late trading for their clients. According to DOJ officials, criminal prosecution of late trading is fairly straightforward because the practice is a clear violation of federal securities laws. SEC staff said that as state and federal criminal prosecutors were already aware of and generally evaluated the mutual fund trading abuse cases for potential criminal violations on their own initiative, they did not need to make specific criminal referrals to bring these cases to their attention. However, in the course of our review, we found that SEC’s capacity to effectively manage its overall criminal referral process may be limited by inadequate recordkeeping. SEC rules provide for what SEC staff characterize as both formal and informal processes for making referrals for criminal prosecutions; however, senior Enforcement staff told us that SEC uses only the informal procedures for making criminal referrals, describing them as less time-consuming and more effective than the more cumbersome formal processes. While potentially efficient, SEC’s informal procedures do not provide critical management information on the referral process. Specifically, SEC staff do not document referrals or reasons for making them. According to federal internal control standards, policies and procedures, including appropriate documentation, should be designed to help ensure that management’s directives are carried out. Without proper documentation, SEC cannot readily determine and verify whether staff make appropriate and prompt referrals. Documentation of referrals might serve as an additional internal indicator of the effectiveness of SEC’s referral process and is also important for congressional oversight of law enforcement efforts in the securities industry. SEC rules set forth what SEC staff characterize as “formal” and “informal” procedures for making referrals for criminal prosecution. Under what SEC staff described as the formal referral procedures, the Director of Enforcement reviews cases to be recommended for criminal prosecution in coordination with the Office of the General Counsel, and, according to senior Enforcement staff, seeks Commission authorization for the recommended referral. Senior Enforcement staff told us that SEC has not used the formal procedures in over 20 years because the Commission has given the ability for making informal criminal referrals to Enforcement staff. According to these staff, the Commission found that it was approving all formal staff requests to make criminal referrals, so it was more efficient to give SEC staff the authority to make the referrals themselves. Under these more informal procedures, staff at the assistant director level or higher have delegated authority to communicate with other agencies regarding cases of mutual interest, including referring cases for criminal prosecution. According to senior Enforcement staff and regional staff, if staff attorneys uncover what they believe might be criminal violations, they inform their assistant director and other management officials about such findings. Staff at the assistant director or associate director level decide whether the staff’s findings merit a criminal referral, and if so, call the local U.S. Attorney’s Office or other criminal authority to see whether they have an interest in the case. According to SEC staff, if the criminal authority is interested in the case they send a letter requesting formal access to SEC’s investigative files for that case. These staff said that the primary benefit of the informal referral process is that it allows for an efficient flow of information between agencies. For example, SEC staff can tip off DOJ about potential criminal cases and DOJ officials also can call SEC and make informal referrals of cases for potential civil prosecution. Although SEC’s informal procedures may make the communication of criminal violations to DOJ efficient and enable an effective cooperative relationship between the agencies, they do not include requirements for the documentation of these referrals. Currently, Enforcement staff do not document what cases have been referred, to whom, or why. Senior Enforcement staff told us that the documentation of criminal referrals was unnecessary for several reasons. First, they said that such documentation would not aid them in managing the referral process, as they already have processes to ensure that cases with criminal potential are appropriately referred. For example, in addition to the day-to-day monitoring of cases at the associate director level, which results in informal referrals to criminal authorities, the Director or Deputy Director of Enforcement conducts quarterly reviews of SEC’s case inventory to ensure, among other things, that referrals are being made. Further, they said that Commission members as a matter of course question staff about their cooperation with criminal authorities when staff request approval for an enforcement action. Second, they said that since the wave of high profile corporate accounting scandals that began in 2000, DOJ has had unprecedented interest in pursuing securities fraud cases. According to SEC staff, senior DOJ officials discuss cases of mutual interest with SEC staff in regular joint meetings and as part of federal regulatory and law enforcement working groups of which both SEC and DOJ are members. SEC staff cited the recent cooperation between criminal law enforcement and SEC in the mutual fund cases as a good example of how well these processes work in alerting criminal prosecutors to appropriate cases. Further, they said that as each local U.S. Attorney’s Office (USAO) sets its own prosecutorial priorities, the most effective way for SEC staff to learn what each USAO considers a useful referral is through strong, informal relationships. While such informal relationships between SEC and criminal law enforcement authorities might be essential to their effective cooperation, appropriate documentation of decision-making is an important management tool. According to federal internal control standards previously discussed, policies and procedures, including appropriate documentation, helps ensure that management directives are carried out. Internal control procedures include a wide range of diverse activities such as authorizations, verifications, and the creation and maintenance of related records that provide evidence that these activities were executed. Without such documentation, the Commission cannot readily determine and verify whether staff make appropriate and prompt referrals. Also, the Commission does not have an institutional record of the types of cases that are referred over the years. Such information is essential for appropriate management and oversight of the referral process. For example, although Enforcement staff told us that the director’s quarterly review of cases involves a discussion of cooperative law enforcement activities, they said that it does not include a written report on criminal referrals made. Instead, the director must informally poll his staff if he wants to develop a list of such referrals, which introduces the likelihood of reporting error. Similarly, in conducting our work, SEC was unable to tell us what cases had been referred to criminal law enforcement without contacting staff assigned to the case or directing us to do the same. Further, we found that other financial regulators such as NASD and CFTC record their criminal referrals to manage their referral processes. Documentation of referrals might also serve as an additional internal indicator of the effectiveness of SEC’s referral process. In addition to aiding SEC management, information about the number, type, and reasons for SEC criminal referrals could also serve as an important tool for congressional oversight. Although SEC does not have jurisdiction over DOJ and other criminal law enforcement authorities and is not responsible for their decision to act or not upon a referral, the maintenance of evidence of SEC referrals could serve as verification that criminal authorities were made aware of appropriate cases. For example, senior Enforcement staff told us that prior to the corporate accounting fraud scandals, DOJ was not as interested as it is now in pursuing securities fraud. In an environment where changing priorities can influence the types of cases criminal law enforcement agencies pursue, the documentation of referrals would provide some assurance that SEC is consistently considering cases for potential criminal prosecution. SEC provides training and guidance to its staff on federal laws and regulations regarding employment with regulated entities and also requires former staff to notify SEC if they plan to make an appearance before the agency. However, SEC does not require departing staff to report where they plan to work as do other financial regulators. According to SEC staff, they have not tracked postemployment information because SEC examiners and other staff are highly aware of employment-related restrictions. SEC staff also said that since agency examiners have traditionally visited mutual fund companies periodically to conduct examinations, they are less likely to face potential conflicts of interest than bank examiners who may be located full-time at large institutions. Nonetheless, SEC staff have told us that as part of recently implemented and planned changes to SEC’s mutual fund oversight program they are assigning monitoring teams to the largest and highest-risk mutual fund companies. The teams would have more regular contact with fund management over a potentially longer period of time. In addition, a new SEC rule requiring all mutual fund firms to designate a chief compliance officer may increase an existing demand for SEC examiners to fill open positions in the compliance departments at regulated entities. As a result, the potential for employment conflicts of interest might increase. Federal laws place restrictions on the postfederal employment of executive branch employees. Specifically, these laws generally prohibit federal executive branch employees from participating personally and substantially in a particular matter that a person or organization with whom the employee is negotiating prospective employment has a financial interest. For example, a senior staff member of SEC’s Ethics Office told us that as a result of this law, SEC examiners and enforcement staff cannot negotiate employment with a firm that is the subject of an ongoing examination or enforcement action in which they have direct involvement, although they are not prohibited from obtaining employment with such firms after the completion of the examination or enforcement action in which they had such involvement. However, federal law prohibits former federal executive branch employees from “switching sides” and representing their new employer before any federal court or agency concerning any matter in which the employees were personally and substantially involved during the time of their federal employment. According to the SEC ethics staff, if a former SEC examiner accepted employment with a firm that the examiner had previously examined, the examiner would be permanently barred from communicating with SEC regarding the examination in which he or she had participated. In addition, former senior employees are prohibited for a period of 1 year following federal employment from communicating with or appearing before their former federal employer on behalf of anyone with the intent to influence agency action. This “cooling-off’ period is 2 years concerning any matter that was pending under a former employee’s official responsibility during the 1-year period prior to termination of federal employment. Violation of either the “seeking employment” or postfederal employment activity restrictions can result in civil and criminal sanctions. The SEC Ethics Office provides annual ethics training and offers ethics counseling to SEC examiners, Enforcement staff, and other employees to explain these and other conflict-of-interest laws and how to avoid violating them. Further, under SEC rules, former SEC staff are required to file a notice with SEC within 10 days after being employed or retained as the representative of any person outside of the government in any matter in which an appearance before, or communication with, SEC or its employees is contemplated. This notice must include a description of the contemplated representation, an affirmative statement that the former employee did not have either personal and substantial responsibility or official responsibility for the matter that is the subject of the representation while employed by SEC, and the name of the SEC division or office in which the former employee had been employed. Senior Ethics Office staff said that upon receiving these notices they verify with the former division or office that the contemplated representation does not involve a matter that the person had responsibility for during his or her employment with SEC. While these notices provide SEC with information on some employees’ postemployment activities and allow SEC to monitor compliance with postfederal employment activity restrictions, they do not provide SEC with information on the postemployment plans of all of its departing staff at the time they announce their intention to leave the agency. SEC currently does not require departing staff to report where they plan to work, a procedure required by other financial regulators to better ensure that seeking employment restrictions have not been violated. For example, OCC and the Federal Reserve Banks of New York and Chicago obtain information from departing staff, or at least examination staff in the case of the Federal Reserve Banks, on where they are going to work. NASD also tracks information on departing staff’s subsequent employment with member firms, although they do not ask staff directly for it. Officials from three of these agencies said that they also ask for this information to assess whether the quality of the employee’s prior regulatory work could have been compromised by a potential conflict of interest with the employee’s new place of employment. For example, when departing examiners, enforcement attorneys, and other professional staff go to work for a bank with whom they have recently been involved in a regulatory matter, OCC requires a review of their related work products, as does the Federal Reserve Bank of New York for departing examiners. Similarly, NASD requires staff to conduct a reexamination of a member firm if that firm hires an employee who was involved in a recent examination of that firm or a review of the related examination workpapers if the employee was a former supervisor, assistant/associate director, or attorney who reviewed or worked on the examination. SEC currently does not require similar workpaper reviews or reexaminations. According to senior staff from SEC’s Office of Compliance Inspections and Examinations (OCIE), which administers SEC’s nationwide examination program for investment companies and other regulated entities, postemployment tracking has not been viewed as essential because SEC examiners face fewer potential conflicts of interest than bank examiners. Senior OCIE staff told us that unlike bank examiners, SEC examiners typically participate in multiple examinations in the course of the year. Banking regulators, on the other hand, often have examiners stationed permanently on site at the largest financial institutions. OCIE staff said that because SEC examiners do not have prolonged contact with management at regulated entities, there is little opportunity for them to develop the type of relationships that could lead to conflicts of interest. However, recently implemented and planned changes to SEC’s mutual fund oversight program might increase the potential for employment conflicts of interest. As part of these changes (which we review in a forthcoming report), OCIE is creating monitoring teams of two or three examiners to be assigned to review the operations and activities of the largest and highest-risk mutual fund companies on an ongoing basis, as opposed to conducting periodic routine examinations. We note that SEC’s planned approach for large mutual fund companies is intended to be similar to the bank regulators’ approach to bank supervision at large financial institutions, in which teams are assigned full-time to monitor the largest institutions. Such an approach would increase the contact SEC examiners have with fund management and potential for conflicts of interest. Further, SEC’s new rule requiring all mutual fund firms to designate a chief compliance officer may increase an existing demand for SEC examiners and other staff to fill open positions at the compliance departments of regulated entities. SEC examiners told us that departing SEC examiners commonly obtained employment in the compliance departments of regulated entities. Further, these examiners and securities industry officials told us that having former SEC staff at these firms was very beneficial because SEC staff have expertise in compliance issues and are compliance-oriented. One securities industry official said former SEC examiners and other staff are a natural source of expertise for firms that were involved in the recent mutual fund trading abuses and that want to correct their problems. While the compliance departments at regulated entities may benefit by hiring experienced SEC staff, an increase in the employment potential of examiners and other staff at these firms could also increase the potential for conflicts of interest. After the mutual fund trading abuses were uncovered in September 2003, SEC acted swiftly to bring enforcement actions against prominent firms and individuals involved in the misconduct and obtained some of its highest penalties in history from them in settlements. SEC has also consistently applied its procedures for establishing such penalties. However, we identified weaknesses in SEC’s internal controls that may limit its capacity to effectively manage its criminal referral process. Currently, SEC does not require staff to document that a referral has been made to a federal or state criminal investigative authority or the reasons for such referrals. According to federal internal control standards, such documentation is important for verifying that management directives have been carried out. Without such documentation, SEC’s ability to measure the performance of its criminal referral process and to help ensure effective congressional oversight of that process is limited. We also found that SEC has not established controls that could help ensure the independence of staff from the fund industry as they carry out SEC’s critical oversight work. Although SEC provides ethics training to its employees regarding seeking employment and postemployment conflict- of-interest laws, the agency does not require departing staff to provide information on their future employment plans. In the absence of such information, SEC’s capacity to ensure compliance with conflict-of-interest laws related to postemployment opportunities is limited. Further, SEC does not have procedures in place requiring review of departing employees’ workpapers should a potential conflict of interest be discovered. SEC’s recently implemented and planned changes to its mutual fund examination program that will likely involve greater contact between examiners and company officials as well as the potential that agency staff will seek to become compliance officers underscore the need for the agency to ensure compliance with these critical conflict of interest laws. To strengthen SEC’s management procedures and better ensure that agency responsibilities are being met, the SEC Chairman should ensure that the agency take the following two actions: document informal referrals to criminal authorities for potential criminal prosecutions and the reasons for such referrals; and request that departing employees provide the name of their next employer as part of exit procedures and establish procedures to review the departing employees’ related work products if a potential conflict of interest is determined to exist. SEC provided written comments on a draft of this report, which are reprinted in appendix II. SEC also provided technical comments, which were incorporated into the final report, as appropriate. SEC agreed with our recommendations. SEC indicated that it is in the process of converting its investigation opening form to a web-based application, which will provide for documentation of informal referrals to criminal authorities. SEC also noted steps it is taking to avoid conflicts of interests that could affect the implementation of SEC programs and activities, which include establishing a formal ethics component to exit procedures. As part of this process, SEC will ask departing staff to provide information about the identity of their next employer, and, to the extent a potential conflict is identified, will investigate as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time we will provide copies of this report to SEC and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no cost on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Wesley M. Phillips, Assistant Director, or me at (202) 512-8678. GAO staff who made major contributions to this report are listed in appendix III. The objectives of our report were to (1) compare the severity of civil money penalties (penalties) obtained in the mutual fund cases with penalties obtained in the past and with similarly egregious cases, review the Securities and Exchange Commission’s (SEC) penalty-setting process in these cases, and discuss SEC’s coordination with state securities regulators in civil enforcement actions; (2) provide information on state and federal criminal enforcement actions regarding market timing and late trading violations; (3) assess SEC’s management procedures for making referrals to the Department of Justice (DOJ) and state authorities for potential criminal prosecution; and (4) evaluate SEC’s procedures for ensuring compliance with federal laws and regulations that govern employees’ ability to negotiate and take positions with regulated entities, such as mutual fund companies. To compare the severity of penalties obtained in the mutual fund cases with penalties obtained in the past and with similarly egregious cases, review SEC’s penalty-setting process in these cases, and discuss SEC’s coordination with state securities regulators in civil enforcement actions, we obtained copies of SEC enforcement actions and settlement orders related to market timing and late trading cases and compared them to corporate accounting fraud and investment banking analyst cases, which SEC staff identified as similar to the mutual fund cases in the egregiousness and pervasiveness of misconduct. We obtained these documents from SEC’s Web site and SEC staff reviewed the list of cases we compiled for accuracy. We then calculated and compared the average penalties obtained in these three types of cases. We also obtained data from SEC on the 30 highest penalties obtained from entities in settlement, according to their records, and similar data for individuals. This data allowed us to compare the penalties obtained in the mutual fund trading abuse cases to the penalties obtained in past cases. In addition, we obtained information from SEC, the Commodity and Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC), and the NASD on the criteria and processes they use to determine penalties and data from CFTC and OCC on their highest settlements and from NASD on its mutual fund trading abuse settlements. Then, to determine whether SEC used its criteria and processes consistently when evaluating what penalties to seek in the late trading and market timing cases, we reviewed documentation pertaining to a selection of 11 out of 14 enforcement actions SEC brought against investment advisers charged with market timing abuses. These 11 cases were distributed among six regional SEC offices. We interviewed regional examiners and attorneys assigned to each case and reviewed the related investigative record. For example, we reviewed enforcement actions and settlement orders, staff analyses of economic harm caused and benefit gained, memorandums from the Division of Enforcement to the Commission, and SEC examinations for each of these investment advisers and their associated fund companies dating back several years. The mutual fund companies we chose to review were among the 100 largest mutual fund companies nationwide, as measured by the size of customer assets under management as of August 1, 2003. We also interviewed two legal scholars and economists who have conducted recent research on SEC penalties or mutual fund trading abuses to obtain additional views on SEC’s penalty- setting process. In addition, we interviewed securities regulators or law enforcement officials from three states that coordinated settlement negotiations with SEC in bringing their own enforcement actions against investment advisers involved in 11 of the 14 SEC enforcement actions mentioned above and obtained copies of the related enforcement actions and settlement orders from their Web sites. These regulatory or law enforcement entities were the New York State Office of the Attorney General (NYSOAG), the Colorado Attorney General’s Office, and the New Hampshire Bureau of Securities Regulation. To provide information on state and federal criminal enforcement actions regarding market timing and late trading violations, we interviewed staff from SEC, NYSOAG, the Wisconsin Attorney General’s Office, and DOJ and obtained copies of late trading and market timing-related criminal complaints from the Web sites of the relevant federal or state criminal authorities. To assess SEC’s management procedures for making referrals to DOJ and state authorities for potential criminal prosecution, we reviewed SEC rules governing these referrals and interviewed staff from SEC, DOJ, and NYSOAG. We also interviewed officials from NASD and CFTC on their referral procedures and obtained copies of relevant rules and policies. We evaluated SEC’s referral procedures using Standards for Internal Controls in the Federal Government. To evaluate SEC’s procedures for ensuring compliance with federal laws and regulations that govern employees’ ability to negotiate and take positions with regulated entities, such as mutual fund companies, we reviewed applicable laws and regulations, interviewed staff from and reviewed the policies and procedures of SEC, OCC, the Federal Reserve Banks of Chicago and New York, and NASD for promoting staff compliance with federal laws limiting the seeking of employment opportunities and postemployment activities of federal executive employees and, in the case of the Federal Reserve Banks and NASD, codes of ethics that also include seeking employment restrictions. We performed our work in Boston, Mass.; Chicago, Ill.; Denver, Colo.; New York, N.Y.; Philadelphia, Penn.; and Washington, D.C., between May 2004 and May 2005 in accordance with generally accepted government auditing standards. SEC provided written comments on a draft of this report, which are reprinted in appendix II. Our evaluation of these comments is presented in the agency comments section. In addition to those named above, Fred Jimenez, Stefanie Jonkman, Marc Molino, Omyra Ramsingh, Barbara Roesmann, Rachel Seid, David Tarosky, and Anita Zagraniczny made key contributions to this report. | The Securities and Exchange Commission (SEC) and other regulators have recently identified two significant types of trading abuses--market timing and late trading--in the mutual fund industry. The more widespread abuse was market timing, which involved situations where investment advisers (firms that may manage mutual funds) entered into undisclosed arrangements with favored customers who were permitted to trade frequently in contravention of stated trading limits. These arrangements harmed long-term mutual fund shareholders by increasing transaction costs and lowering fund returns. Late trading, a significant but less widespread abuse, occurs when investors place trades after the mutual fund has calculated the price of its shares, usually at the 4:00 p.m. Eastern Time close of financial markets, but receive that day's fund share price. Investors who late trade have an opportunity to profit, which is not available to other investors. To assess SEC's efforts to impose penalties on violators, this report (1) discusses SEC's civil penalties in settled trading abuse cases, (2) provides information on related criminal enforcement actions, and (3) evaluates SEC's criminal referral procedures. Since September 2003, SEC has brought 14 enforcement actions against investment advisers and 10 enforcement actions against other firms for mutual fund trading abuses. Penalties obtained in settlements with investment advisers are among the agency's highest--ranging from $2 million to $140 million and averaging $56 million. In contrast, penalties obtained in settlements for securities law violations prior to 2003 were typically under $20 million. SEC's penalties in the investment adviser cases are also generally consistent with penalties it has obtained from firms involved in similarly egregious corporate misconduct. Further, SEC brought enforcement actions against 24 individuals associated with the investment advisers, many of them high-ranking, and obtained penalties as high as $30 million as well as life-time industry bars for some persons. In reviewing a sample of investment adviser cases, GAO found that SEC followed a consistent process for determining penalties and that it coordinated penalties and other sanctions with interested states. State and federal criminal prosecutors told us that while they have recently investigated market timing conduct, they have generally not pursued criminal prosecution in those cases. They have, however, brought criminal charges in cases involving late trading violations. These officials said that the criminal prosecution of market timing is complicated by the fact that market timing conduct itself is not illegal. Although SEC instituted administrative proceedings in the investment adviser cases discussed above by alleging that the undisclosed market timing conduct involved constituted securities fraud, both federal and state criminal prosecutors told us they reviewed cases involving such market timing conduct and generally concluded that it did not warrant criminal fraud prosecutions. In contrast, criminal charges have been brought against at least 12 individuals for alleged late trading violations. Federal criminal prosecutors said that criminal prosecution of late trading is fairly straightforward because federal securities laws prohibit the practice. SEC officials said that as state and federal criminal prosecutors were already aware of and generally evaluated the mutual fund trading abuse cases for potential criminal violations on their own initiative, they did not need to make specific criminal referrals to bring these cases to their attention. However, during the course of its review, GAO found that SEC's capacity to effectively manage its overall criminal referral process may be limited by inadequate recordkeeping. In particular, SEC does not require staff to document whether a referral was made or why. According to federal internal control standards, appropriate documentation of agency actions helps ensure that management directives are carried out. Without such documentation, SEC cannot readily determine whether staff make appropriate referrals. Such information is also important as an agency performance indicator and for congressional oversight purposes. |
As reflected by federal statutes and a number of executive orders, it is the policy of the federal government to encourage the participation of small businesses, including businesses owned and controlled by socially and economically disadvantaged individuals, in the performance of federal procurement contracts. The Small Business Act established SBA as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns; preserve free competitive enterprise; and maintain and strengthen the overall economy of the nation. Among other things, the act sets a minimum governmentwide goal for small business participation of not less than 23 percent of the total value of all prime contract awards for each fiscal year and makes SBA responsible for reporting annually on agencies’ achievements on their procurement goals. The act authorizes the President to establish the annual governmentwide goals. To meet its responsibilities under the act, SBA negotiates annual procurement goals with each federal executive agency with the intent to ultimately achieve the 23 percent governmentwide goal. Some agencies have goals higher than 23 percent, while others may have goals that are lower than or equal to 23 percent—SBA negotiates all of them with the intent that the governmentwide small business participation rate will not be less than the goal of 23 percent. Among the agencies we reviewed for this report, annual small business procurement goals for fiscal year 2005 ranged from 16 percent (NASA) to 56 percent (Interior). DOD’s goal was set at 23 percent, Treasury’s at 24 percent, and HHS’s at 30 percent. The Small Business Act also sets annual prime contract dollar goals for participation by certain types of small businesses that agencies strive to meet as part of their efforts to meet their overall small business participation goal. Specifically, these include goals for participation by SDBs (5 percent), businesses owned and controlled by women or service- disabled veterans (5 and 3 percent, respectively), and, businesses located in historically underutilized business zones (HUBZones, 3 percent). “Each department or agency that contracts with businesses to develop advertising for the department or agency or to broadcast Federal advertising shall take an aggressive role in ensuring substantial minority-owned entities’ participation, including 8(a), SDB, and Minority Business Enterprise (MBE) in Federal advertising-related procurements.” The criteria for determining a firm’s status as an 8(a) or SDB are set forth in section 8 of the Small Business Act and related regulations, while the definition of MBE is set forth in Executive Order 11625. Specifically, The 8(a) program, authorized by section 8(a) of the Small Business Act, was created to help small disadvantaged businesses compete in and access the federal procurement market. Generally, in order to be certified under SBA’s 8(a) program, a firm must satisfy SBA’s applicable size standards, be owned and controlled by one or more socially and economically disadvantaged individuals who are citizens of the United States, and demonstrate potential for success. Black Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans are presumptively socially disadvantaged for purposes of eligibility. The personal net worth of an individual claiming economic disadvantage must be less than $250,000 at the time of initial eligibility and less than $750,000 thereafter. To qualify for SDB certification, a firm must be owned and controlled by one or more socially and economically disadvantaged individuals or a designated community development organization. Individuals presumed to be socially disadvantaged for purposes of the 8(a) program are also presumed to be socially disadvantaged for purposes of determining eligibility for SDB certification. In contrast to the 8(a) program applicants, businesses applying for SDB certification need not demonstrate potential for success, and the personal net worth of the owners may be up to $750,000 at the time of certification. SDBs are eligible for incentives such as price evaluation adjustments of up to 10 percent when bidding on federal contracts in certain industries. Prime contractors that achieve SDB subcontracting targets may receive evaluation credits for doing so. Section 8(a) firms automatically qualify as SDBs, but other firms may apply for SDB-only certification. Executive Order 11625 defines minority business enterprises as those businesses that are owned or controlled by one or more socially or economically disadvantaged persons. The order states that disadvantages could arise from cultural, racial, or chronic economic circumstances or background or from similar causes. Under the order, socially or economically disadvantaged individuals include, but are not limited to, African-Americans, Puerto Ricans, Spanish-speaking Americans, American Indians, Eskimos, and Aleuts. While the definition of “MBE” is similar to the definition of “socially and economically disadvantaged small business” for purposes of the 8(a) and federal SDB programs, unlike these programs, the order does not limit the term “MBE” to small businesses. Executive Order 13170 spells out specific responsibilities for SBA, OMB, and executive agencies with procurement authority. Generally, the order gives SBA responsibility for setting goals with agencies and publicly reporting the progress toward those goals. Although the order gives OMB general oversight responsibility for implementing the order, OMB and SBA officials told us that the two agencies had agreed that SBA would take on the oversight responsibilities because SBA already had programs in place to oversee the small business programs of federal agencies. Section 2(b) of the order directed federal agencies with procurement authority to develop long-term, comprehensive plans to, among other things, aggressively seek to ensure that businesses classified as 8(a), small disadvantaged, and minority-owned are aware of contracting opportunities and report annually on efforts to increase utilization of these businesses. Section 2(b) also directed OMB to review each of these plans and report to the President on the sufficiency of each plan to carry out the terms of the executive order. The federal government awards contracts for advertising-related services for a variety of reasons, but primarily to deliver messages about its programs and services. According to Advertising Age, the largest amount of federal advertising spending goes to procure television and magazine advertising. Within the federal government, as we noted earlier, the biggest buyer of these services is DOD, which is very often doing so as part of ongoing recruiting campaigns by the military services. Additionally, for example, the Treasury’s Bureau of Engraving and Printing procures the services of an advertising firm to promote public awareness and acceptance of changes to U.S. currency (e.g., the introduction of the redesigned currency). Similarly, NASA also uses advertising firms to help plan and carry out a variety of events held around the country intended to publicize its programs and ongoing space research as well to support internal purposes, such as organizing off-site conferences. The five agencies we reviewed implemented Executive Order 13170 primarily by continuing their existing efforts to broadly identify potential contracting opportunities with all types of small businesses, while three of the agencies addressed section 4 of the order by initiating new actions specific to advertising-related contracts. For example, HHS and NASA cited ongoing training efforts directed to procurement staff or small businesses as one way their agencies addressed the order. The five agencies’ focus on ongoing efforts was consistent with SBA’s and OMB’s views that several provisions of the order duplicated program requirements under existing legislation. Specific to advertising, Treasury officials indicated that the agency was building on existing relationships with trade associations in order to identify advertising contracting for SDBs. Earlier this year, Treasury also established new outreach efforts and reporting requirements for advertising contracts with 8(a), SDB, and minority-owned businesses. Rather than develop plans focused specifically on section 4 of the executive order, for the most part the five agencies that we reviewed said that they already had programs in place to address similar requirements in previous legislation and that these activities were consistent with the expectations of the order. In response to the order, agencies generally reemphasized to procurement officers in subagencies around the country (who are responsible for awarding contracts) each agency’s small business program policies and goals. While not directed specifically toward advertising contracts, these existing programs were designed to encourage the participation of small and minority-owned businesses in federal procurement. Treasury, HHS, and NASA spelled out their strategies for addressing the executive order in written implementation plans that they prepared pursuant to the requirements of section 2(b) of the order. DOD and Interior did not, as directed, prepare such plans at that time, but agency officials from those departments described to us the efforts they undertook. More specifically, to ensure that 8(a)s, SDBs, and minority- owned businesses were aware of contracting opportunities: Treasury indicated in its implementation plan that it would continue to maintain a Web site for small business procurement and would post annual forecasts of contracting opportunities there. Further, the agency stated that it would publicize contracting opportunities in the Commerce Business Daily and FedBizOpps (an Internet-based point-of-entry for federal government procurement opportunities) and use its existing relationship with a variety of trade associations to foster the development of small minority-owned and women-owned businesses to increase awareness of contracting opportunities. HHS’s plan stated that the agency would continue to train program and procurement officials through the HHS Acquisition Training Program on policies that affect federal procurement awards to 8(a), small disadvantaged, and minority-owned businesses. NASA’s plan stated that it would continue to provide a 3-day course, “Training and Development of Small Businesses in Advanced Technologies,” that was designed to increase the knowledge base of small businesses—including disadvantaged, 8(a), and women-owned businesses, and minority educational institutions—by improving their ability to compete for contracts in NASA’s technical and complex environment. Interior officials told us that they had disseminated information on future contracting opportunities to small businesses through the Internet, developed an advanced procurement plan, and conducted quarterly outreach meetings with potential small business contractors. DOD officials noted that the department’s Small Business Program adhered to the requirements set forth in the Small Business Act and other applicable statutory provisions and federal regulations. The officials further explained that they used FPDS-NG and the department’s internal database to monitor DOD’s progress toward meeting its small business program goals. The five agencies’ focus on enhancing their ongoing small business procurement programs to address section 4 of Executive Order 13170 was consistent with SBA’s and OMB’s views that some requirements in the order reflected previous legislation. Specifically, officials from SBA and OMB told us that several provisions of the executive order paralleled procurement program requirements under the Small Business Act and other existing legislation. As a result, these two agencies, which were assigned certain oversight and reporting responsibilities in section 2 of the order, agreed that SBA should address such responsibilities as part of its ongoing oversight activities under the Small Business Act. For example, the order requires SBA to conduct semiannual evaluations of the achievements in meeting governmentwide prime and subcontracting goals and the actual prime and subcontract awards to 8(a)s and SDBs for each agency and to make the information publicly available. However, prior to the issuance of the order, SBA was already evaluating awards to SDBs and publishing the information in its annual reports on the goals and achievements of each agency’s procurement efforts. SBA’s goaling requirements were previously established by the Small Business Act. Our comparison of the order to existing legislation also showed that almost all of the requirements in the order had already been reflected in previous legislation. For example, the order required agencies to ensure that minority-owned businesses are aware of future prime contracting opportunities, an existing requirement under the Small Business Act and the Federal Acquisition Regulation (FAR). Similarly, the order requires that the directors of the Offices of Small and Disadvantaged Business Utilization (OSDBU) carry out their responsibilities to maximize the participation of 8(a)s and SDBs in federal procurement, a requirement that was previously set forth in the Small Business Act. Specifically, the Small Business Act requires each covered agency to establish an OSDBU to be responsible for, among other things, the implementation and execution of the functions and duties under the sections of the act that pertain to the 8(a) and SDB programs in each agency. We found that many of the activities mentioned in the agencies’ implementation plans or described to us highlighted actions that the agencies already had in place in their small business programs. Although agency officials at all five agencies indicated that their current small business programs broadly addressed procuring services from 8(a)s, SDBs, and minority-owned businesses, including advertising-related services, three of the five agencies we reviewed—HHS, Treasury, and Interior—planned new activities to increase federal advertising contracting opportunities for these businesses. For example, HHS stated in its implementation plan that it would make every effort to develop alternative strategies to maximize small and minority business participation in its advertising contracts at both the prime contracting and subcontracting levels. HHS also directed staff from its OSDBU to work with its operational divisions to ensure that all advertising efforts were properly structured under the Federal Acquisition Regulation. In order to direct federal advertising procurement opportunities to 8(a)s, SDBs, and minority-owned businesses, Treasury stated in its implementation plan that it would identify contracting opportunities for SDBs in advertising and information technology by building on its existing relationships with trade associations. Treasury had previously established a memorandum of understanding (MOU) with several trade associations, including the Minority Business Summit Committee and the U.S. Pan Asian American Chamber of Commerce. Treasury intended the MOU to foster an environment that would allow small and minority-owned firms to compete successfully for Treasury contracts and subcontracts. According to Treasury officials, the focus on advertising in Executive Order 13170 allowed the department to leverage an existing program by adding a component specifically for advertising and information technology services. In addition to the efforts to partner with trade organizations that it began in 2001, Treasury issued an acquisition bulletin in January 2007 establishing additional outreach efforts and reporting requirements relating to the procurement of federal advertising services from 8(a)s, SDBs, and minority-owned businesses. The bulletin requires (1) small business specialists located at Treasury’s bureaus to use databases and other sources to identify minority-owned entities to solicit for advertising- related services, and (2) Treasury’s bureaus to report all contract actions related to federal advertising to the Office of Procurement Executive for contracts awarded from March 1, 2007, through September 30, 2007. Interior, which had previously relied on its existing small business program to address the order, is currently drafting an implementation plan that will, according to the department’s OSDBU officials, propose activities to increase advertising opportunities for 8(a)s, SDBs, and minority-owned businesses. Interior plans to convey through its efforts that the department’s OSDBU is available to make the process of doing business with Interior simpler and more consistent across Interior’s component subagencies. Interior plans to target all small businesses whose owners include representatives from socioeconomic groups identified as disadvantaged in the Small Business Act. Overall, from fiscal years 2001 through 2005, 8(a), small disadvantaged, and minority-owned businesses received about 5 percent of the $4.3 billion in advertising-related obligations awarded by DOD, Interior, HHS, Treasury, and NASA. These businesses accounted for 12 percent of the contract actions that the five agencies awarded, but the percentages the agencies awarded varied substantially. For example, Treasury awarded less than 2 percent of its advertising-related dollars to 8(a)s, SDBs, and minority-owned businesses over the 5-year period, while HHS awarded about 25 percent to these business types. Advertising dollars also varied from one year to the next at individual agencies, sometimes significantly, primarily because of large advertising campaigns that the respective agencies undertook to publicize new programs or promote their mission (e.g., public health). The extent to which agencies’ yearly increases in overall advertising obligations affected obligations to 8(a), small disadvantaged, and minority-owned firms also varied. According to federal procurement data, the federal government obligated about $4.8 billion to contractors for advertising-related services from fiscal years 2001 through 2005. During this period, the five agencies obligated $4.3 billion for advertising-related services—about 92 percent of total advertising-related obligations for the federal government (this amount consists of $3.4 billion of their own funds, and another $919 million on behalf of other agencies). As shown in figure 1, DOD accounted for over half of all advertising-related obligations during this period. Treasury (Other agency funded) From fiscal years 2001 through 2005, the five agencies we reviewed collectively obligated about $218 million to businesses designated as 8(a), small disadvantaged, or minority-owned; individually, their utilization of these businesses varied widely (fig. 2). Specifically, HHS awarded the highest dollar amount to 8(a), SDB, and minority-owned businesses during the 5-year period—about $122 million—and NASA awarded the highest percentage of its dollars to these businesses—89 percent, or about $41 million. During this period, the five agencies awarded a total of 6,279 contract actions, about 12 percent of which (725) were awarded to businesses with these designations (fig. 3). Individually, the extent to which agencies awarded contract actions to 8(a), SDB, and minority-owned businesses varied widely, with Treasury awarding none on behalf of other agencies to these types of businesses and NASA awarding 45 percent. The number of contract actions awarded to 8(a)s, SDBs, and minority-owned businesses ranged from 0 at Treasury (administered for other agencies) to 449 at DOD. Individually, the agencies we reviewed awarded different percentages of their advertising-related contracting dollars and actions to these types of small businesses. For example, on average, NASA awarded more than 80 percent of its total advertising-related obligations to businesses in each of these categories for the 5-year period. Except for 8(a)s and SDBs in 2001, NASA consistently awarded 66 percent or more of its advertising-related obligations to the three types of businesses. In contrast, Treasury and DOD on average awarded 1.7 percent or less of their advertising-related obligations to 8(a), SDB, or minority-owned businesses. Figure 4 shows the amount of advertising-related obligations awarded by each agency to each of the three business types for 5 fiscal years as well as the total for the 5-year period. Similarly, figure 5 shows the number of advertising- related contact actions awarded by each agency to each of the three business types for each year and the total for the 5-year period. Contracting dollars and actions awarded directly to businesses can be counted in more than one category, so the dollars and actions awarded to various types of small businesses are not mutually exclusive. As we noted earlier in this report, federal agencies award contracts for advertising-related services for a variety of reasons, the primary one being to deliver messages about the agencies’ programs and services. The advertising services that agencies procured ranged from recruiting and public service announcements to public relations. We found that advertising dollars for agencies sometimes varied significantly from one year to the next (table 1) and that these differences were mostly the result of large advertising campaigns specific to the individual agencies. While we noted the year-to-year variations in agencies’ overall advertising obligations, we also observed that these variations did not always translate into a direct effect on the share of agencies’ advertising obligations that went to 8(a)s, SDBs, or minority-owned businesses (fig. 4). For example, during the 5-year period under review, DOD showed an upward trend of increasing obligations for advertising-related procurement, with the largest increase occurring in fiscal year 2005 (about 31 percent). DOD officials attributed the increase in advertising expenses to confronting the challenge of continuing to fill the military ranks with recruits and reenlistees in the midst of war. More specifically, during fiscal year 2005 DOD awarded multiple actions on four ongoing unrelated large contracts with obligations ranging from about $60 million to $175 million. None of these new fiscal year 2005 contract actions used 8(a)s, SDBs, or minority- owned businesses. Overall, however, DOD increased its advertising-related obligations to each of the three business types (from 2004 to 2005). HHS officials told us that HHS’s higher advertising-related obligations in fiscal years 2001 and 2003 were mostly attributable to the Centers for Disease Control and Prevention’s (CDC) development of a Youth National Media Program. In support of this initiative, two advertising programs were conceived: the National Youth Media Campaign and the Targeted Communities-Youth Media Campaign. HHS obligated $151 million for these two campaigns. A portion of these obligations—just over $48 million—was awarded to two minority-owned businesses, one of which was also certified as a SDB. These campaigns included HHS’s VERB advertisement targeted toward children and teens to promote more physical activity (fig. 6). The increase in HHS’s overall advertising obligations from 2002 to 2003 did not have a uniformly similar effect on the obligations the agency directed to 8(a)s, SDBs, and minority-owned firms, even though, as we note, some of the spending for the youth initiative was directed to small disadvantaged and minority-owned firms. Specifically, as a percentage of the agency’s total advertising obligations, HHS’s total obligations to 8(a) and minority-owned firms decreased from 2002 to 2003, and its obligations to SDBs showed an increase of less than 1 percent. About 84 percent of NASA’s obligations were related to two contracts. The first of these was a contract NASA’s Langley Research Center awarded in fiscal year 2001 to an SDB for a variety of public relations activities. For example, this contractor provided services such as preparing written and photographic materials for media and selected internal and external communications programs and administrative support for outreach and special events. The contractor also developed, installed, and maintained exhibits for events and provided logistical and general services to plan and conduct conferences, symposia, peer reviews, and workshops for off-site conferences and events. From fiscal years 2001 through 2005, NASA obligated over $5 million for this contract. The second NASA contract was awarded in fiscal year 2002 as a multiple- year contract by its Marshall Space Flight Center. The contract was originally awarded to a business classified as minority-owned that was later admitted to the 8(a) and SDB programs. The contractor was primarily responsible for providing support services to human resources, educational programs, government and community relations, public exhibits, internal communications, employee training, and organizational development. More recently, the contractor has helped with several public events, including an air show called Thunder in the Valley in Columbus, Georgia, in March 2007 and the X-Prize Cup in Las Cruces, New Mexico, in October 2006. Between fiscal years 2002 and 2005, NASA obligated over $33 million for this contract. Generally, agency officials told us that the procurement decisions reflected in their overall contracting data and specifically the advertising contracting data we present here were more often driven by needs identified at the subagency or local area level than by the departments’ needs. These decisions are made by contracting officers at procurement offices, which are located around the country. For example, NASA has contracting officers at each of its 10 field centers. Each center specializes in different areas of research and technology specific to NASA. The Marshall Space Flight Center in Huntsville, Alabama, for example, focuses on space exploration, with specific emphasis on completing the international space station and returning to the moon. Contract-related needs for the Marshall Space Flight Center seek to advance technology in the space exploration area, and officials at the center identify contracting opportunities to meet those needs. Officials in NASA’s OSDBU told us that they did not tell contracting officers what services should be directed to small businesses, because the businesses that were selected to provide a service were chosen based on need (as identified by the centers’ contracting officers and other officials) and ability to meet the center’s requirements. We provided SBA, OMB, GSA, DOD, Treasury, HHS, Interior, and NASA with a draft of this report for review and comment. After reviewing the report, all agencies responded that they did not have any comments, including any of a technical nature. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the Ranking Member of the Senate Committee on Small Business and Entrepreneurship, the Chair and Ranking Member of the House Committee on Small Business, and other interested congressional committees. In addition, we will send copies to the Secretaries of Defense, Treasury, Health and Human Services, and Interior, as well as NASA’s Administrator, the Administrator of General Services, the Administrator of the Small Business Administration, and the Director of the 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 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 II. In this report, we describe (1) strategies that the Departments of Defense (DOD), Interior, Health and Human Services (HHS), Treasury, and National Aeronautics and Space Administration (NASA) used to address section 4 of Executive Order 13170, and (2) the total obligations, the number of contract actions, and the percentage of total obligations represented by these contract actions that each of the five agencies awarded to businesses in the Small Business Administration’s (SBA) 8(a) and federal small disadvantaged business (SDB) programs and to minority- owned businesses for advertising-related services. We queried the Federal Procurement Data System-Next Generation (FPDS-NG) using the product service codes for advertising and public relations to identify advertising- related activity. Using these data, we judgmentally selected the four agencies that had obligated the most funds (DOD, Interior, HHS, and Treasury) and one that had a high participation of 8(a), small disadvantaged, and minority-owned businesses (NASA), based on identification in the FPDS-NG of awards to 8(a)s, SDBs, and minority- owned businesses for advertising-related contracts for fiscal years 2001 to 2005. In total, these agencies represented about 92 percent of all federal advertising-related obligations for this 5-year period. To describe strategies used by the five federal agencies to address section 4 of Executive Order 13170, we obtained documentation from the agencies outlining the actions they planned to take to implement the order, interviewed agency officials regarding their plans and actions taken, and compared both their planned actions as well as actions taken to the requirements presented in the order. We also interviewed officials at SBA and Office of Management and Budget (OMB) regarding the oversight responsibilities each was given in implementing the order. Furthermore, we identified a number of federal statutes and regulations pertaining to executive agency procurement and small business programs, including the Small Business Act and the Federal Acquisition Regulations, that were consistent with the requirements of section 2 of the Executive Order 13170. To determine the total dollar amount for each of the five agency’s advertising-related obligations for fiscal years 2001 through 2005 and the dollar amount and percentage for obligations and contract actions awarded to businesses designated as 8(a)s, SDBs, or minority-owned during that same time period, we extracted key data fields from FPDS-NG. These data fields included contracting department, procurement instrument identifier (contract/order number), advertising-related product or service codes (R701 and R708), SDB firm designation, 8(a) firm designation, minority-owned designation, and funding agency. We then analyzed the data to identify the total amount of advertising-related obligations for each agency for each fiscal year and the amount and percentage of the total for obligations and number of contract actions awarded to 8(a)s, SDBs, and minority-owned businesses. We did not use FPDS data from before fiscal year 2001 because agencies did not consistently report certain data elements important to our analysis, such as minority ownership. Even after the General Services Administration (GSA) upgraded the system to FPDS-NG in 2003 (to capture, among other things, a data element for minority ownership from fiscal year 2004 forward), agencies varied in the extent to which they modified earlier years’ data to reflect this information. In assessing the reliability of federal contracting data, we interviewed officials from GSA, the agency responsible for maintaining FPDS-NG. Additionally, we performed specific steps using the FPDS-NG data. First, we compared FPDS-NG advertising totals to the Federal Procurement Data System, the previous governmentwide contracting system, for the five agencies for fiscal years 2001 through 2003. For the DOD data, we also compared FPDS-NG advertising totals to DD-350 (DOD’s internal contracting database) totals for fiscal years 2001 through 2005. In these comparisons, we found some differences between the databases that we determined could be attributed to the fact that FPDS-NG was a real-time system that allowed for editing and updates, such as updates to the primary purpose of a multiple-year contract in later years. FPDS and DD- 350 did not allow for such real-time changes. On the basis of this assessment, we concluded that FPDS-NG data were sufficiently reliable for the purposes of our report. Next, we tested the reliability of the 8(a), SDB, and minority-owned designations in FPDS-NG. To do this, we electronically compared the FPDS-NG designations for 8(a) and SDB to SBA’s list of certified 8(a)s and SDBs. We found a small number of certified 8(a) businesses that were not designated as such in FPDS-NG. For DOD contractors that the DD-350 also identified as being 8(a), we modified our data to reflect the certified 8(a) status. To determine the reliability of the minority-owned data in FPDS- NG, we compared FPDS-NG contractor data for fiscal years 2004 and 2005 to the self-reported minority-owned designations in SBA’s Small Disadvantaged Businesses file and the Central Contractor Registration database (the DOD database that also serves as the primary vendor database for the U.S. government). We found that the number of minority- owned businesses that received advertising-related contracts from these five agencies was undercounted in the FPDS-NG for fiscal years 2004 and 2005. We could not determine the degree of undercounting because our analysis was not based on a sample that could be generalized to the population of advertising-related contractors. Other than the minor differences that we found, we determined that the business designations were sufficiently reliable for the purposes of our report. We conducted our work in Washington, D.C., between October 2006 and June 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, Bill MacBlane, Assistant Director; Johnnie Barnes; Michelle Bracy; Emily Chalmers; Julia Kennon; Lynn Milan; Marc Molino; Omyra Ramsingh; and Rhonda Rose made key contributions to this report. | In 2005, federal spending on advertising exceeded $1 billion. Five agencies--DOD, Treasury, HHS, Interior, and NASA--together made up over 90 percent of this spending from 2001 to 2005. Executive Order 13170, signed in October 2000, directs agencies to take an aggressive role in ensuring substantial participation in federal advertising contracts by businesses in the Small Business Administration's (SBA) 8(a) and small disadvantaged business (SDB) programs and minority-owned businesses. This report describes (1) strategies DOD, HHS, Treasury, Interior, and NASA used to address Executive Order 13170, and (2) the total obligations, number of contract actions, and percentage of total obligations represented by these actions that each agency awarded to 8(a)s, SDBs, and minority-owned businesses for advertising services. In conducting this study, GAO analyzed agency contracting data and executive order implementation plans and interviewed agency procurement officials. Because much of Executive Order 13170 was consistent with existing legislation, the five agencies we reviewed generally addressed the order's emphasis on advertising contracts by continuing existing programs designed to identify potential contracting opportunities with all types of small businesses. The five agencies' focus on ongoing efforts was consistent with SBA's and the Office of Management and Budget's (OMB) views that several provisions of the order paralleled procurement program requirements under the Small Business Act. Three agencies--HHS, Treasury, and Interior--also planned additional activities that targeted the agency's contracting efforts for advertising services. For example, one of Treasury's additional activities was to work with trade associations to identify opportunities for SDBs in advertising. From fiscal years 2001 through 2005, 8(a), SDB, and minority-owned businesses received about 5 percent of the $4.3 billion in advertising-related obligations of DOD, Treasury, HHS, Interior, and NASA and 12 percent of the contract actions that these agencies awarded; the percentages varied substantially among each of the five agencies. For example, Treasury awarded less than 2 percent of its advertising-related dollars to 8(a)s, SDBs, and minority-owned businesses collectively over the 5-year period, while NASA awarded about 89 percent to these types of businesses. Overall advertising obligations also varied from one year to the next at individual agencies, sometimes significantly. Year-to-year increases were driven by large campaigns that the respective agencies undertook to publicize new programs or promote their mission (e.g., public health). Agencies varied in the extent to which year-to-year increases in overall advertising obligations had a similar effect on obligations to 8(a), small disadvantaged, and minority-owned firms. |
According to SEC, short selling provides the market with at least two important benefits: market liquidity and pricing efficiency. For example, market professionals, such as market makers (including specialists) may provide liquidity by naked short selling to offset temporary imbalances in the buying and selling interest for securities. Market makers generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of sellers of that security available in the market. For the purposes of this report, we refer to both market makers and specialists as market makers. Efficient markets require that prices fully reflect all buy and sell interest. Market participants that believe a security is overvalued may engage in short sales to profit from a perceived divergence of prices from economic values. According to SEC, such short sellers contribute to pricing efficiency because their transactions inform the market of their evaluation of the future price performance of the security. This evaluation is reflected in the resulting market price of the security. Naked short selling may have negative effects on the market, particularly when it results in FTD and those FTD persist for an extended period and represent a significantly large unfulfilled delivery obligation at the clearing agency. Specifically, SEC stated that short sellers that fail to deliver securities on the trade settlement date may face fewer restrictions than if they were required to deliver the securities in a reasonable period. For example, SEC said that short sellers may sometimes intentionally fail to deliver securities to avoid borrowing costs, especially when the costs of borrowing security are high. Furthermore, SEC stated that such sellers could attempt to use this additional freedom to engage in trading activities that deliberately and improperly depress the price of a security. For example, SEC said that short sellers sometimes may intentionally fail to deliver securities in an attempt to manipulatively naked short sell a security. Issuers and investors have raised concerns to SEC in recent years about manipulative naked short selling, particularly in thinly capitalized securities that trade over the counter (OTC). To the extent that large and persistent FTD might indicate manipulative naked short selling, SEC stated that such FTD may undermine the confidence of investors. In turn, investors may be reluctant to commit capital to an issuer that they believe to be subject to such manipulative conduct. Due to the volume and value of trading in today’s markets, NSCC nets trades and payments among its participants using its Continuous Net Settlement System (CNS System). This is a book-entry accounting system in which each participant’s daily purchases and sales of securities, based on trade date, are automatically netted into one long position (right to receive) or one short position (obligation to deliver) for each securities issue purchased or sold. The participant’s corresponding payment obligations are similarly netted into one obligation to pay money or into one obligation to receive money. If a member is unable to fulfill its delivery obligation on settlement date, FTD occurs and the CNS System maintains the net short position for that participant until the obligation is fulfilled. As we have previously discussed, while naked short selling may result in FTD, there are other legitimate reasons why FTD may occur. FTD may result from either a long sale or a short sale, and, according to SEC and FINRA, may result from mechanical error or processing delays. For example, processing delays can result from transferring securities in physical certificate, rather than in book-entry form. SEC oversees broker-dealers primarily through OCIE and Trading and Markets and in conjunction with FINRA and other SROs. FINRA is an SRO with statutory responsibilities to regulate its broker-dealer members. As part of its responsibilities, FINRA conducts examinations of its members to ensure compliance with SRO rules and federal securities laws. OCIE evaluates the quality of FINRA examinations by conducting oversight examinations of broker-dealers recently examined by FINRA as well as through inspections of SROs that review all aspects of the SRO’s compliance, examination, and enforcement programs. OCIE also directly assesses broker-dealer compliance with federal securities laws through “special” and “cause” examinations. Special examinations include sweep examinations. OCIE conducts cause examinations when it has reason to believe something is wrong at a particular broker-dealer. Additionally, OCIE conducts examinations of clearing agencies, which are the SROs that clear and settle most securities trades in the United States. Trading and Markets administers and executes the agency’s programs relating to the structure and operations of the securities markets. SEC also has delegated authority to Trading and Markets to administer the securities laws affecting broker-dealers and engage in related oversight activities, such as SRO rule filings. Where appropriate, SEC’s Enforcement and the SROs’ enforcement divisions are responsible for investigating and disciplining broker-dealers regarding violations of securities laws or regulations. When it initially promulgated Regulation SHO, SEC sought to curb the potential for manipulative naked short selling by imposing (1) uniform requirements on broker-dealers to locate a source of securities available for borrowing and (2) additional delivery requirements on broker-dealers for securities in which a substantial amount of FTD occurred. However, growing concerns about volatile markets and declining investor confidence prompted SEC to take emergency actions in the summer and fall of 2008 to address all FTD in all equity securities by issuing both permanent and temporary amendments to Regulation SHO. The locate and delivery requirements in Regulation SHO, which required compliance beginning in January 2005, prohibited a broker-dealer from accepting a short sale order in any equity security from another person, or effecting a short sale order in any equity security for its own proprietary accounts, unless it first located securities available for borrowing. To satisfy this requirement, the broker-dealer must either borrow the security, enter into an arrangement to borrow the security, or have reasonable grounds to believe the security can be borrowed so that it can be delivered on the settlement date. Executing broker-dealers must obtain and document their source of borrowable stock (a locate) prior to effecting the short sale. Broker-dealers can demonstrate that they have reasonable grounds to believe a security can be borrowed in time for settlement by directly contacting a source for that security. Industry officials told us that a potential source for securities might include the securities lending desk of their own firm or that of another broker-dealer or the lending agents for large institutional investors, such as mutual funds, pension funds, or insurance companies. Regulation SHO also allows broker-dealers to rely on industry-generated lists of securities that are considered widely available, instead of contacting the source for those securities directly. These lists generally are known as “easy-to-borrow” lists. Regulation SHO also allows broker-dealers to rely on assurances from a customer that the customer can obtain securities from a third party in time to settle the trade (customer-provided locate). Broker-dealers must document compliance with the locate requirement. Regulation SHO included three exceptions to the locate requirement. First, it excepted market makers from having to obtain a locate when they effect short sales in connection with bona fide market making activities. SEC stated that this exception was necessary because market makers may need to facilitate customer orders in a fast-moving market without possible delays associated with complying with the locate requirement. According to SEC, market makers are unlikely to cause high levels of FTD, because most of them seek a net “flat” position in a security at the end of each day—offsetting short sales of a security with purchases of that security so that they do not have to deliver securities under the CNS System. Second, Regulation SHO allows an exception to the locate requirement when a broker-dealer receives a short sale order from another broker-dealer (introducing broker-dealer). In these cases, the introducing broker-dealer is required to comply with the locate requirement, unless the executing broker-dealer has entered into a contractual agreement to obtain locates on behalf of the introducing broker-dealer. Third, Regulation SHO provides an exception to the locate requirement in those cases where a broker-dealer effects a sale on behalf of a customer that owns a particular security, but through no fault of the customer or broker-dealer, the broker- dealer does not expect that the security will be delivered by the settlement date. An example of this exception would be sales of restricted securities—securities acquired in unregistered, private sales from the issuers through private placement offerings. The sale of such securities often involves processing delays that prevent the customer from obtaining and delivering the securities on time. Since Regulation SHO requires broker-dealers to mark sales as short if the customer does not have possession of the securities at the time of the sale, broker dealers often must mark the sale of restricted securities as short sales, even though the customer owns the securities. As we have previously discussed, Regulation SHO requires clearing broker-dealers that have FTD in threshold securities persisting for 10 days after the normal settlement date (T+13) to close out their FTD by purchasing securities of like kind and quantity by the beginning of regular trading hours the next day (T+14). For example, if a clearing broker- dealer has 100 FTD in threshold security XYZ for 13 consecutive days, the participant is required to purchase 100 shares of XYZ by the next day to close out these FTD. Clearing broker-dealers that do not close out their FTD threshold securities by the morning of T+14 are required to preborrow, or arrange to borrow, securities of XYZ before effecting additional short sales for themselves or for any of their customers, until the FTD are closed out. In adopting these close-out requirements, SEC stated that it believed it was addressing those circumstances that warrant action to address the potential negative effects of large and persistent FTD. By narrowly targeting threshold securities, SEC stated that it would not burden the vast majority of securities without similar concerns for settlement. At the time SEC adopted the rule, OEA had calculated that approximately 4 percent of all reporting securities would qualify as threshold securities. As adopted, Regulation SHO included three exceptions to the close-out requirement. First, the close-out requirement did not apply to any FTD that were established prior to the security becoming a threshold security. SEC included this exception, termed the grandfather exception, because it was concerned about creating volatility through short squeezes if la rge preexisting FTD had to be closed out quickly after a security became a Second, SEC allowed a limited exception for FTD threshold security. resulting from short sales effected by options market markers to establish or maintain a hedge on options created before the underlying security became a threshold security, as long as the short sales were effected as part of bona fide market making. SEC created this exception to address concerns expressed by market participants that the close-out requirement would affect the liquidity and pricing of options. These market participants had argued that without the ability to hedge their options through short sales, options market makers would cease options trading in securities considered hard to borrow, and thus, prone to FTD—in other words— securities most likely to enter the threshold list. Finally, SEC excepted FTD resulting from sales of customer-owned securities that the broker- dealer did not reasonably expect would be in its possession by the settlement date, such as the restricted securities that we previously discussed. Broker-dealers have 35 days to close out FTD resulting from the sale of these securities. After considering data showing that substantial and persistent FTD in a small number of threshold securities were not being closed out due to reliance on the grandfather exception, SEC amended Regulation SHO in August 2007 to eliminate it. At the time it adopted Regulation SHO, the Commission stated that it would monitor its operation to determine whether grandfathered FTD were being cleared under the existing close- out requirement, or whether any further regulatory action was warranted. We reviewed data that SEC used in its deliberations to eliminate the grandfather exception. For example, we found that OEA had estimated that from January 7, 2005, through December 31, 2005, the average daily percentage of grandfathered FTD to total FTD for securities on the threshold list was about 48 percent. Furthermore, in 2005, OCIE conducted several examinations for Regulation SHO compliance that found that some broker-dealers were still carrying a significant amount of FTD in securities that they were not closing out because they were relying on the grandfather provision. In the 2007 rule amendment, SEC reiterated its concerns regarding the impact that large and persistent FTD can have on the market for a security. SEC also said that some issuers believed that they had suffered unwarranted reputational damage because of investors’ negative perceptions about large and persistent FTD in their securities. According to one issuer’s comment letter, its investors attributed the issuer’s frequent reappearances on the threshold list to manipulative short selling and frequently demanded that the issuer take action to address this issue. SEC stated that any unwarranted reputational damage caused by large and persistent FTD might have an adverse impact on the security’s price. We discuss the number of securities that reappeared on the threshold list during the period of our review in greater detail later in this report. Increasing market volatility in the securities of financial institutions of significance prompted SEC to issue an emergency order on July 15, 2008, that temporarily restricted short sales in the publicly traded securities of 19 large financial firms, unless the seller had borrowed, or arranged to borrow, the security prior to effecting the short sale. The order also prohibited any FTD in these securities by requiring that the short seller deliver the security on the settlement date. The order was effective from July 21, 2008, to August 12, 2008. SEC amended the order on July 18, 2008, to except market makers engaged in bona fide market making from the preborrow requirement. SEC issued the order because it was concerned that rumors about financial institutions of significance in the United States may have fueled market volatility in the securities of some of these institutions. Trading and Markets staff said that SEC’s decision to issue the order was precipitated by the rapid decline and subsequent collapse in the price of the securities of the investment firm Bear Stearns. This event raised concerns at SEC about a type of market manipulation called short and distort (i.e., an individual short sells a particular security and then attempts to drive down its price by spreading false rumors about the company). Although a trader could engage in a short-and-distort scheme without naked short selling, SEC stated it was concerned that naked short selling could accelerate a price decline in the event of a false rumor. SEC chose the 19 financial firms because it believed that they were particularly susceptible to short-and-distort schemes. Trading and Markets staff said that they did not see evidence of naked short selling or increased FTD in these securities prior to the issuance of the emergency order. Instead, they said that the emergency order was an attempt by the Commission to reassure the investing public that SEC would not allow naked short selling to occur. Citing concerns about sudden and unexplained declines in the prices of equity securities generally, SEC, in consultation with the Federal Reserve and the Treasury Department, issued an emergency order on September 17, 2008. This order (1) temporarily enhanced delivery requirements on the sale of all equity securities, (2) implemented an antifraud rule targeted to short sellers that lie about or misrepresent their intention to deliver securities in time for settlement, and (3) eliminated the options market maker exception to Regulation SHO’s close-out requirement. First, SEC added a temporary amendment to Regulation SHO through the September order to enhance delivery requirements on sales of all equity securities. The temporary rule requires clearing broker-dealers to deliver securities resulting from any short sale by the settlement date (T+3), or, if they have FTD on the settlement date, to take action to purchase or borrow securities to close out the FTD by no later than the beginning of regular trading hours on T+4. Participants that do not close out their FTD on the morning of T+4 are required to borrow, or arrange to borrow, securities before effecting additional short sales. Clearing broker-dealers that can show that the FTD resulted from a long sale, or a short sale by a market maker engaged in bona fide market making, have until the beginning of trading hours on T+6 to close out the FTD by purchasing securities of like kind and quantity. Upon expiration of the emergency order, SEC adopted these requirements as an interim final temporary rule, with a request for comments, which is set to expire on July 31, 2009. In issuing the temporary rule, SEC stated it was concerned that the current locate and close-out requirements in Regulation SHO had not gone far enough to reduce FTD and address potential manipulative naked short selling, especially in light of the ongoing instability and lack of investor confidence in the financial markets. SEC also noted that because Regulation SHO’s close-out requirement applied only to threshold securities, FTD in nonthreshold securities never had to be closed out. In addition, SEC noted that the current delivery requirement for threshold securities under Regulation SHO and the lack of any delivery requirement for nonthreshold securities enabled FTD to persist for many days beyond the settlement date. SEC stated that the temporary rule was needed to require earlier close outs of FTD so that more sales would settle by settlement date. SEC acknowledged that the temporary rule’s delivery requirements may require the close out of some FTD that occur because of ordinary settlement delays and would ordinarily clear up within a few days, but SEC believes that these requirements were necessary to help ensure that all trades in all equity securities settled by settlement date and that FTD would be closed out promptly after being incurred. The September order also made effective SEC’s proposed “naked” short selling antifraud rule. The rule is intended to clearly affirm the liability of individuals who deceive specified individuals about their intention or ability to deliver securities in time for settlement, including individuals who deceive their broker-dealer about their locate source or ownership of shares and fail to deliver securities by settlement date. Enforcement staff said that a rule highlighting the illegality of these activities would focus the attention of market participants on such activities. This rule does not provide SEC with any additional enforcement powers. Following the expiration of the order, SEC made the amendment permanent. Third, the September order made effective a proposed rule amendment to eliminate the options market maker exception from Regulation SHO’s delivery requirement. SEC had proposed to eliminate this exception in August 2007, based in part on data it had obtained from SROs showing that substantial levels of FTD continued to persist in some threshold securities as a result of this exception. Following the expiration of the order, SEC made the amendment permanent. SEC issued a second emergency order on September 18, 2008, also in consultation with Federal Reserve and Treasury Department officials, that temporarily restricted all short sales in the publicly traded securities of about 800 financial institutions (short sale ban). In the order, SEC noted its continued concerns regarding recent market conditions, and noted that short selling in the securities of a wider range of financial institutions than those subject to the July emergency order may be causing sudden and excessive fluctuations of the prices of such securities that could threaten fair and orderly markets. The order expired on October 8, 2008. We reviewed trends in threshold securities and their FTD from January 2005 through December 2008 (the review period). These measures showed initial declines soon after the implementation of Regulation SHO, but subsequently increased during 2007, concurrent with increasing turbulence in the markets brought on by the financial crisis. We observed significant declines in threshold securities and their FTD after SEC implemented the July and September 2008 emergency orders, but the sustainability of this trend is unclear. We reviewed trends in threshold securities and their FTD between January 2005 and December 2008. Although definitive conclusions cannot be drawn from simple trend analysis, we had difficulty discerning an intermediate impact of Regulation SHO on these measures. Figure 1 shows the average number of securities on the threshold list, by month, over the review period. Although subject to volatility from month to month, the average monthly number of threshold securities declined from 423 to 231, or by about 45 percent from January 2005 through August 2006. This decline was most pronounced in the first 6 months after the regulation became effective, and particularly in the first month, when the number of securities declined from 529 on January 10, 2005 (the date the SROs published the first threshold list), to 414 by January 31, 2005. After July 2006, however, the average monthly number of threshold securities per month began to trend upward, reaching a record high of 582 for the review period in July 2008. This upward trend corresponds to several indicators of the severity of the current financial crisis, including several bankruptcies involving mortgage lenders starting in December 2006; announcements by the ratings agencies of downgrades and reviews for potential downgrade of mortgage-related assets starting in June 2007; and negative announcements by Bear Stearns beginning in June 2007 and its subsequent merger to avoid collapse in March of 2008, among others. Caution should be used in interpreting the trends in threshold FTD, especially since we do not have an appropriate measure of FTD prior to Regulation SHO. Average outstanding FTD per month in these securities also declined from 218.5 million to 104.2 million, or 52 percent, between January 2005 and August 2006 (fig. 2). However, there was greater volatility from month to month in this figure, and the direction and magnitude of the change are highly sensitive to the start and end points selected. After July 2006, outstanding FTD increased considerably. As we discuss in the text that follows, an increase in threshold security FTD does not necessarily imply ineffectiveness since it is difficult to determine what would have happened ppened in the absence of Regulation SHO. in the absence of Regulation SHO. We also generated the total number of new FTD, per month, in threshold securities over the review period (fig. 3). New FTD are the number of FTD that occur each day. Total new FTD from January 2005 through August 2006 declined by about 43 percent, from 264.3 million to 151.7 million, again subject to considerable volatility. For example, when we measured the difference in new FTD from January 2005 through June 2006, we found that new FTD increased 103 percent, to 535.3 million. This was largely due to a significant increase in new FTD in June 2006. This measure also began to increase in 2007. The initial decline in threshold securities, particularly in the first few months of 2005, may indicate that Regulation SHO had some impact on reducing the number of threshold securities soon after the regulation became effective. However, other market factors also may have contributed to this initial decline. We found that the overall level of FTD across the market appeared to have been declining since at least April 2004 (the earliest date we could obtain FTD data), almost 8 months before the effective date of Regulation SHO’s locate and delivery requirements, and continued after the adoption and implementation of Regulation SHO. Regulation SHO may have accelerated this trend for the threshold securities, and it is possible that a portion of this decline can be attributed to an early impact of Regulation SHO through an announcement effect. The subsequent increase in threshold securities, outstanding FTD, and new FTD culminated in record highs for the review period in July 2008. It is unclear whether the number of threshold securities and their FTD would have increased further in the absence of Regulation SHO. We note that Regulation SHO did not intend to prohibit FTD in threshold securities. Rather, it was intended to address FTD once they had accumulated to a substantial level and persisted for 13 consecutive days. Moreover, SEC also intended for the locate requirement to limit naked short selling by better ensuring that broker-dealers that effect short sales have a source of securities they can borrow in time for settlement. If Regulation SHO acted to curb FTD resulting from short sales, we would generally expect to see declines in new FTD. Our data, however, indicate overall increases in new FTD during 2007 and up until July 2008, subject to considerable volatility. As we have previously discussed, SEC eliminated the grandfather exception in August 2007 after data showed that persistent FTD in some threshold securities were due to reliance on this exception. Our data show that despite the elimination of this exception, threshold securities and their FTD levels continued to increase. OEA examined FTD before and after the elimination of the grandfather exception in the threshold securities to determine the impact of its removal. According to OEA, FTD shifted from nonoptionable to optionable securities after the elimination of the grandfather exception. OEA staff said that one explanation of these results could be short sellers that previously failed to deliver in the equity market moved to the options market, where option market makers still had an exception to the close-out requirement, to establish a synthetic short position. In proposing to eliminate the options market maker exception, SEC analyzed 2006 data and found that some threshold securities were persisting on the threshold list due to option market makers claiming an exception to the close-out requirement. However, CBOE examiners said that by the time SEC eliminated the options market maker exception, it was their understanding that option market makers may have modified their hedging strategies and stopped relying on the exception. They explained that, since SEC began seeking comments on eliminating the exception in July 2006, options market makers had anticipated that SEC would eventually eliminate the exception. OEA staff said that changes in FTD may be influenced also by factors other than Regulation SHO, such as changes in the mix of securities being traded. For example, they noted that the mix of securities with FTD tilted toward higher-priced stocks after the elimination of the grandfather exception (higher-priced stocks also tend to be optionable stocks), reflecting the financial sector and other industries undergoing turbulence at that time. OEA and Trading and Markets staffs said that changes in market conditions, including overall increases in trading volume, volatility, and short interest, were also likely factors contributing to the increase in FTD. According to these staff, increases in trading volume and volatility are likely to correlate with increases in FTD because the higher the volume of trades, the more likely errors and other processing delays will occur. To the extent that FTD are due to errors or other processing delays, we would expect to see an increase in FTD proportional to an increase in trading volume. In figure 4, we show that the upward trend in FTD for NYSE, NASDAQ, and Amex threshold securities persisted even when expressed as a percentage of market volume. Thus, increased trading volume may not entirely explain the increase in FTD for threshold securities. Figure 5 compares trends in volatility, market performance, and short interest with the trends in FTD outstanding across NYSE, NASDAQ, and Amex securities over the review period. The first graphic in figure 5 shows market volatility, as measured by changes in the CBOE Volatility Index (VIX), beginning to trend upward by January 2007. We measured market performance using the S&P 500 Total Return Index (second graphic), and we use short interest—the total number of shares of a security that have been sold short, but not yet covered or closed out—as a proxy for the volume of short selling occurring in the market (third graphic). We expected declining market performance during 2007 and 2008 to correlate with an increase in short interest as market sentiment declined. The third graphic shows that after January 2007, short interest highly correlated with FTD, suggesting that increased short selling activity partially explains the rise in FTD. In particular, the July 2008 high in FTD correlated closely with the peak in short interest over the review period. The strong correlation between short interest and FTD suggests that the effectiveness of the locate requirement during this period of market turbulence may have been limited. OEA staff told us that a significant increase in short selling may result in increased FTD as the current processes for locating and obtaining securities may be temporarily overwhelmed. Furthermore, they said that as short interest increases, more securities— particularly those that are less liquid—face a binding borrowing constraint. As a result, borrowing becomes more difficult for more securities, potentially resulting in more FTD. Other factors may also have contributed to the increased number of threshold securities and FTD observed during this period. For example, OEA staff noted the increasing presence of ETFs on the threshold list during this period. We discuss ETFs in greater detail later in this report. Furthermore, industry officials with whom we spoke also said that several threshold securitieshad ceased trading or were trading at very low prices, making it difficult to resolve any FTD in those securities. After reaching a high on July 17, 2008, the number of threshold securities and their FTD began to decline. OEA staff pointed to the corresponding decline in short interest as one potential factor. While the SEC’s emergency order restricting naked short selling in the securities of 19 large financial firms was issued about the same time (July 15, 2008), OEA staff said that they do not know to what extent the order was responsible for the subsequent decline in threshold securities and their FTD. Only 1 of the 19 firms that were subject to the order was on the threshold list before the order went into effect, and the other securities had low FTD levels. However, these staff said that market uncertainty about whether SEC would take additional emergency actions may have affected the amount of short selling in which the market engaged. OEA staff said that the September emergency orders—which eliminated the options market makers exception, imposed stricter close-out requirements on FTD in all equity securities, and temporarily banned short selling in the securities of financial firms—had a significant impact on the number of threshold securities and their FTD levels. Our data show that the number of threshold securities continued to decline after the September 2008 emergency orders became effective. Although the elimination of the options market maker exception and the provisions of the temporary rule were not fully in effect until mid-November when compliance grace periods expired, the average number of threshold securities declined to 72 in November—the lowest number during our review period since the effective date of Regulation SHO. The number of threshold securities temporarily increased to 123 by December 31, 2008, but subsequently declined. By May 5, 2009, there were 68 securities on the threshold list. Similarly, outstanding FTD and total new FTD in threshold securities also continued to decline after the September 2008 emergency order, although these declines had slowed by the end of 2008, when the level of outstanding FTD had declined to slightly below their January 2005 level. Total new FTD also declined, but by the end of 2008 were still above their January 2005 level. One explanation for continued outstanding FTD may be that the enhanced delivery requirements of the temporary rule apply only to FTD from trades that occurred after the September emergency order became effective on September 18, 2008. Preexisting FTD in any equity security do not have be closed out, unless the security enters the threshold list. In that case, the close out provision for threshold securities applies, and the clearing broker-dealer has 13 consecutive days to close out the FTD. As a result, outstanding FTD may be due to new securities entering the threshold list. We discuss characteristics of the remaining threshold securities later in this section of our report. Furthermore, while the temporary rule imposes close-out requirements on FTD in all equity securities, it does not prohibit them from occurring. Levels of new FTD can continue to fluctuate, although the overall decline since the September 2008 emergency order suggests that the close-out requirements of the temporary rule have curbed the number of threshold securities and new FTD in these securities. Figure 6 shows the number of equity securities across the market with outstanding FTD and those with new FTD over the review period. As with the threshold securities, the number of these securities began to decline after the July order, concurrent with the decline in short interest, and continued to decline after the implementation of the September emergency order. As we have previously discussed, the close-out requirements of the temporary rule applied to FTD resulting from trades in any equity security, not just threshold securities. Most notably, we found that the gap between securities with outstanding FTD and those with new FTD narrowed considerably by December 2008, again suggesting that the close-out requirements were resulting in more prompt close outs. The overall decline in securities with new FTD also suggests the new requirements may be having the effect of curbing new FTD. Figure 7 shows the monthly average outstanding FTD for all securities, and indicates a similar declining trend in threshold securities after July 2008. By the end of 2008, outstanding FTD did not appear to have declined below the earlier low point (late-2005). As we have previously discussed, FTD existing prior to the effective date of the September emergency order do not have to be closed out, unless the security enters the threshold list. In addition, although the temporary rule appeared to have curbed the number of securities with new FTD by the end of 2008, it does not prohibit new FTD. The potential exists that market events, such as increased trading volume or short interest, could again lead to increased FTD. It remains to be seen whether the stricter close-out requirements are having the effect of encouraging improvements in locating and delivery processes that would help mitigate increases in new FTD under such circumstances. Our review of FTD data showed that the majority of threshold securities “graduated” from the threshold list in a timely manner over the review period, although most returned to the threshold list at least once. Furthermore, until the September emergency order became effective, some threshold securities persisted on the list for extended periods. A majority of the threshold securities (83 percent) graduated from the list within 22 days, the earliest we expected given the implementation of the close-out requirement, and many graduated sooner—25 percent within 6 days. The timely graduation of threshold securities, in most instances, indicates that the regulation worked as intended to reduce FTD to below the threshold level once securities appeared on the threshold list. However, in many instances, this effect was not permanent, as FTD in these securities eventually increased again. From January 10, 2005, the day the first threshold list was published, until December 31, 2008, about 21,400 securities graduated from the threshold list. Of these securities, about 17,000, or 80 percent, returned to the threshold list at least once, and about 1,200, or 6 percent, returned to the list more than 10 times. In addition to showing the average monthly number of threshold securities over the review period, figure 8 includes data on the number of days these securities persisted on the threshold list. We found that the average daily number of securities per month that were on the threshold list for 22 days or less ranged from 50 percent (October 2008) to 91 percent (December 2008). However, some securities persisted for considerably longer periods. Figure 8 also indicates the number of securities that persisted on the list for more than 22, 30, 60, and 90 days, respectively, during the review period. Securities legitimately could have persisted on the threshold list during the review period for several reasons: FTD in these securities could have been exempt from the close-out requirement under the former grandfather and option market maker exceptions, at least until these exceptions were eliminated. FTD in these securities also could have fallen under the third exception from the Regulation SHO delivery requirement if they resulted from long sales of formerly restricted securities. As we have previously discussed, Regulation SHO allows owners of formerly restricted securities 35 days to complete processing of these securities and deliver them to their clearing broker- dealer. Clearing broker-dealers may have closed out their FTD in compliance with Regulation SHO, but as old FTD were cleared up, new ones were created that kept the security on the threshold list. Clearing broker-dealers may have been unable to close out their FTD after 13 consecutive settlement days, because, for example, of a lack of liquidity in a specific security. In that case, until the relevant clearing broker-dealer was able to obtain securities and close out its FTD, it would be required to preborrow, or arrange to preborrow, securities before effecting additional short sales. Examination and enforcement staff at FINRA and SEC told us that until they conduct an examination or inquiry into persistent FTD in a threshold security, they do not know whether they were legitimate (e.g., based on an exception) or whether the firm violated Regulation SHO’s delivery requirements in those securities. We reviewed securities that persisted for more than 90 days over the review period and found they comprised about 300 unique securities. Table 1 shows the number of securities that persisted on the threshold list for more than 90 days, by the number of days. The table reflects a total of 365 because some securities appeared on the list more than once. We found 1 security that persisted on the threshold list for more than 700 consecutive days. For those securities that returned to the threshold list more than once, we found that the total number of days they could persist on the list could be greater. For example, 1 security that returned to the threshold list 5 times persisted for a total of 862 days. The September emergency order appeared to significantly reduce the ability of securities to persist for extended periods. From May 2005, the first month that a security could be on the threshold list for more than 90 days, through September 2008, the average daily number of securities persisting for more than 90 days ranged from a low of 12 per month (April 2007) to a high of 63 per month (August 2008). Our data showed that the number of such securities did not begin to decline significantly from their record high until after the September order became effective. By the end of 2008, no securities on the threshold list had persisted for more than 90 days. The percentage of ETFs on the threshold list increased over the review period (fig. 9) as the number of these products trading in the financial markets also grew. By December 2008, about 50 percent of the securities remaining on the threshold list were ETFs. Trading and Markets and OEA staffs said that, at this time, they do not believe ETFs are persistently failing due to manipulation, and noted that ETFs are characteristically less prone to manipulation than common stock since the ETF price is based generally on large baskets of underlying securities. Instead, Trading and Markets, OEA, and FINRA staffs believe that structural characteristics associated with ETFs make them more likely to experience FTD. This is primarily because ETFs can only be created and redeemed in large blocks of shares (e.g., 50,000) called creation units. For example, OEA staff said that, given the costs associated with creating and redeeming units, broker-dealers may have little incentive to create additional units until the number of FTD is at least as great as the creation unit size. As a result, ETFs are more prone to inclusion on the threshold list than other securities. OEA staff said that because many ETFs have a low number of total shares outstanding, FTD in ETFs can easily trigger the 10,000 share FTD and 0.5 percent of total shares outstanding criterion for becoming a threshold security. In addition, the creation unit size may far exceed the 10,000 share FTD trigger level for becoming a threshold security. FINRA staff told us that when newly listed ETFs begin trading, there is uncertainty in the marketplace regarding the level of demand. If demand for the specific ETF exceeds contemporaneous sell-side supply, FINRA staff said that market makers will short sell the ETF pursuant to existing exemptions, causing FTD. However, these staff said that the resulting FTD are typically short term and resolved through the issuance of additional creation units. Trading and Markets and OEA staffs said that they are continuing to review ETFs to further understand the reasons for FTD in the products, and to monitor any potential changes to ETF products for manipulation or other concerns. Some market participants and others (commenters) expressed concern that under the current locate requirement, broker-dealers with available shares may provide more locates than they have shares available. Furthermore, they said that the current close-out requirements do not address manipulation that can occur within the 3-day settlement period. To mitigate this potential, these commenters advocate requiring short sellers to first borrow securities before effecting their short sales. Trading and Markets and FINRA staffs agreed that market manipulation within the T+3 settlement period is possible. Meanwhile, Trading and Markets staff said that they are still considering whether a preborrow requirement is an appropriate regulatory response. Some commenters believe that the current locate requirement is not sufficient to curb FTD resulting from short sales or prevent manipulative trading. As we have previously discussed, Regulation SHO allows broker- dealers to rely on industry easy-to-borrow lists, instead of directly contacting the source of the securities. According to OCIE and FINRA staffs and industry officials, the industry generally relies on these lists, to satisfy the locate requirement when effecting short-sales in securities considered widely available. For securities that are not on an easy-to- borrow list, the customer or the broker-dealer typically calls the securities lending department of the broker-dealer to determine the availability of the securities for borrowing. However, Regulation SHO does not require the entity on which a broker-dealer relied as a source of available securities to have the securities available on settlement date. Some commenters have expressed concern that unless SEC requires broker- dealers to borrow securities prior to effecting short sales, or at least requires sources of securities to set aside securities as they are providing locates, broker-dealers could provide more locates than they could fill, which could lead to FTD if they are not able to obtain sufficient shares for delivery from another source on settlement day. One securities lending consultant with whom we spoke said that the process of providing locates for hard-to-borrow stocks generally is informal, with locates at times provided verbally. This consultant said that such informal conversations can result in the securities not being available on settlement day if the parties misunderstand the type and amount of securities available. Another consultant in financial services said that because broker-dealers could rely on telephone calls, they may not actually check whether the source was valid. Although the temporary rule requires most FTD resulting from short sales to be closed out on T+4, several commenters expressed concern that market manipulation could occur within the T+4 time frame. These commenters said that under the current locate and close-out requirements, a trader could still naked short sell a security and cover the sales with purchase orders prior to settlement day. Because the trader does not have to incur the cost of borrowing shares, these commenters said that the trader could naked short sell without limit—thus, flooding the market with sell orders to potentially depress the price of the security and realize greater profits. To mitigate this type of market manipulation, the commenters recommended that SEC require broker-dealers to preborrow securities prior to effecting a short sale on behalf of a customer, which they said would eliminate the potential for manipulative short selling within the 3-day settlement period and more generally provide greater assurance that short sales do not result in FTD. Trading and Markets staff said that they have not conducted any empirical studies to assess the effectiveness of the locate requirement for reducing FTD. However, they and industry officials said that overlocating is unlikely to occur because only an estimated 5 percent to 10 percent of locates result in the actual borrowing and delivery of shares. For example, many customers choose not to proceed with the short sale order after obtaining or requesting a locate. Industry officials noted that there is a key difference between a locate, which occurs prior to the short sale being effected, and a borrow, which occurs at settlement. Because broker- dealers settle transactions in each security on a net basis, these officials and the regulators said that the actual settlement obligation is often less than the number of shares sold short, making borrowing unnecessary or necessary only in limited quantities. Industry officials told us that as a result of the standardization of the locate requirement under Regulation SHO, they have developed policies and procedures that help them to better manage their securities lending operations. More specifically, these officials said that the locate requirement, and the new T+4 close-out requirement for FTD resulting from short sales, has resulted in increased and improved communication with customers prior to effecting a short sale. For example, some industry officials said that as a result of the locate requirement of Regulation SHO, they are denying customers’ requests to effect short sales in hard-to- borrow securities because a source of available and sufficient securities cannot be located. They said that the customer has a vested interest in making sure that the broker-dealer can deliver the securities in time for settlement. If securities cannot be borrowed and delivered in time for settlement, the broker-dealer will be required to close out the FTD under the temporary rule, thus increasing the chance that the customer may be bought-in at a loss or will be required to close out its short position earlier than desired. Industry officials said that, consequently, when customers call the securities lending department to obtain a locate for hard-to- borrow securities, the customer and staff from the securities lending department are more likely to discuss the availability of the security, the cost to borrow it, and the length of time it can be borrowed. Furthermore, industry officials said that broker-dealers also are motivated to manage their inventory effectively to avoid FTD, which otherwise trigger the close- out obligations of the temporary rule. To better understand industry practices regarding locates, we reviewed several broker-dealer examinations conducted by OCIE that focused on Regulation SHO compliance. We found that four of the five broker-dealers that were examined either generated their own easy-to-borrow lists or used the easy-to-borrow lists of other broker-dealers with which they had stock borrow arrangements, to determine whether a security was widely available for borrowing prior to effecting a short sale. We found that some of these firms decremented their easy-to-borrow lists as they provided locates, or practiced some other form of inventory management to help ensure that they did not provide locates for more securities than they could fill at settlement date. Others, however, did not follow these practices. We note that without such practices in place, it is unclear how these firms could ensure that they are not providing locates in excess of their available supply of securities and thereby limiting the potential for FTD. As we have previously discussed, Regulation SHO does not require firms to decrement their easy-to-borrow lists as they provide locates to their customers or traders, nor does it include definitive criteria regarding what constitutes an easy-to-borrow security other than a reasonableness requirement. Without such criteria, it is unclear how SEC could ensure that firms prepare these lists in a consistent manner and contain an appropriate range of securities that are available for borrowing. Although short sellers and broker-dealers could still potentially collude to effect a manipulative short selling scheme, Trading and Markets and FINRA staffs said that under the current locate and close-out requirements, it is less likely traders would effect short sales resulting in persistent FTD. FINRA staff said that this is because the locate and close- out requirements mandate the broker-dealer to settle the trade or to resolve the FTD created when the trade was not settled on time. Customers, on the other hand, do not have any role in the settlement of trades. For example, these staffs said that it would not be very likely that a retail customer, who generally relies on the same broker-dealer to obtain a locate, execute, and settle a trade, could implement a manipulative naked short selling scheme. To do so, FINRA staff said that the broker-dealer would in all likelihood have to collude with the customer and agree to allow a short sale to be effected without a locate being obtained, fail to deliver securities, and keep the FTD open while the customer attempted to fraudulently drive down the price of the security. Industry officials told us that the customers who are allowed to provide their own locates to executing brokers and arrange for securities to be delivered to the clearing broker-dealer for settlement generally are institutional investors, such as hedge funds. They said that institutional investors may choose to execute and settle the trade with one broker- dealer, or they may choose to execute the trade with one broker-dealer and settle it with another broker-dealer (a prime brokerage arrangement), where the clearing broker-dealer is called a prime broker. When a customer uses a prime broker to clear and settle his trades, the executing broker remains responsible for obtaining a locate, marking the trade long or short, and executing the trade. The prime broker is responsible for delivering securities in time for settlement, whether or not it relies on the customer’s source of securities. Therefore, according to FINRA and industry officials, manipulative naked short selling is likely to occur only to the extent that the prime broker agrees to fail to deliver securities on time and keep FTD open. According to industry officials, prime brokers will only look to the customer’s source of a locate for delivery if the prime broker cannot otherwise obtain the necessary shares for delivery. Both Trading and Markets and FINRA staffs said that the preborrow penalty specified in Regulation SHO and the temporary rule provides the clearing broker-dealer with a strong financial incentive to close out FTD as required by the rules. However, before SEC issued the temporary rule in September 2008, Regulation SHO’s close-out requirement applied only to threshold securities (and only after the FTD had been open for 13 consecutive days). Furthermore, FTD in nonthreshold securities never had to be closed out. As a result, under Regulation SHO, FTD resulting from naked short sales could persist for many days. Under the temporary rule, subject to certain exceptions, if a clearing firm is unable to close out FTD resulting from a short sale on the morning of T+4 in any security, or, for FTD resulting from long sales or bona fide market making on T+6, the clearing firm cannot execute additional short sales in that security for any of its customers or its proprietary account, unless it first preborrows (or arranges to borrow) the security. The temporary rule allows the clearing firm to avoid the preborrow penalty to the extent that it can identify any introducing broker-dealer(s) that have contributed to the FTD, by allocating the close-out and preborrow obligations to those broker-dealers. Industry officials and FINRA staff told us that clearing broker-dealers generally do not allocate FTD in this manner. Instead, they told us that clearing broker-dealers may choose to finance the costs of closing out FTD, or preborrow the securities if they cannot, and allocate those costs among their customers. Several clearing broker-dealers told us that they allocate these costs to their customers with open short positions. Hedge fund officials with whom we spoke said that FTD create friction with prime brokers because the hedge funds rely on the prime brokers to obtain and deliver shares on time. They said that resolving FTD is costly and time-consuming because traders must spend time with the hedge fund’s operations group to reconcile the trade. To the extent that the prime broker cannot identify the customer responsible for the FTD, hedge fund officials said that at times they have been allocated the costs of closing out FTD for which they believe they were not responsible. These officials said that if a hedge fund identifies settlement failures at a particular prime broker, it typically will reduce its activity at that prime broker or stop using it altogether. Trading and Markets and FINRA staffs acknowledged the potential for market manipulation within the T+4 time frame. FINRA officials explained that a fraudulent short selling scheme could occur even in situations where market participants or customers are fully compliant with the locate rule and no FTD develop on settlement day. In such intraday manipulations, the customer or market participant, after having made a valid locate, engages in a pattern of short selling activity during a concentrated period of time, with the specific intent of driving down the price of a stock for a specific period. The customer or market participant then purchases shares after the price decline occurs to cover its short position for a profit. Because the purchase and sale activity nets out to zero, no FTD develop on settlement day as a result of this activity. Trading and Markets and FINRA staffs said that those securities that are most vulnerable to such short selling abuse would be thinly traded, highly illiquid, and have a relatively low number of total shares outstanding. They said that securities that have many total shares outstanding and are very liquid are more difficult to manipulate, because the trader would have to effect very large and numerous short sale orders to create downward pressure on the price. FINRA staff said that a marketwide preborrow requirement would likely increase the overall costs of short selling, including the costs to effect an intraday market manipulation, but it would not necessarily eliminate this type of misconduct. Trading and Markets staff also told us that the costs of a marketwide preborrow requirement to address FTD, manipulative naked short selling, or market manipulation occurring within the T+4 time frame might outweigh any potential benefits, especially considering that the vast majority of trades settle on time. After the July emergency order, OEA staff conducted an analysis of the impact of the order to understand the potential economic trade-offs of a preborrow requirement. To address these questions, OEA examined how various measures hypothesized to be affected by the order evolved over time for the securities of the 19 financial firms subject to the order. OEA then compared the experience of these securities with that of two control samples that were not subject to the order: one control sample consisted of other financial securities, and the other sample consisted of large nonfinancial securities. OEA’s results suggested that imposing a preborrow requirement may have had the intended effect of reducing FTD, but also may have resulted in significant costs to short sellers. First, OEA found that short selling declined more for the securities in the July emergency order than for securities in the two control groups—by almost 9 percent of volume. Second, OEA’s analysis showed large, but temporary, initial increases in securities lending rates, as measured by rebate rates, followed by rates still higher than before the order. The rebate rate reflects the portion of interest the lender earns on the borrower’s collateral that the lender agrees to pay the borrower. The lower the rebate rate, the higher the securities lending rate. OEA found that rebate rates for these securities over the review period declined by 1.56 percent, from 1.8 percent to 0.24 percent. However, OEA found that the rebate rates dropped significantly in the first day of the July order, on average below negative 1 percent. Rates recovered to above zero before the end of the order, but were still well below their preorder levels by the end of the review period. OEA also found that significant reductions in FTD were associated with the emergency order—the level of FTD in the securities of the 19 firms declined from 2.8 million to 1.0 million during the order, or about 64 percent. New FTD in these securities declined by about 78 percent, from an average of 1.8 million shares per day to 0.4 million shares per day. OEA concluded that the order appeared to have been effective at reducing and preventing FTD, but it noted that the success came with significant trade-offs, most notably a large increase in lending fees and a large decline in short sales. OEA also noted that the securities included in the order had relatively large market capitalization, traded in a liquid market, and tended to be easy to borrow. Consequently, OEA cautioned that the results may not be fully indicative of how a preborrow requirement might affect markets if applied on a broader scale. Specifically, OEA said that similar requirements imposed on smaller, more illiquid, or hard-to-borrow securities might cause a significantly larger disruption to short selling and to liquidity. Trading and Markets staff said that they had received feedback from the industry on the impact of the temporary preborrow requirement. The industry commented that the order had a number of unintended consequences, including forcing shares to be borrowed even when they are not needed for delivery, thereby decreasing the liquidity of the securities lending market and resulting in the supply of borrowable shares being allocated to large broker-dealers, leaving smaller broker-dealers in certain situations with less ability to borrow shares to effect short sales. Furthermore, the industry commented that the order impacted the efficient use of capital because firms were forced to commit their own capital to preborrow securities. More specifically, according to an industry trade association, several of its broker-dealer members reported a reduction in the loan liquidity in some of the securities of the 19 firms, ranging from an estimated 10 percent to 85 percent, depending on the security. Instead of borrowing securities on a net basis when they were required for the settlement date, the preborrow requirement caused broker-dealers to borrow gross volumes of securities when the securities were located, resulting in significant overborrowing. According to the industry trade association, some firms reported additional balance sheet costs related to financing preborrows, which affected such firms’ efficient use of capital. The size of such increases to balance sheet costs varied, with high-end costs of close to $2 billion per day to preborrow securities. These firms reported that increases to balance sheet costs were lower for firms that were arranging to borrow (i.e., hold) rather than to actually preborrow securities prior to effecting the short sales. As the Commission considers whether to finalize the temporary rule, Trading and Markets staff said that they are continuing to evaluate the appropriateness of a preborrow requirement for addressing FTD and market manipulation related to naked short selling. Separately, SEC is currently considering other measures that are intended to address abusive short selling concerns. In April 2009, SEC voted to propose two approaches to restrictions on short selling. One approach would apply on a marketwide and permanent basis (short sale price restrictions), while the other approach would apply only to a particular security during severe market declines in that security (circuit breaker restrictions). SEC is currently seeking public comments on these two approaches. After SEC implemented Regulation SHO, SEC and the SROs took steps to enforce its requirements—first by conducting a joint sweep examination, and later by conducting routine and other compliance examinations and regular surveillances of FTD data. While these examinations have found a significant number of firms with Regulation SHO compliance deficiencies, OCIE and SRO staffs told us these deficiencies generally were not indicative of systemic problems or attempts to manipulate a security. However, broker-dealers are facing challenges in complying with Regulation SHO’s requirement to determine whether the locates they obtain prior to effecting a short sale are reasonable sources for securities needed at settlement. SEC and SRO examinations have found that most Regulation SHO deficiencies by broker-dealers and options market makers appear to be nonsystemic deficiencies. As of April 1, 2009, two SROs have brought several compliance actions. Within months of Regulation SHO’s compliance date and in coordination with Trading and Markets, OCIE, NYSE, and the former NASD conducted a coordinated sweep examination of 19 clearing broker-dealers that execute and clear short-sale transactions. The 19 firms were selected from NASD- and NYSE- generated lists of firms that had aged FTD in threshold securities. The purpose of the sweep examination was to determine whether firms were in compliance with Regulation SHO’s locate, close-out, or order-marking requirements, along with other Regulation SHO requirements. Examiners also reviewed the adequacy of the firms’ written supervisory procedures for ensuring compliance with these requirements. These joint sweep examinations found deficiencies with Regulation SHO requirements at all 19 broker-dealers. OCIE and SRO examiners told us that they generally did not find evidence that these deficiencies were part of a deliberate problem or part of attempts to manipulate a security. For example, deficiencies related to the close-out requirement generally involved limited instances with a majority of the firms having failed to deliver in only one or two securities. As a result of the sweep examination, NYSE brought formal enforcement actions against four of its members. According to examiners who had participated in the examinations of these firms, NYSE brought these enforcement actions because it believed that the firms had been given adequate time before Regulation SHO went into effect to develop processes and procedures for compliance with the requirements. OCIE also found that the most serious finding was that most of the firms did not have adequate written supervisory procedures to ensure compliance with Regulation SHO. Although OCIE does not conduct routine examinations of SRO member firms for Regulation SHO compliance, OCIE officials stated that between January 2005 and October 2008, OCIE conducted approximately 90 cause or broker-dealer oversight examinations that included a review of the firm’s compliance with Regulation SHO. Of these examinations, 41 had Regulation SHO-related findings. We reviewed 12 of the 41 examinations with Regulation SHO findings and found that the findings reported were similar to those of the 2005 sweep examination. For example, examiners generally found deficiencies in marking trades or performing an appropriate locate prior to effecting a short sale in some firms. To assist OCIE in their examinations, we found that OEA conducted multiple analyses using NSCC-provided FTD and threshold list data to analyze data on particular firms. Most recently, as part of a sweep examination, OCIE stated that it has initiated 4 examinations to assess compliance with the October 2008 rule changes. To date, SEC has not charged violations of Regulation SHO in any enforcement actions. However, according to SEC Enforcement staff, Regulation SHO is largely enforced by the SROs because of the regulation’s focus on broker-dealer operations. After the initial 2005 sweep examinations were completed, the SROs continued to monitor the industry for compliance with Regulation SHO through routine examinations and electronic surveillance. FINRA continued to monitor firms for Regulation SHO compliance by incorporating an assessment of Regulation SHO compliance into three of its routine examination programs: the Risk Oversight and Operational Regulation Program, which focuses on clearing firms; the Sales Practice Examination Program, which focuses on introducing firms; and the Trading and Market Surveillance Program, which complements existing automated surveillance. We reviewed the examination modules for each of the three FINRA programs. To assess compliance with the locate and order-marking requirements, the modules direct examiners to use various methods to select samples of trades for review. For the selected sample, examiners are directed to review a firm’s supporting documentation—such as locate logs, trade blotters, position records, and FTD ledgers. Similarly, to assess whether a clearing broker-dealer appropriately closed out FTD in threshold securities, examiners are directed to select and analyze a sample of FTD from the firm’s FTD ledgers. We found that FINRA had taken steps to update the examination modules to reflect the stricter close-out requirements of the temporary rule. According to FINRA data, between January 1, 2005, and December 31, 2008, FINRA conducted 1,124 routine examinations of its members through the 3 programs. Of these examinations, 302 contained Regulation SHO deficiencies. FINRA staff stated that they have not detected any particular trends or patterns in the types of violations that would indicate systemic abuse, and do not consider the deficiencies found in these examinations to be egregious. For example, staff found in 1 examination that locates were not performed for 4 trades out of a sample of 60 trades. In another example, examiners sampled 10 short sale transactions and found 1 instance where the amount sold short exceeded the amount located by 1,000 shares. In addition to its examination programs, FINRA also uses automated surveillance to identify firms with close-out obligations for all threshold securities within a specified period. Specifically, we found that FINRA runs quarterly reports using FTD data obtained from NSCC to identify all threshold securities for that quarter and those clearing firms with potential close-out obligations in those securities—that is, aged FTD in threshold securities. FINRA staff then contact these firms to determine why the potential close-out obligation has not been met, and to determine whether there are any violations of Regulation SHO or whether the aged FTD were due to legal exceptions. Since the adoption of the temporary rule, FINRA staff stated that FINRA has updated its surveillances to monitor for FTD in all securities, and that it runs the surveillance on a bimonthly basis. FINRA then selects firms identified by this surveillance to contact to determine why the potential close-out obligation has not been met and to determine whether there are any violations of Regulation SHO. CBOE also monitors its membership for compliance with Regulation SHO through its member firm examinations and surveillances. Between January 1, 2005, and December 31, 2008, CBOE conducted 326 examinations that included a review of Regulation SHO requirements. Of these examinations, 152 contained some level of apparent Regulation SHO violations (i.e., 140 marking violations, 65 locate violations, and 26 close-out violations). Due to their nature, the majority of these violations were resolved through nonformal disciplinary action. CBOE also participated in a 2006 sweep examination that focused on the options market maker exception to the close-out requirement for aged FTD in threshold securities that were open for 13 consecutive days. CBOE staff also have developed surveillance to help detect noncompliance with the close-out requirements of Regulation SHO. Moreover, beginning in early 2005, SRO staff identified multiple traders that appeared to be using an illegal trading strategy to inappropriately avoid the close-out requirement of Regulation SHO. These traders were identified through SRO surveillance and complaints that the SRO received. As a result of FINRA’s surveillances and investigations, which were conducted on behalf of the American Stock Exchange (Amex), the exchange brought two formal disciplinary actions for violations of Regulation SHO against two options traders. Amex alleged that the options traders improperly used the market maker exception to engage in naked short selling without first obtaining a locate, and circumvented the delivery obligation through various trading schemes. CBOE has also initiated 26 investigations against member firms for similar apparent activity. As of February 19, 2009, 7 cases have been presented to the CBOE’s Business Conduct Committee. CBOE and FINRA staffs stated that since the above Amex actions regarding two traders became public, this type of activity appears to have ceased. Regulation SHO requires broker-dealers to demonstrate that the sources on which they rely for locates are reasonable—that is, the broker-dealer does not have reason to believe that the source will be unable to deliver shares in time for settlement. Firms are also required to have procedures or systems in place to determine whether it is reasonable to rely on customer assurances or an easy-to-borrow list. However, in both the initial sweep examinations and subsequent oversight and sweep examinations, OCIE has found that some firms do not have procedures or systems in place to monitor whether the locate source was reasonable. According to OCIE examinations, some broker-dealers are not monitoring to determine whether locates are resulting in FTD because firms do not expect that the source from which the firm obtained the locate will be the source from which the firm will obtain shares for settlement. As a result, it may be difficult for broker-dealers and regulators to determine whether a locate source is reasonable because the source that provided the locate for past trades may or may not have been the source from which the clearing broker-dealer attempted to obtain shares for settlement. According to SEC and SRO staffs and industry officials the source used to borrow shares and make delivery can differ from the locate source for several reasons. The clearing broker-dealer may simply decide to use a source other than the source used to obtain the locate. For example, a broker-dealer may decide to use shares from its own inventory instead of going to the source of its locate, or the locate source provided by the customer. In addition, the netting process of the clearance and settlement system may result in a broker-dealer not being required to deliver any shares or only a portion of the total sold short, thus eliminating the need to borrow securities or reducing the amount required and potentially eliminating the need to borrow from the source used to obtain a locate for a specific trade. The source used to borrow shares also may be different than the locate source because securities that are available on trade date may not be available on the settlement date from that locate source, when borrowing is effected to settle the short sale. Conversely, a source that may not be able to provide a locate on trade date may have the securities available to be loaned on the settlement date. We also found that executing broker-dealers may not always have the information necessary to make a determination that the locate source provided by the customer is reasonable. According to FINRA staff and industry officials, this is most common in prime brokerage transactions where the customer delivers the securities to the prime broker rather than to the executing broker for settlement of sell orders. As we have previously discussed, Regulation SHO requires the executing broker- dealer to locate shares available for borrowing prior to effecting a short sale. An executing broker may fulfill this requirement by relying on a customer’s representation that it has obtained the locate from another source. However, because Regulation SHO does not obligate the clearing firm—in this case, the prime broker—to provide trade settlement information to the executing broker, the executing broker may not know if, at settlement, the prime broker was unable to borrow shares to delivery, and thus may not have the information necessary to determine whether it can rely on that customer’s locates for future short sale transactions. Industry, Trading and Markets, and FINRA staffs said that this information gap in Regulation SHO could be addressed by clarifying the responsibilities of the prime broker and executing broker to ensure compliance with Regulation SHO. In March 2007, Trading and Markets and industry representatives helped provide this clarification by drafting revisions to the Prime Broker Letter issued by SEC staff in 1994. According to the industry officials working with Trading and Markets, these revisions are intended to enhance communications between the prime broker and executing broker and to help ensure that the customer is providing accurate information to the executing broker. Furthermore, these revisions would provide the executing broker with the information necessary to make a determination of whether a customer’s assurance is reasonable. As of April 2, 2009, Trading and Markets has not yet finalized the revised Prime Broker Letter to make it effective. Trading and Markets staff said that because SEC still is evaluating comments on the temporary rule and it remains subject to modification, they cannot sign the letter. According to these staff, the draft letter reflects Regulation SHO as adopted, and officials need to review the letter to determine whether any adjustments are necessary to reflect the provisions of the temporary rule, if it is adopted as final. The letter was revised in March 2007, prior to the issuance of the temporary rule in September 2008, and the information gap has existed since Regulation SHO became effective in January 2005. Without access to the information from prime brokers that would allow them to establish whether customer-provided locates are resulting in FTD, executing broker-dealers may not be able to achieve compliance with Regulation SHO. In addition, this information gap may create the perception that prime brokerage customers—typically, hedge funds or large investors—are allowed to circumvent Regulation SHO and naked short sell. SEC has said on several occasions that the perception that FTD may be indicative of manipulative naked short selling can damage investor confidence and the stability of the market. By completing its review and finalizing the revised 1994 Prime Broker Letter, SEC can ensure that this information gap is closed, and that the parties responsible for executing and clearing and settling trades (1) establish the communication processes necessary to comply with Regulation SHO and (2) make the appropriate determinations about customer-provided locates. Regulation SHO compliance violations do not necessarily indicate that manipulative naked short selling has occurred. If examiners identify indications of potential manipulative trading, OCIE or FINRA can pursue further investigation or refer the case to their respective Enforcement divisions for further investigation. For example, we reviewed one OCIE examination where possible Regulation SHO violations led to such a referral. As we have previously discussed, regulators have found Regulation SHO deficiencies to be nonsystemic and not indicative of abuse or attempts to manipulate individual securities. SRO staff stated that Regulation SHO is effective from an examination and enforcement perspective because it specifically identifies the parties responsible for obtaining a locate or closing out FTD and identifies when each of these responsibilities is to be completed. Furthermore, because Regulation SHO was designed to curb manipulation facilitated by naked short selling and address large and persistent FTD by imposing operational requirements on regulated entities, the SROs are able to bring regulatory actions against their members for Regulation SHO violations. SEC and the SROs rely on complaints, tips, and electronic market surveillance, among other things, to identify suspicious trading activity, including potential instances of manipulative naked short selling. Enforcement staff stated that while it is not difficult to determine whether there are FTD in a security, they have found through their experiences and discussions with the SROs that FTD are not a proxy for manipulative conduct and do not provide regulators with much information regarding possible manipulation. For example, a FTD could occur, but that information alone does not tell a regulator whether there was intent to fail to deliver or whether an appropriate locate was conducted. Also, as we have previously discussed, FTD may result from long or short sales. To determine if a trader was successful in manipulating the market through naked short selling, regulators must unwind FTD and trading activity, which requires considerable analysis of trading data and other supporting documentation, such as e-mails, and reliance on large amounts of circumstantial evidence. Furthermore, according to Enforcement and FINRA staffs, manipulation investigations, including manipulative naked short selling, are complex matters and the standard of proof, especially proving intent, to prevail in an enforcement action is high. Enforcement stated that quantifying the amount of manipulative activity, including manipulative naked short selling, that occurs in the market is difficult. According to FINRA, most market manipulation is identified through activities of the market surveillance divisions at the SROs that review market activity for aberrant price and volume movement in the security that can suggest manipulation. The SROs have established electronic surveillance systems that generate an alert if a security’s price or volume of shares traded, among other things, moves outside of set parameters. These price and volume movements can indicate a number of illegal trading practices, including manipulative naked short selling. A significant factor in determining whether an aberrant movement was a case of potential manipulative naked short selling is if a FTD appears at NSCC 3 days after the aberrant movements. SRO staff review thousands of alerts annually to identify those that are most likely to involve fraud or warrant further investigation on the basis of a variety of factors, such as profit potential and news related to the security. In the course of a full investigation, the SROs gather information from their member broker- dealers, including the names of individuals and organizations that were active in trading during the time in question. When an SRO finds evidence of illegal trading involving its members, it can conduct disciplinary hearings and impose penalties ranging from disciplinary letters to fines to expulsion from trading and SRO membership. Because the SROs do not have jurisdiction over entities and individuals that are not part of their membership, they refer suspicious trading on the part of nonmembers, including customers, directly to SEC Enforcement. Industry officials said that the stricter close-out requirements imposed through the September emergency order and the temporary rule have resulted in several unintended negative consequences on security prices and securities lending. Trading and Markets staff said they are reviewing these concerns to determine whether any changes to the requirements are warranted before the Commission considers finalizing the rule by July 2009. The industry also has experienced operational issues in implementing Regulation SHO and the temporary rule, but Trading and Markets responsiveness to industry requests for guidance on these issues has been mixed. According to several comment letters submitted to SEC on the temporary rule, the industry generally supported the fundamental tenets of the temporary rule, including a compressed mandatory close-out obligation for all equity securities. However, industry commenters cited several negative consequences that resulted from the temporary rule, noting that it potentially contributed to market volatility and price spikes at market open and to instability in the securities lending market. Industry commenters said that the requirement that broker-dealers close out FTD by the opening of trading on T+4 (for short sales) or T+6 (for long sales or bona fide market maker sales) inadvertently contributes to increased market volatility and price spikes at market open. For example, a large industry group’s comment letter referenced 40 instances in which these close-out requirements potentially created significant but temporary upward pressure on the price of certain hard-to-borrow optionable securities at the opening of trading. According to this letter, the price of these securities opened trading at least 15 percent above the previous night’s closing price, but prices receded back to approximately the previous night’s closing price within 30 minutes. Industry officials also said that the new close-out requirements are having a negative impact on the efficient operation of the securities lending market, leading potentially to reduced inventory of shares available for borrowing, increased borrowing costs, and reduced liquidity. According to an industry group comment letter, when a security that is out on loan is sold, the lending agent will first attempt to reallocate the loan by identifying other customers with shares available for lending. If that effort is not successful, the lending agent must recall the loaned shares from the borrower. The comment letter continues by explaining that the recall is typically done through a written notice and takes place 1 or 2 days after the trade, with the majority of the notices issued 2 days after the trade. The borrower then has 3 full days to return the securities—in effect, until the end of T+5. According to the comment letter, when the lending agent receives the shares late on T+5, it returns the shares to the lender or its agent, which must then deliver the shares for settlement. In many cases, the ultimate delivery of shares will not be processed until the morning of T+6. Under the temporary rule, FTD resulting from long sales—which include the sale of securities out on loan—are required to close out by the opening of trading on T+6. According to some comment letters and industry officials, this requirement leaves little or no time for securities lenders to deliver recalled shares in time to avoid being bought in at the opening of trading on T+6. Furthermore, two large industry trade groups commented that most current broker-dealer and clearing firm systems are unable to differentiate between FTD that resulted from long sales versus FTD that resulted from short sales, with one stating that any differentiation requires extensive manual processing that typically cannot be completed by the opening of trading on T+4. As a result, some industry comment letters and officials stated that some broker-dealers are closing out all FTD on T+4, regardless of whether they are the result of a long or short sale, which further increases securities lenders’ risk of being bought- in and causes some lenders to exit or reduce their participation in the market. To resolve these concerns, several industry officials recommended that SEC require broker-dealers to close out all FTD, regardless of whether they result from long or short sales, by the close of trading on T+6. These commenters said that doing so would allow for those FTD that occur for processing reasons to be cleared up without the need to borrow and deliver or buy-in FTD. Furthermore, they said closing out all FTD by the close of trading on T+6 also would eliminate the need for broker-dealers to engage in complex; time-consuming; and, at times, imperfect processes in an effort to determine whether a FTD was due to a long or short sale, because all FTD would be treated the same. Several industry officials with whom we spoke also stated that it may not be possible to build systems capable of differentiating between FTD that resulted from long sales versus FTD that resulted from short sales prior to the opening of trading on T+4. However, because they are unsure about what the requirements will be after the rule is finalized, industry officials told us they are not yet attempting to build these systems. Some industry commenters also recommended that SEC change the close- out requirement to allow clearing broker-dealers to close out their FTD throughout trading on the required close-out day, instead of only in the morning at market open. According to one industry comment letter from a large industry trade group, as a practical matter, transactions effected at market open to close out FTD are no different than those effected later in the trading session because both types are part of the same clearance and settlement cycle. As such, the group said that this change would allow clearing broker-dealers to close out FTD as currently intended by the temporary rule, but eliminate the volatility and price spikes associated with all FTD being required to close out prior to or at the opening of trading. Although SEC and FINRA acknowledge that the industry may be required to make system changes to comply with the requirements of the temporary rule, they believe the industry is capable of accomplishing these system changes necessary for compliance. According to OCIE staff, during a recent sweep examination of prime brokers they found that one broker had already developed the capability of tracking its FTD back to the trade that caused the FTD and then identifying whether that trade was marked long or short. Examiners conducting these sweep examinations also stated that the prime brokers they reviewed are able to identify the customers that are failing to deliver to the prime brokers, and that determining whether a trade was marked as long or short would most likely not require much additional effort. However, they did note that each firm probably will have a different infrastructure with which to work so each firm’s implementation of the requirements may be unique. Trading and Markets staff also said that while they are considering all of the comment letters and proposed amendments to the rule, any change to extend the current T+4 buy-in date for FTD resulting from short sales expands the time frame in which manipulative naked short selling could occur, potentially undermining the Commission’s policy objective of curbing this type of abuse. SROs and industry officials noted that SEC staff were responsive to some requests for implementation guidance regarding Regulation SHO and the recent emergency orders; however, in some instances where complex issues have arisen or the application of the rules to a particular scenario was unclear, industry officials and staff from one SRO with whom we spoke said that other requests went unanswered or experienced lengthy delays. Staff from one SRO said that Trading and Markets has issued numerous guidance and interpretive products and continuously updated these products. Trading and Markets can provide interpretive guidance to the SROs and industry through a number of publications, such as exemptive orders, no-action letters, compliance guides, staff legal bulletins, and answers to frequently asked questions. However, Trading and Markets staff do not have a formal (i.e., written) process to determine when requests from industry and SROs merit a formal response. Instead, staff have discretion to determine when SRO and industry request merit such a response. Staff from another SRO noted that SEC worked with them to approve an appropriate methodology to use to assess Regulation SHO exemption determinations. SRO staff told us that because the SROs do not have the authority to independently issue interpretative guidance on SEC rules, they must obtain this guidance from SEC for their own and members’ consideration when necessary. The SRO staff cited an occasion when they attempted to put guidance in a compliance circular that used SRO interpretations to answer specific questions it or its membership had regarding Regulation SHO. This SRO was delayed in providing the guidance to its members because of the time that passed before SEC provided feedback on whether the SRO’s interpretations were correct. In this example, the SRO submitted a list of technical operational questions, ranging from basic questions about the close-out requirement to hypothetical situations that were described to elicit the meaning of certain phrases to Trading and Markets. Although communication took place between the SRO and SEC, an extended period of time passed between the initial document being submitted to Trading and Markets and the SRO providing answers to its members. The SRO also stated that in some instances in which it had asked for guidance, Trading and Markets told the SRO that the regulation was clear and no additional guidance was necessary. Industry officials with whom we spoke also stated that the SEC staff’s responses to their requests for implementation guidance, particularly for recent emergency orders, have been inconsistent. Several market participants said that because Regulation SHO was enacted after a lengthy comment period and firms were given many months to put systems and policies and procedures in place, many of the potential implementation issues were discovered and resolved prior to the regulation being enforced. However, the July and September emergency orders and the temporary rule were made effective the day they were issued, or soon thereafter, with little or no advanced warning. According to some industry officials, these orders required system changes, some on a global basis, and numerous implementation issues arose. Industry officials said that, in some cases, they were able to work quickly with Trading and Markets to resolve these issues. For example, 3 days after the July emergency order restricting short selling securities of certain financial firms, SEC amended the order to exempt bona fide market making from the requirement. Nevertheless, industry officials stated that, in other situations, SEC was not responsive to their requests for guidance. For example, industry officials stated that due to the rushed nature of the September emergency order and the temporary rule, there was a lot of uncertainty and confusion related to the scope and application of the new requirements. Although some issues were addressed promptly, other industry requests for clarification or additional guidance remained unresolved. Trading and Markets staff stated that they did not believe issuing formal guidance was appropriate for some of the requests for interpretive guidance on Regulation SHO, because they felt the regulation was clear or that the request was more for a change of rule that would require going back to the Commission than an interpretation. Trading and Markets staff also told us that they did not want to provide answers to some of the requests that asked for guidance in specific circumstances, because they felt such requests were attempts to find loopholes in Regulation SHO, rather than attempts at compliance. These staff stated that because the temporary rule is set to expire on July 31, 2009, they are focused on reviewing and analyzing the written comments received to provide a recommendation to the Commission about the final form of the rule. They also said that providing the industry with guidance on a rule the Commission is still attempting to finalize would be difficult, and that the staff do not have a process by which implementation issues that arise from temporary rules can be readily addressed. Furthermore, responding to some of the implementation issues could have potentially required changes to the temporary rule, something that Trading and Markets is not authorized to do. By the time that the Commission takes final action on the temporary rule, it will have been in effect for 10 months, during which time the industry may have been inconsistently implementing its requirements. Trading and Markets’ varied and, at times, untimely responsiveness to industry and SRO requests for interpretive guidance on Regulation SHO and the emergency orders conflict with the goals articulated in SEC’s current Strategic Plan. The plan states that SEC should write regulations that are clearly written, flexible, and relevant and do not impose unnecessary financial or reporting burdens. One potential measure for monitoring progress the plan outlines is the length of time to respond to no-action letters, exemptive applications, and interpretive requests. The Strategic Plan also states that as part of its efforts to ensure compliance with federal securities laws, SEC should work to enhance its interpretive guidance process to meet the needs of the staff, the public, and other external stakeholders. Without timely and clear interpretive guidance from SEC, SROs may be unable to effectively enforce SEC rules and regulations, and SEC cannot ensure the consistent implementation of the rules and regulations. FTD may undermine the confidence of investors, making them reluctant to commit capital to an issuer that they believe to be subject to such manipulative conduct. While our review of FTD data showed that the majority of securities graduated from the threshold list in a timely manner, we also found that about 80 percent of threshold securities returned to the list, and some securities persisted for considerable periods of time. We recognize that there are legitimate reasons why a security could persist on the threshold list, but the cause for extended FTD in any individual security only can be assessed through regulatory scrutiny and generally is not apparent to the investing public, which may have concerns that securities on the threshold list are the target of manipulative naked short selling. With the requirements of the temporary rule, SEC has made progress in facilitating the goal that all sellers of securities should promptly deliver, or arrange for delivery of, securities to the respective buyer, and that all buyers of securities have a right to expect prompt delivery of securities purchased. Of the threshold securities remaining in December 2008, about 50 percent were ETFs. SEC and SRO staffs have begun assessing the reasons for FTD in these securities, and they believe structural characteristics in the creation and redemption of these securities are a critical factor. While these staff said their assessments do not currently lead them to believe that these securities are vulnerable to manipulative naked short selling, continued scrutiny of these products should help SEC confirm this assessment and determine whether Commission action is needed to address the causes for FTD in these products. Although Trading and Markets staff are continuing to study the effects of the temporary rule, they and FINRA staff believe that the locate and close- out requirements of Regulation SHO, and particularly the enhanced close- out requirements of the temporary rule, have made it less likely for traders to effect short sales that result in persistent FTD. While we agree that the close-out requirements of the temporary rule likely have reduced the opportunity to create persistent FTD and, thus, the incentive to engage in manipulative naked short selling, some potential for this illegal conduct still may exist. In response to an alternate suggestion to implement a marketwide preborrow requirement, Trading and Markets and FINRA staffs said such a requirement might be costly to the industry because FTD represent a very small percentage of the dollar value of trades and only a small group of securities would likely be the target of any manipulative scheme. However, Enforcement and FINRA staffs said that market manipulation is difficult to detect and successfully prosecute, and the potential damage to an individual company could be severe. For these reasons, an important element of continued evaluation of the effects of the temporary rule will be a careful evaluation of whether the T+4 close-out requirement is sufficient to protect the most vulnerable firms from market manipulation. Another potentially important aspect of any SEC determination regarding whether to continue to rely on the current locate and close-out requirements for mitigating manipulative short selling will be an evaluation of the effectiveness of the current locate requirement in reducing FTD and the potential for market manipulation, with a particular focus on the reliability of easy-to-borrow lists—that is, these lists must represent securities that are available for borrowing. Regulation SHO lacks specific criteria regarding what constitutes an easy-to-borrow security, but SEC found that a few firms have not followed industry best practices, which call for decrementing their inventory as locates are provided. We note that unless firms follow such best practices, it is not clear how they can ensure that they are providing locates only on their available supply of securities and limiting the potential for FTD. However, because following industry practice is voluntary, the magnitude of firms overlocating or including securities that are not easy to borrow on the list is currently unclear. Our review also found that the industry currently faces challenges in complying with Regulation SHO’s requirement to assess whether locates provided by customers are reasonable and not resulting in FTD, particularly in the context of prime brokerage. Regulation SHO currently does not provide executing brokers with access to information from prime brokers that would allow them to establish whether customer-provided locates are resulting in FTD. Although SEC worked with the industry to revise the 1994 Prime Broker Letter in 2007, it has not completed its review of the letter, citing its need to wait until the Commission determines whether to finalize the temporary rule. By finalizing the revised Prime Broker Letter, SEC would provide the means by which executing brokers could evaluate customer-provided locates to determine whether they are reasonable and thus comply with the locate requirement. Moreover, finalized guidance would help alleviate investor concerns that such conduct could occur. In implementing the new close-out requirements though emergency order and extending them through a temporary rule, SEC imposed requirements on the industry without first providing for the usual comment period. In their comment letters, market participants generally supported the fundamental tenets of the temporary rule, including a compressed maximum close-out obligation for all equity securities; however, they also have identified several operational issues and negative consequences caused by the implementation of the temporary rule. According to Trading and Markets staff, they had been unable to respond to some of these issues raised by the industry because the requirements were issued as a temporary rule and certain changes would require a rule change approved by the Commission. Furthermore, Trading and Markets staff said that it would be difficult to provide guidance to the industry about other issues until the Commission determines whether to finalize the temporary rule, which potentially will not occur until July 2009. We recognize that Trading and Markets staff currently may have limited ability to resolve issues arising from the implementation of a temporary rule without obtaining input or authorization from the Commission. Without a formal process in place that would give Trading and Markets staff a basis upon which to address implementation issues that arise in connection with interim final temporary rules in a timely manner, staff are unable to respond adequately to concerns of industry participants affected by the rule. Moreover, while providing formal responses to all requests for interpretive guidance may not be appropriate, establishing a formal process would provide a basis for consistently addressing matters relating to compliance with SEC regulations. Doing so also would help prevent negative impacts from temporary rules in the periods before expiry or finalizations. Furthermore, providing timely answers to SRO and industry requests is important for SROs and industry to help ensure consistent implementation of SEC rules and regulations. To address the current information gap in Regulation SHO for prime brokerage arrangements and mitigate the impact of any unintended consequences caused by SEC rules, as well as ensure consistent implementation of SEC rules by the industry, we recommend that the Chairman of the Securities and Exchange Commission take the following two steps: finalize, in an expedited manner upon finalization of the temporary rule, the revised 1994 Prime Broker Letter and develop a process that allows Commission staff to raise and resolve implementation issues that arise from SEC regulations, including interim final temporary rules, in a timely manner. We provided a draft of the report to the Chairman of the Securities and Exchange Commission for her review and comment. We also provided relevant portions of the report to FINRA and CBOE for their review and comment. We received technical comments from SEC, FINRA, and CBOE, that were incorporated, where appropriate. SEC provided written comments that we reprinted in appendix IV. In its written comments, SEC stated that regarding our first recommendation, it will consider the need to clarify the communications between prime broker-dealers and executing broker-dealers that would facilitate Regulation SHO compliance in connection with its consideration of further action on the temporary rule. We encourage SEC to take the steps necessary to clarify this communication. In doing so, SEC would provide the means by which executing brokers could evaluate customer- provided locates to determine whether they are reasonable and facilitate compliance with the locate requirement. Moreover, finalized guidance would help alleviate investor concerns that such relationships could be exploited to engage in manipulative naked short selling. Regarding our second recommendation, SEC noted that it regularly provides guidance to the industry and outlines that routine rulemaking provides a time for comments prior to the adoption of the final rule. It also noted that, unlike routine rulemaking, when SEC promulgates a rule or regulation as an interim final temporary rule, the rule is adopted and in effect during the comment period. SEC stated that it is committed to engaging in a deliberative process to develop meaningful regulation of short selling and providing interpretive guidance to the industry to facilitate implementation, as appropriate. SEC also stated that it will evaluate whether there are additional steps that it can take, consistent with the Administrative Procedure Act, to address implementation issues raised by industry. Again, we encourage SEC to take the steps necessary to determine what additional steps can be taken to address implementation issues raised by the industry and SROs, especially regarding interim temporary final rules, which can be in effect for significant periods of time. While providing formal responses to all requests for interpretive guidance may not be appropriate, establishing a formal internal process consistent with the Administrative Procedure Act to facilitate providing timely answers to SRO and industry requests would help ensure effective administration of SEC rules and regulations. Furthermore, a formal process would help reduce the chances of negative consequences of temporary rules occurring during the periods before expiry or finalizations. As agreed with your offices, unless you publicly announce its contents 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 Chairman of the Securities and Exchange Commission, 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 staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. Key contributors to this report are listed in appendix V. To provide an overview of the actions that the Securities and Exchange Commission (SEC) has taken to address manipulative naked short selling and failures to deliver (FTD), including Regulation SHO and the recent emergency orders—and the factors SEC considered in taking these actions, we reviewed Regulation SHO; the recent July and September 2008 emergency orders, including associated amendments; and the interim final temporary rule (temporary rule) and interviewed staff from SEC’s Division of Trading and Markets (Trading and Markets). We also obtained copies of related rules issued by the former NASD. To discuss the potential impact of Regulation SHO on FTD in threshold and nonthreshold securities using trend analysis, we obtained (through SEC) FTD data that the National Securities Clearing Corporation (NSCC) generated from April 1, 2004, to December 31, 2008. We chose to obtain data going back to April 1, 2004, because we wanted to identify any trends in FTD prior to the effective date of Regulation SHO in January 2005, and because April 1, 2004, was the earliest date SEC began receiving FTD data from NSCC. We also obtained the daily lists of threshold securities published by the equities self-regulatory organizations (SRO) from January 10, 2005 (the date the first threshold list was published), through December 31, 2008. From these data, we generated a number of graphics to illustrate trends in threshold securities, including the number of threshold securities and the level of outstanding and new FTD in these securities, both across the market and by individual markets. We generated other descriptive statistics from the data on threshold securities, such as the number of securities that had persisted for more than 90 days on the threshold list over this period. In addition, we generated graphics illustrating trends in FTD in all equity securities across the market and, by individual market, from April 1, 2004, through December 31, 2008. In performing our analyses, we conducted a data reliability assessment of the NSCC data. To do so, we reviewed a 2005 SEC Office of Compliance Inspections and Examinations (OCIE) examination that, in part, assessed NSCC’s processes for generating reports that are used to provide daily FTD data to SEC and the equities SROs. We also employed our own data reliability tests by taking a random sampling of trading dates and verifying that the listing of threshold securities provided to us by SEC matched those published by the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (Amex). In addition, we reviewed these data for missing values and outliers as well as for the accuracy of pricing information. We determined that these data were reliable for our purposes. As part of our work, we also obtained and reviewed multiple studies of the same data conducted by SEC’s Office of Economic Analysis (OEA). We also compared total new FTD in threshold securities listed on the NYSE, NASDAQ, and Amex with consolidated trading volume on those exchanges. We obtained consolidated trading volume data for all three exchanges from the Financial Industry Regulatory Authority (FINRA). In addition, we compared trends in FTD in these markets with trends in volatility, as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX); market performance, as measured by the S&P 500 Total Return Index; and short interest. We obtained the VIX from Yahoo! Finance, the S&P 500 Total Return Index from Global Insight, and short interest from the midmonth short interest press releases from the three major exchanges. We did not conduct an assessment of the reliability of these measures. However, these sources are widely used in both finance and economics and are considered credible for the purposes in which we used them. In addition, these measures are used solely for descriptive purposes and not for the purpose of making recommendations or drawing conclusions about causality. We also identified the percentage of threshold securities in our review period that were exchange-traded funds (ETF). To identify these securities, we downloaded lists of ETFs from four separate sources—including Morningstar, Yahoo! Finance, MSN Money, and Bloomberg—and compared these lists to identify any differences. We found that differences between the sources amounted to less than 3 percent of ETFs appearing on each respective list. To have the most comprehensive list, we included ETFs that appear on at least three of these four sources. We have determined that these data were reliable for our purpose, which was to provide descriptive information. To discuss regulatory, industry, and other market participant views on the effectiveness of Regulation SHO and the recent emergency orders in curbing the potential for manipulative naked short selling, we reviewed and analyzed the requirements of Regulation SHO, the recent emergency orders, the temporary rule, and comment letters submitted to SEC. We also reviewed the results from an OEA study on the impact of the temporary preborrow requirement on the market in the July emergency order. While we found the results were based on a reasonable methodology, we note that is difficult to draw strong conclusions given a number of limitations, including the temporary nature of the emergency order. We also reviewed two private sector studies to better understand market trends during and after the implementation of the July emergency order. We did not evaluate or validate their findings because these private sector studies were reviewed primarily to provide additional descriptive information beyond the OEA study, and because neither conducted a rigorous causal investigation. In general, the inclusion of the OEA and private sector studies is purely for research purposes and does not imply that we deem them definitive. Furthermore, we obtained and reviewed comment letters submitted to SEC about Regulation SHO, the emergency orders, and the temporary rule. Finally, we conducted interviews with staffs from OEA, Trading and Markets, OCIE, SEC’s Division of Enforcement, and FINRA; broker-dealers and two trade associations representing broker-dealers; securities lenders and a trade association representing securities lenders, securities lending consultants; an issuer and a trade association representing issuers; an investor; legal and subject area experts; and other market observers. To analyze SEC and SRO efforts to enforce industry compliance with Regulation SHO and to detect manipulative naked short selling, we reviewed a 2005 joint sweep examination that OCIE, NYSE, and the former NASD conducted. We obtained data from FINRA and CBOE on the number of Regulation SHO-related examinations that they conducted during calendar years 2005 through 2008, and the number of these examinations that resulted in Regulation SHO deficiencies. We conducted a data reliability assessment of the FINRA and CBOE data and determined they were reliable for our purpose. We also reviewed FINRA data on the periodic surveillance sweeps of FTD data that the authority conducted during this period to monitor its members for potential Regulation SHO violations. We obtained data from OCIE on the oversight and cause examinations conducted from January 1, 2005, through September 30, 2008, that reviewed for Regulation SHO compliance. We conducted a data reliability assessment of these data and determined they were reliable for our purpose. From these data, we selected and reviewed 12 OCIE broker- dealer oversight or cause examination reports and 11 FINRA examination reports that resulted in findings of Regulation SHO deficiencies. We also reviewed a 2006 sweep examination conducted by CBOE of its options market makers, FINRA examination guidance, and the revised 1994 Prime Broker Letter. We conducted interviews with staffs from OCIE, Enforcement, FINRA, CBOE, and NYSE, and with broker-dealers and a trade association representing broker-dealers. To discuss industry experience regarding the implementation of the new and enhanced close-out requirements, we reviewed industry comment letters submitted to SEC, documentation related to SRO requests to SEC for guidance, and the 2004-2009 Strategic Plan. We also interviewed broker-dealers and a trade association representing broker-dealers; securities lenders and a trade association representing securities lenders; securities lending consultants; and staff from Trading and Markets and an SRO. We conducted this performance audit from March 2008 through May 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. According to the Depository Trust and Clearing Corporation (DTCC), most broker-to-broker equities securities trades in the United States are cleared and settled through its clearing agency subsidiaries, NSCC and the Depository Trust Company (DTC). As a clearing corporation, NSCC provides clearing and settlement, risk management, central counterparty services, and guarantee of trade completion in the event of a participant’s default. As the central security depository and custodian in the United States, DTC acts as a custodian for the majority of securities issues and transfers ownership, in book-entry form, during settlement. Due to the volume and value of trading in today’s markets, NSCC nets trades and payments among its participants, using its Continuous Net Settlement System (CNS System). The CNS System is a book-entry accounting system in which each NSCC participant’s daily purchases and sales of securities, based on trade date, are automatically netted into one long position (right to receive) or one short position (obligation to deliver) for each securities issue purchased or sold. The participant’s corresponding payment obligations are similarly netted into one obligation to pay or one obligation to receive money. For each participant with a short position on settlement date, NSCC instructs the securities depository designated by the participant—typically, DTC—to deliver securities from the participant’s account at the depository to NSCC’s account. NSCC then instructs the depository to deliver those securities from NSCC’s account to participants with net long positions in the security. NSCC provides participants with multiple daily reports that detail their net long and short positions in each security. One example of such a report is the CNS Accounting Summary, which provides NSCC participants with its prior day’s positions, settling trades during the day, closing positions, and the market value of its positions. Any unfulfilled net long or short position in a settlement cycle is carried forward to succeeding settlement cycles. Figures 10 and 11 illustrate the CNS process. Figure 10 illustrates a series of transactions between multiple brokers and the resulting CNS position. Figure 11 illustrates the transactions that occur on settlement day and the resulting CNS positions. This example assumes that the brokers shown in the graphic executed no other trades in the XYZ Company’s security. If a participant fails to deliver the total number of securities that it owes NSCC on a particular settlement date, NSCC may be unable to meet its delivery obligations, resulting in a failures to receive (FTR) for participants who have net long positions. NSCC uses the automated Stock Borrow Program (SBP) to borrow shares to meet as many of its delivery obligations as possible. This program allows participants to instruct NSCC on the specific securities from their DTC account that are available for borrowing to cover NSCC’s CNS delivery shortfalls. Any shares that NSCC borrows are debited from the lending participant’s DTC account; delivered to NSCC; and, subsequently, delivered to a NSCC participant with a net long position. NSCC creates a right to receive (net long) position for the lender in the CNS System to show that it is owed securities. Until the securities are returned, the lending participant no longer has ownership rights in them and, therefore, cannot relend them. Additionally, any delivery made using the SBP does not relieve the participant that fails to deliver from its delivery obligation to NSCC. Participants with a FTR position not filled through the SBP have three options for receiving the securities they are owed. First, the participant can choose to wait for the CNS System to allocate the securities that it is owed through the normal course of business. Second, the participant can request that NSCC give its FTR priority in the CNS System. This allows the participant’s FTR position to be filled with any securities NSCC receives after all buy-in requests are fulfilled, but before CNS begins allocating received shares to other participants with net long positions in the security. Third, the participant can initiate a buy-in. This process requires the participant to file paperwork with NSCC directing the corporation to request a net short participant to deliver securities to NSCC and for NSCC to deliver those securities to the net long participant. If the position remains unfilled, NSCC instructs the member to buy-in the unfilled position. NSCC has no authority under SEC rules to force a buy-in. DTCC officials explained to us that approximately 6,000 notices of intention to buy-in are filed each day, with approximately 20 notices resulting in execution. According to these officials, relatively few such notices are executed because FTD are generally resolved in the normal course of business. Trade clearance and settlement in the United States operate on a standard 3-day settlement cycle. On trade date (T), trade details are transmitted to NSCC for processing. According to DTCC, an estimated 99.9 percent of equity transactions are transmitted to the clearing agency as “locked-in,” meaning that the security exchange has already compared the buyer’s account with the seller’s account of the trade details (e.g., share quantity, price, and security) and has determined that they match. On the first day following the trade date (T+1), NSCC assumes the role of central counterparty by taking on the buyer’s credit risk and the seller’s delivery risk. On the second day (T+2), NSCC provides summaries of all compared trades to its participant broker-dealers, including information on the net positions of each security due or owed for settlement. On the third day (T+3), securities are delivered and payments of money are made to the respective parties through NSCC and DTC. Figure 12 summarizes the clearance and settlement process for equity securities trades in the United States. SEC has taken several actions in recent years that were intended to address FTD and manipulative naked short selling. In August 2004, SEC adopted Regulation SHO, which was intended to address large and persistent FTD and curb the potential for manipulative naked short selling. Among other things, Regulation SHO imposed delivery requirements on broker-dealers for equity securities in which a substantial amount of FTD had occurred, which the regulation designated as “threshold securities.” Regulation SHO required broker-dealers that have FTD in these securities lasting for 10 consecutive days to “close out” the FTD by purchasing securities of like kind and quantity in the market by the beginning of regular trading hours, the next morning (T+14), with some exceptions. In July 2008, SEC issued an emergency order (July emergency order) to temporarily restrict naked short selling and FTD in the publicly traded securities of 19 large financial firms, with limited exceptions. In September 2008, SEC took more comprehensive action to curb the potential for manipulative naked short selling when it issued another emergency order (September emergency order) that temporarily enhanced close-out requirements on the sale of all equity securities. The September emergency order required broker-dealers to deliver securities resulting from short sales in any equity security (not just threshold securities) by the settlement date (T+3), or, if they have FTD on the settlement date, to take action to purchase or borrow securities to close out the FTD by the beginning of regular trading hours the next morning (T+4), with limited exceptions. Broker dealers that can show that the FTD resulted from a long sale were allowed until the beginning of regular trading hours on T+6 to close out the FTD. Upon expiration of the emergency order, SEC extended this temporary requirement until July 31, 2009, as part of the interim final temporary rule (temporary rule). Figures 13 through 24 illustrate the trends in threshold securities and their FTD between the effective date of Regulation SHO in January 2005 through December 2008, by the market on which these securities were trading. These markets include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (Amex). We have also generated trends for threshold securities trading on NYSE Arca, the Over- The-Counter Bulletin Board (OTCBB), and Pink Quote under the “Other Securities” category. We also generated trends in FTD in all securities (both threshold and nonthreshold), by market, over the review period market, over the review period (figs. 25 through 36). (figs. 25 through 36). In addition to the contact named above, Karen Tremba (Assistant Director), Lawrance Evans, Stefanie Jonkman, Matthew Keeler, Marc Molino, Carl Ramirez, Barbara Roesmann, Jeremy Schwartz, and Paul Thompson made key contributions to this report. | The Securities and Exchange Commission (SEC) adopted Regulation SHO to, among other things, curb the potential for manipulative naked short selling in equity securities. Selling a security short without borrowing the securities needed to settle the trade within the standard 3-day period, can result in failures to deliver (FTD), and can be used to manipulate (drive down) the price of a security. To further address this concern, SEC recently issued an order amending Regulation SHO. This report (1) provides an overview of Regulation SHO and related SEC actions, (2) discusses regulators' and market participants' views on the effectiveness of the rule, and (3) analyzes regulators' efforts to enforce the rule. To address these objectives, GAO reviewed SEC rules and draft industry guidance, analyzed FTD data, reviewed SEC and self-regulatory organization (SRO) examinations, and interviewed SEC and SRO officials and market participants. To address FTD and curb the potential for manipulative naked short selling in equity securities, Regulation SHO required broker-dealers to (1) locate securities available for borrowing before effecting short sales in that security and (2) close out FTD lasting ten consecutive settlement days in securities for which a substantial number of FTD accumulated (threshold securities). SEC imposed the close-out requirement only on threshold securities because it believed high levels of FTD could indicate potential manipulative naked short selling. Increasing market volatility led SEC to issue a September 2008 emergency order requiring broker-dealers to close out FTD resulting from short sales in any security the day after the settlement date. SEC extended thisrequirement until July 2009 in an interim final temporary rule. GAO found that the number of threshold securities declined after the implementation of the stricter close-out requirement, but it is not clear whether this trend can be sustained. Some market participants believe that the stricter close-out requirement does not prevent manipulative trading from occurring within the 3-day settlement period. They recommend that SEC address potential abuse by requiring all short sellers to borrow securities before a short sale. As the Commission considers whether to finalize the temporary rule, SEC staff said that they are continuing to evaluate the appropriateness of a preborrow requirement for addressing FTD and market manipulation related to naked short selling. However, SEC staff said that the costs of a preborrow requirement might outweigh the benefits because FTD represent 0.01 percent of the dollar value of trades, and that a small group of securities (small market capitalization, thinly traded, or illiquid) are likely to be the target of any manipulative scheme. SEC and SRO examiners have found that some broker-dealers do not monitor whether the source a broker-dealer uses to locate available securities is reasonable (i.e., does not result in FTD). The broker-dealers may not have done so because firms do not expect that the source from which it obtained the locate will be used to obtain shares for settlement. In some cases, the executing broker-dealer may lack information needed to establish whether the locates were reasonable. SEC staff worked with the industry to draft guidance in 2007 to clarify communication responsibilities in such instances, but SEC has not finalized it. As a result, some firms may continue to be noncompliant with the locate requirement. Furthermore, SEC sometimes did not provide interpretive guidance for questions on the implementation of Regulation SHO and temporary rule-related requirements, or did so after lengthy delays. SEC does not have formal processes for determining which requests for guidance merit a formal response, nor does it have a process by which implementation issues that arise from temporary rules can be readily addressed. Without timely and clear guidance to the industry, SEC cannot ensure the consistent implementation of its rules or help address the unintended consequences of operational issues that occur while awaiting rule expiry or finalization. |
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 (revised Dec. 21, 2004), 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, which was revised in 2004 with the revisions effective for fiscal year 2006, 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 the Chief Financial Officers (CFO) Act agencies, beginning in fiscal year 2006, 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. GAO’s Standards for Internal Control in the Federal Government provides the overall framework for establishing and maintaining 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 GAO’s Standards for Internal Control in the Federal Government, 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—internal 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 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 all five internal control standards are critical and are used by us as a basis for evaluating the effectiveness of IRS’s internal controls, we place a heavy emphasis on testing control activities. This has resulted in the identification of significant deficiencies in certain internal controls over the years and recommendations for corrective action. The objectives of this report are to (1) assist IRS management in tracking the status of financial audit and financial management-related recommendations and the actions needed to address them and (2) demonstrate how the recommendations fit into IRS’s overall management and internal control structure. To accomplish these objectives, we evaluated the effectiveness of IRS’s corrective actions implemented in response to open recommendations during fiscal year 2005 as part of our fiscal years 2005 and 2004 financial audits. To report on the current status of the recommendations, we obtained the status of each recommendation and corrective action taken or planned as of April 2006, as reported to us by IRS. We then compared IRS’s assessment to our fiscal year 2005 audit findings and noted 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 GAO’s Standards for Internal Control in the Federal Government 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, GAO/AIMD-12.19.6 (revised June 2001). We conducted our review from December 2005 through May 2006 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designee. We received written comments from the commissioner, which are reprinted in appendix II. IRS continues to make progress on addressing its significant financial management challenges. Over the years since we first began auditing IRS’s financial statements in fiscal year 1992, we have closed out over 200 financial management-related recommendations we made based on actions IRS has taken to improve its internal controls and operational efficiency. This includes 34 recommendations we are closing in fiscal year 2006 based on actions IRS took during the period covered by our fiscal year 2005 financial audit. At the same time, however, our audits continue to identify significant internal control deficiencies, resulting in our making further recommendations for corrective action, including 22 new financial management-related recommendations resulting from our fiscal year 2005 financial audit. These internal control deficiencies, and the resulting recommendations, can directly be traced to the control activities in GAO’s Standards for Internal Control in the Federal Government. As such, it is essential that they be fully addressed and resolved to strengthen IRS’s overall financial management and to assist it in achieving its goals and mission. In April 2005, 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 2004 and prior year financial audits and other financial management-related work. In that report, we identified 84 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 been effective in resolving the issues that gave rise to the recommendations. IRS continued to work to address many of the internal control deficiencies to which these open recommendations relate. In the course of performing our fiscal year 2005 financial audit, we identified numerous actions IRS took to address many of its internal control deficiencies. Based on IRS’s actions, which we were able to substantiate through our audit, we are able to close 34 of these prior years’ recommendations since we concluded that IRS’s actions effectively addressed the issues that gave rise to them. IRS considers another 23 of the prior years’ recommendations to be effectively addressed. However, we still consider them to be open either because we have not yet had time 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 serious internal control weaknesses. While we are able to close 34 financial management recommendations made in prior years, this still leaves 50 recommendations from prior years that remain open, a significant number of which have been outstanding for several years. In some cases, as mentioned, IRS may have effectively addressed the issues that gave rise to the recommendations subsequent to our fiscal year 2005 audit testing; however, in many cases, our fiscal year 2005 audit determined that the actions taken to date had not effectively addressed the underlying internal control issues. Additionally, during our fiscal year 2005 audit, we identified additional internal control issues that will require corrective action by IRS. In a recent management report to IRS, we discussed these internal control issues, and made 22 new recommendations to IRS to address these new issues. Consequently, a total of 72 financial management-related recommendations are currently open and need to be addressed by IRS. Of these, we consider 64 to be short term and 8 to be long term. Appendix I presents a listing of (1) recommendations we have made based on our financial audits and other financial management-related work that we have not previously reported as closed, (2) the status of each of these recommendations and corrective actions taken or planned as of April 2006 as reported to us by IRS, and (3) our analysis of whether the issues that gave rise to the recommendations have been effectively and fully addressed based on the work performed during our fiscal year 2005 financial audit. The appendix lists the recommendations by the date on which the recommendation was made and by report number. An agency’s overall internal control environment comprises the plans, methods, and procedures that are used to meet its mission, goals, and objectives and, in doing so, supports its performance-based management. Internal control also serves as the first line of defense in safeguarding an agency’s assets and in preventing and detecting errors and mitigating the potential for fraud. Effective internal control assists program managers in achieving desired results through effective stewardship of public resources. Control activities, one of the five broad standards contained in GAO’s Standards for Internal Control in the Federal Government, are the policies, procedures, techniques, and mechanisms that enforce management’s directives. As such, they are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achievement of results. GAO’s Standards for Internal Control in the Federal Government defines 11 control activities. These control activities can be further grouped into three broad categories: safeguarding of assets and security activities, including 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, including appropriate documentation of transactions and internal control, accurate and timely reporting of transactions and events, and proper execution of transactions and events; and effective management review and oversight, including 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 the 11 control activities and their three broad categories. Table 1 presents a summary of the open recommendations, each tied back to the control activity to which it relates. As table 1 indicates, many of IRS’s open recommendations are tied to safeguarding and security issues. Specifically, 29 of the open recommendations, or 40 percent, relate to issues associated with IRS’s lack of effective controls over safeguarding of assets and security activities. Another 26 recommendations, or 36 percent, relate to issues associated with IRS’s inability to properly record and document transactions. The remaining 17 recommendations, or 24 percent, relate to issues associated with the lack of effective management review and oversight. Linking the open recommendations from our financial audits and other financial management-related work, and the issues that gave rise to them, to the internal control activities identified in GAO’s Standards for Internal Control in the Federal Government provides insight regarding their significance to IRS’s ability to effectively achieve the objectives associated with the control activities and, thus, to its overall mission and goals. On the following pages, we group the 72 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 GAO’s Standards for Internal Control in the Federal Government 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 the control activity is important for IRS and thus why implementing the recommendations would strengthen management and controls that support those operations. 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 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 GAO’s Standards for Internal Control in the Federal Government 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. 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 over $2 trillion 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 Treasury Department’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 in 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 one of its offices. While adequate 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) may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center processes increases to hundreds of millions of dollars a day during the April 15 time frame. Of our 72 open recommendations, the following 13 open recommendations are designed to improve IRS’s physical controls over vulnerable assets. (See table 2.) 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 both causing an error or irregularity 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. The following three open recommendations would help IRS improve its separation of duties, which will in turn strengthen its controls over both tax receipts and refunds. (See table 3.) 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, we have identified over the years 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 March 2006, there were 45 open recommendations from our information security work designed to improve IRS’s information security controls. Recommendations resulting from our information security work are reported separately and are not included in this report primarily because of the sensitive nature of some of these issues. However, the following six open recommendations are related to systems limitations and IRS’s need to review and resolve various exception reports that its systems generate. (See table 4.) We included reviews of exception reports in this control activity since they help ensure the integrity of IRS’s automated data. 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 over who has 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 with 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 seven open recommendations would help IRS improve its access restrictions to assets and records. (See table 5.) 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 day-to-day decisions. While progress is being made to modernize its financial management capabilities, IRS nonetheless continues to face many of the pervasive internal control weaknesses that we have reported each year since we began auditing its financial statements in fiscal year 1992, many of which are related to its long- standing systems deficiencies. However, 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 improvements in 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 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 appropriate assurance that all documents and records are properly managed and maintained both at its facilities and at the lockbox banks. The following 11 open recommendations would assist IRS in improving its documentation of transactions and internal control procedures. (See table 6.) 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 is dependent on future funding. The following 14 open recommendations would strengthen IRS’s recordkeeping abilities. (See table 7.) They include some 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 certain of our recommendations directly affect taxpayers, such as those involving duplicate assessments, errors in calculating and reporting manual interest, and recovery of trust fund penalty assessments. Half of these recommendations are almost over 5 years old and 1 is over 10 years old, reflecting the long-term nature of the resolution of some of these issues. 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 assuring 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 tremendous 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 officials who are designated by managers. However, weaknesses in the authorization of such approving officials expose the federal government to losses because of the issuance of improper refunds. The following open recommendation would improve IRS’s controls over its manual refund transactions. (See table 8.) All personnel within IRS have an important role in making internal controls work, but the responsibility for good internal control rests with IRS’s managers. Management sets the objectives, puts the control mechanisms and activities in place, and monitors and evaluates the controls. Without effective monitoring by managers, internal control activities may not be conducted on a consistent and timely basis. 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. Managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences. IRS has over 80,000 full-time employees and hires over 10,000 seasonal personnel to assist during the tax filing season. In addition, as discussed earlier, IRS 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 the IRS, management oversight is imperative. The following 12 open recommendations would improve IRS’s management oversight. (See table 9.) In general, 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. The majority of these recommendations emphasize improvements needed to IRS’s oversight of lockbox banks and contracted courier programs in order to ensure appropriate physical control over vulnerable assets, such as taxpayer receipts. 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 taxpayer education, 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, and collecting from those receiving refunds for which they are not eligible. Although IRS has at its peak over 90,000 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 in a manner that maximizes the government’s return on investment. However, in past audits we have reported that IRS did not capture cost 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. Additionally, we have reported that IRS’s controls over its reporting of interim performance measurement data were not effective throughout the year because the data reported at interim periods for certain performance measures were either not accurate or were outdated. The following four 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 cost, benefits, or outcomes of its operations—particularly with regard to identifying its most effective tax collection activities. 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, management’s responsibility to keep its guidance up-to-date and its staff properly trained is imperative. The following open recommendation would assist IRS in its management of human capital in its financial operations. (See table 11.) The recommendation is over 5 years old and may be resolved through IRS’s business systems modernization efforts. Increased budgetary pressures and an increased public awareness of the importance of internal control require IRS to operate more efficiently and more effectively in its mission while protecting taxpayers and their information. Sound financial management and effective internal controls can assist IRS in achieving 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 6 years, resolution of several material internal control weaknesses, and the closing of hundreds of financial management recommendations. This progress has been the result of hard work and commitment at the top. Nonetheless, more needs to be done to fully address the financial management challenges the agency faces. Efforts must continue 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. In commenting on a draft of this report, IRS expressed its appreciation that we acknowledged the progress the agency has made in addressing its financial management challenges, and noted that our mapping of its remaining recommendations to specific internal control activities and grouping them into three broad categories will facilitate its strategy to address the remaining financial management issues. IRS also highlighted its efforts to further improve its internal controls over hard-copy tax receipts, noting that its plan to address these issues now includes comprehensive actions to address our remaining recommendations covering lockbox banks, submission processing campuses, taxpayer assistance centers, and field offices. We will review the effectiveness of these corrective actions and the status of IRS’s progress in addressing all open recommendations as part of our fiscal year 2006 IRS financial statement audit. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Appropriations; Senate Committee on Finance; Senate Committee on Homeland Security and Governmental Affairs; and Subcommittee on Taxation and IRS Oversight, Senate Committee on Finance. We are also sending copies to the Chairmen and Ranking Minority Members of the House Committee on Appropriations; House Committee on Ways and Means; Chairman and Vice Chairman of the Joint Committee on Taxation, the Secretary of the Treasury, the Director of the Office of Management and Budget, 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 can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable (GAO/AIMD-94-22, Dec. 21, 1993) Open. The five errors identified in the FY05 Financial Statement Audit were resolved. The Complex Interest Quality Measurement System (CIQMS) staff assisted GAO with their sample review for the FY06 Audit. Once GAO completes their audit, CIQMS will continue to provide assistance as subject matter experts. Open. In testing a statistical sample of 45 manual interest transactions recorded during fiscal year 2005, we found five errors relating to the calculation and recording of manually calculated interest. We estimate that 11 percent of IRS’s manual interest population contains errors and concluded that IRS controls over this area remain ineffective. We will continue to test the accuracy of IRS’s manual interest calculations during our fiscal year 2006 financial audit. Manually review and eliminate duplicate or other assessments that have already been paid off to assure all accounts related to a single assessment are appropriately credited for payments received. (short-term) Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) 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 Trust Fund Recovery Penalty (TFRP) process, the IRS initiated a quality review process that focused in two primary areas. The first being consolidation of all TFRP work to one campus. Consolidation of all SB/SE Automated Trust Fund Recovery (ATFR) work to the Ogden campus was completed in September 2005. All Wage & Investment (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. The enhanced rewrite has been delivered and is in production testing. Training is scheduled to begin in June 2006 with a complete nationwide deployment by the end of fiscal year 2006. IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. Open. We recognize automation of the current TFRP program is much needed. However, IRS’s efforts to date have not been effective. In fiscal year 2005, we reviewed a statistical sample of 80 TFRP payments made on accounts established since August 2001. We found six instances in which IRS did not properly record the payment to all related taxpayer accounts. We estimate that 7.5 percent of these payments may not be properly recorded. We will continue to review IRS’s initiatives to improve posting of TFRP cases and test TFRP cases for proper postings to all related accounts as part of our fiscal year 2006 financial audit. Ensure that IRS’s modernization blueprint includes developing a subsidiary ledger to accurately and promptly identify, classify, track, and report all IRS unpaid assessments by amount and taxpayer. This subsidiary ledger must also have the capability to distinguish unpaid assessments by category in order to identify those assessments that represent taxes receivable versus compliance assessments and write-offs. In cases involving trust fund recovery penalties, the subsidiary ledger should ensure that (1) the trust fund recovery penalty assessment is appropriately tracked for all taxpayers liable but counted only once for reporting purposes and (2) all payments made are properly credited to the accounts of all individuals assessed for the liability. (short- term) Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) Open. The Custodial Accounting Project (CAP) has been canceled due to budget constraints. The IRS chief financial officer (CFO) has developed a TFRP database that can establish the links and identify problems to more accurately report a single balance due for these assessments and determine areas for improvement in the TFRP program. The TFRP database is the first Release of the Financial Management Information System’s (FMIS) enhancement to the Custodial Detail Data Base (CDDB) that has been proposed to enable the IRS CFO to address many of the outstanding financial management recommendations. FMIS/CDDB Release 1, TFRP database will be tested and fully implemented in 2006. Further releases of FMIS/CDDB functionality are contingent on future funding levels. Open. We will continue to monitor IRS’s development of an alternative strategy for CAP, as well as its implementation of the new FMIS/CDDB. If IRS implements CDDB Release 1 for fiscal year 2006, we will perform tests of these data as part of our fiscal year 2006 audit. Ensure that all returned refund checks are stamped “nonnegotiable” as soon as they are extracted. (short-term) Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 1998) Closed. A memorandum is issued to Submission Processing (SP) Field Directors prior to filing season reinforcing the importance of ensuring SP procedures and policies regarding overstamping of returned refund checks are followed. In addition, this requirement is part of the Campus Monthly Security Reviews. All findings are shared with SP Field Directors. Local management continues to remind employees of the importance of overstamping returned refund checks on a regular basis through individual and group meetings to ensure compliance with the Internal Revenue Manual (IRM) and security requirements. Closed. During our fiscal year 2005 audit, we found no instances where returned refund checks were not stamped “nonnegotiable” upon extraction at the four SCCs we visited. Ensure that walk-in payment receipts are recorded in a control log prior to depositing the receipts in the locked container and ensure that the control log information is reconciled to receipts prior to submission of the receipts to another unit for payment processing. To ensure proper segregation of duties, an employee not responsible for logging receipts in the control log should perform the reconciliation. (short- term) Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 1998) Open. During our fiscal year 2005 audit, we found a lack of segregation of duties related to the preparation, review, and/or reconciliation of Form 795 at six of the eight TACs we visited. At three of these TACs, at times only one employee was present to carry out the functions of the office. At another TAC, there was no evidence that the Form 795 was reconciled by an employee other than the employee who received the payment from the taxpayer and recorded it on the Form 795. At this same TAC, we observed two instances where employees did not log information onto the Form 795 upon receipt. At the fifth TAC, the employee responsible for receiving and recording payments on the control log did not receive an independent reconciliation of the payments before they were mailed to the SCC for further processing. At the sixth TAC, one employee retrieved all the checks from the locked container and logged all the checks received onto a Form 795 and sent them to the SCC without a supervisor or designee review. The corrective actions cited by IRS were subsequent to our fieldwork at those locations. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Field Assistance headquarters began conducting operational reviews on February 28, 2006. The operational reviews include assessing their ability to engage employees in process and program improvement, identifying best practice ideas, ensuring elements of accountability and responsibility are clearly communicated at each level, and assessing conformance to the current policies and procedures. Analyze and determine the factors causing delays in processing and posting TFRP assessments. Once these factors have been determined, IRS should develop procedures to reduce the impact of these factors and to ensure timely posting to all applicable accounts and proper offsetting of refunds against unpaid assessments before issuance. (short-term) Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. To ensure quality, timeliness, and accuracy of the TFRP process, the IRS initiated a quality review process that focused in 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. The enhanced rewrite has been delivered and is in production testing. Training is scheduled to begin in June 2006 with a complete nationwide deployment by the end of fiscal year 2006. IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. Open. We will continue to review IRS’s initiatives to improve posting of TFRP cases and monitor trust fund recovery penalty processing timeliness as part of our fiscal year 2006 audit. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Closed. The guidelines in the Fiscal Year 2003 Operating Procedures for TACs for safeguarding receipts in locked containers and over-stamping checks made payable to IRS were incorporated into the IRM in June 2003. The requirement for over- stamping checks made payable to the IRS has been emphasized. Operational reviews by Field Assistance Headquarters are planned to ensure adherence to safeguarding of receipts and over- stamping requirements. Employees have been instructed to keep all containers locked that contain taxpayer data. Each employee will be provided individual performance feedback regarding any security violations. More frequent security reviews will be conducted that include this and other areas relating to protection of taxpayer data. Additional emphasis will be placed on development of internal controls and the oversight and accountability of both employees and managers within Field Assistance. Open. While IRS has taken steps to address this recommendation, the current response does not entail expansion of IRS’s service center security reviews and TAC operational reviews to the non- W&I business units. During our fiscal year 2005 audit, we found several instances where controls over safeguarding taxpayer receipts and information at the SB/SE, the Large and Mid-Size Business (LMSB), and Tax Exempt and Government Entities (TE/GE) field office units were not effective. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Ensure that additional staff are employed or existing staff appropriately cross- trained to be able to perform the master file extractions and other ad hoc procedures needed for IRS to continually develop reliable balances for financial reporting purposes. (short-term) Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. The CAP has been stopped due to budget cuts. The IRS has decided to address this recommendation by enhancing the Service’s existing FMIS with a new database, the CDDB and the Interim Revenue Accounting Control System (IRACS) used to support the financial audit. The CFO has developed a business case and will pursue opportunities to identify resources within the IRS’s Information Technology budget to fund this effort. The need to build an appropriate depth of experience is still an immediate and ongoing issue. The IRS continues to examine its resources to see if work can be realigned, and if existing employees can be retrained. Contractor support is used to provide the support and backup necessary for preparation of the compensating procedures, pending implementation of the CDDB and the Customer Account Data Engine (CADE). IRS is committed to supporting the funding of contractor resources that are used for the financial statement audit. This corrective action will be continually monitored. Open. In fiscal year 2005, IRS continued to augment its own resources with contractor support to produce auditable financial statements. We will continue to assess IRS’s actions during our fiscal year 2006 audit. Develop the data to support meaningful cost information categories and cost- based performance measures. (long-term) Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Open. Integrated Financial System (IFS) Release 1, which was implemented on November 10, 2004, includes a cost module that will interface with program area management information systems. Both direct and indirect resource cost data will be linked to the budget process and the strategic planning goals of all business units. This will help move IRS forward in transitioning to a performance- based organization. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. An integrated Work Management module would routinely provide a greater level of detail for costing purposes. However, at present, all future releases are being reevaluated based on funding availability and no future implementation date has been established. Open. We will follow up during future audits to assess IRS’s progress in implementing a cost- accounting system and populating it with the cost information needed to support meaningful cost-based performance measures. Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Open. In IFS Release 1, implemented on November 10, 2004, P&E are being recorded as an asset when purchased. The ability to tie to the detailed physical asset information and a fully integrated system with subsidiary records will not be available until the IFS Asset Management module is implemented. At present, all future releases are being reevaluated based on funding availability and no future implementation date has been established. Open. IRS implemented the first release of the new IFS on November 10, 2004, which allowed recording P&E as assets when purchased. However, implementation of a property asset module that is intended to generate detailed records for P&E that will reconcile to the financial records is being deferred indefinitely due to funding constraints. We will continue to monitor IRS’s progress in implementing subsequent IFS releases and the property asset module. As an alternative to prematurely suspending active collection efforts, and using the best available information, develop reliable cost- benefit data relating to collection efforts for cases with some collection potential. These cost-benefit data would include the full cost associated with the increased collection activity (i.e., salaries, benefits, and administrative support) as well as the expected additional tax collections generated. (short-term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO-01-42, Nov. 17, 2000) Open. Based on initial success with modeling technology, SB/SE has initiated several other projects to build additional decision analytical models to increase our ability to route cases to the appropriate resource. These projects include the addition of external credit scores and other internal data to build more robust models with increased predictive power. These efforts will continue to help IRS ensure that the right resources are devoted to the appropriate cases. IRS has developed a corporate strategy for working collections cases. The Collection Governance Board (consisting of executives from SB/SE and W&I) was established in August 2005 to ensure inventory is balanced and resources are expended appropriately. Open. We will continue to review IRS’s initiatives to manage resource allocation levels for its collection efforts. Implement procedures to closely monitor the release of tax liens to ensure that they are released within 30 days of the date the related tax liability is fully satisfied. As part of these procedures, IRS should carefully analyze the causes of the delays in releasing tax liens identified by our work and prior work by IRS’s former internal audit function and ensure that such procedures effectively address these issues. (short-term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO-01-42, Nov. 17, 2000) Open. IRS has redeveloped the prior action plan to incorporate the requirements of the revised OMB Circular No. A-123. The overall action addresses untimely lien releases, including identification of root causes and where they occur organizationally. Open. During our fiscal year 2005 audit, we continued to find delays in release of liens. We found 13 instances out of 59 cases tested in which IRS did not release the applicable federal tax lien within the 30-day statutory period. The time between the satisfaction of the liability and release of the lien ranged from 36 days to 233 days. We will assess the impact of IRS’s actions and continue to review IRS’s release of tax liens as part of our fiscal year 2006 audit. For (1) IRS’s AUR and Combined Annual Wage Reporting programs, (2) screening and examination of Earned Income Tax Credit claims, and (3) identifying and collecting previously disbursed improper refunds, use the best available information to develop reliable cost-benefit data to estimate the tax revenue collected by, and the amount of improper refunds returned to, IRS for each dollar spent pursuing these outstanding amounts. These data would include (1) an estimate of the full cost incurred by IRS in performing each of these efforts, including the salaries and benefits of all staff involved, as well as any related nonpersonnel costs, such as supplies and utilities and (2) the actual amount (a) collected on tax amounts assessed and (b) recovered on improper refunds disbursed. (long-term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO-01-42, Nov. 17, 2000) Open. Allocation methodology was reviewed and enhanced for fiscal year 2006 and further refinements will be implemented each year. The first year’s data will be reviewed in fiscal year 2006 and a plan developed for integrating cost data in decision making. The use of the data will be tested in fiscal year 2007 with baseline data. However, to achieve maximum benefit in decision making, several years’ data will be needed. As a result, the IRS will fully implement the use of cost accounting data for resource allocation decisions in fiscal year 2008. Open. During our fiscal year 2005 audit, IRS provided information on the AUR program, including program results. Based on our review of the information and discussions with IRS officials, we determined IRS does not use the data to make decisions on the AUR workload. In addition, IRS implemented a cost accounting module during fiscal year 2005. However, management has not yet determined what the full range of its cost information needs are or how best to tailor the capabilities of this module to serve those needs. Also, IRS has not yet implemented a related workload management system intended to provide the cost module with detailed personnel cost information. In addition, as noted by IRS, because it generally takes several years of historical cost information to support meaningful estimates and projections, IRS cannot yet rely on this system as a significant planning tool. We will continue to followup on IRS’s progress on this issue during our fiscal year 2006 audit. Develop a subsidiary ledger for leasehold improvements and implement procedures to record leasehold improvement costs as they occur. (long- term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO-01-42, Nov. 17, 2000) Open. In IFS Release 1, implemented on November 10, 2004, P&E and leasehold improvements are recorded as assets when purchased. However, amortization will remain a manual process. The ability to tie the detailed physical asset information and a fully integrated system with subsidiary records will not be available until the Asset Management module is implemented. At present, all future releases are being reevaluated based on funding availability and no future implementation date has been established. Open. IRS implemented the first release of the new IFS on November 10, 2004, which allowed recording leasehold improvements as assets when purchased. However, implementation of a property asset module that is intended to generate detailed records for P&E that will reconcile to the financial records is being deferred indefinitely due to funding constraints. We will continue to monitor IRS’s progress in implementing subsequent IFS releases and the property asset module. Implement procedures and controls to ensure that expenditures for P&E are charged to the correct accounting codes to provide reliable records for expenditures as a basis of extracting the costs for major systems and leasehold improvements. (short- term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO-01-42, Nov. 17, 2000) Closed. In IFS Release 1, implemented on November 10, 2004, P&E and leasehold improvements are posted to the correct accounting code at the time of purchase. IRS has improved the definitions of P&E and has provided guidance on appropriate coding classifications to end users. Routine control reviews have been established to ensure the accuracy and appropriate coding of classifications. Closed. IRS implemented the first release of IFS on November 10, 2004, which incorporated procedures to allow IRS to record the majority of P&E additions in the appropriate general ledger accounts as they occur. During our fiscal year 2005 audit, we found that IRS was generally recording P&E transactions as they occurred, although we did identify some new issues. See recommendation ID. No. 06-20. Develop a mechanism to track and report the actual costs associated with reimbursable activities. (long-term) Management Letter: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 2001) Open. IRS has developed guidance for costing reimbursable agreements, which includes instructions on tracking labor. IFS Release 1, implemented on November 10, 2004, includes a cost module that will interface with program area management information systems. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. Actions will be initiated in fiscal year 2006 or fiscal year 2007 to begin gathering the real cost of certain reimbursable projects. At present, future releases are being evaluated based on funding availability and no future implementation date has been established. 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 plans to implement these procedures over several years as it phases in various program area management information systems that will provide critical information to its new cost accounting system. However, as indicated by IRS, these systems have not yet been scheduled for implementation. 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 its reimbursable agreements. Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 2001) Closed. In IFS Release 1, implemented on November 10, 2004, property and equipment are recorded as assets when purchased. Closed. IRS implemented the first release of IFS on November 10, 2004, which incorporated procedures to allow IRS to record the majority of P&E additions in the appropriate general ledger accounts as they occur. During our fiscal year 2005 audit, we found that IRS was generally recording P&E transactions as they occurred, although we did identify some new issues. See recommendation ID. No. 06-20. Implement policies and procedures to require that all employees itemize on their time cards the time spent on specific projects. (long-term) Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 2001) Open. IRS agreed with the objective of this recommendation, which is to allow it to collect and report the full payroll costs associated with its activities. While IRS indicated that most of its employees already itemize their time charges in functional tracking systems, it has acknowledged that full implementation of the IFS cost accounting module is required to close this recommendation. IFS Release 1, implemented on November 10, 2004, includes requirements for a cost module that will be interfaced with program area management information systems. Both direct and indirect resource cost data can be linked to the budget process and the strategic planning goals of all business units. This will help move IRS forward in transitioning to a performance- based organization. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. At present, all future releases are being reevaluated based on funding availability and no future implementation date has been established. Open. We confirmed that IRS employees continue to use functional tracking (workload management) systems to itemize and track their time charges. However, this recommendation remains open because its objective is to allow IRS to collect and report the full payroll costs associated with its activities. During our fiscal year 2005 audit, we continued to find that the functional tracking systems are insufficient for this purpose because they do not interface with each other or the general ledger to allow management to use them to readily accumulate the time charged to specific projects. Implement policies and procedures to allocate nonpersonnel costs to programs and activities on a routine basis throughout the year. (long-term) Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 2001) Open. The IFS, Release 1, implemented on November 10, 2004, includes a cost module that is interfaced with program area management information systems. Both direct and indirect resource cost data can be linked to the budget process and the strategic planning goals of all business units. This helps move IRS forward in transitioning to a performance-based organization. Full cost accounting will not be realized until future IFS releases, including Work Management, are implemented. Open. We confirmed that the IRS plans include requirements that meet the objectives of this recommendation; however, IRS has indefinitely delayed the implementation of these requirements. IRS’s plans to implement these requirements are expected to be executed over several years as IRS phases in various program area management information systems that will provide critical information to the cost accounting system. We will continue to monitor the progress of IRS’s efforts to address this issue. Develop policies and procedures to require that IRS and lockbox employees performing final candling record receipts in a control log at the time of discovery, recording at a minimum the total number of payments found, the amount of each payment, and the taxpayer who submitted the payment. (short-term) Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Closed. The 2005 Lockbox Processing Guidelines (LPG), Documentation of Items Found in Candling (Form 9535), directs the responsible manager to initial Form 9535 every day for each shift. An entry must be made each shift, whether or not items have been found. A manager will initial Form 9535 to validate all of the following: (1) all available information is correctly entered; (2) items found have been reconciled with Form 9535 entries; (3) items have been correctly categorized as processable or unprocessable; (4) all processable work has been cleared after each shift, i.e., the work has been put back into the stream of work; and (5) the received date has been entered correctly. Only Form 9535 will be used for documenting items found during candling. Closed. During our fiscal year 2005 audit, we verified that IRS updated its candling procedures in the LPG and IRM to include the recording of receipts in the control log at the time of discovery. IRM 3.10.72.6.2 provides the following guidance for the campuses: Management shall maintain Form 13592 Candling Log – Receipt and Control (R&C) Discovered Remittances to record remittances found in final candling. An employee designated by management will immediately record these items into the final candling log. In addition, management shall initial the log to validate that all available information is correctly entered and ensure that all remittances listed on the log are brought to the deposit function on a daily basis. The National Office redesigned the Form 13592 candling log that records, at a minimum, the total number of payments found, the amount of each payment, and the taxpayer who submitted the payment. Ensure that field office management complies with existing receipt control policies that require a segregation of duties between employees who prepare control logs for walk-in payments and employees who reconcile the control logs to the actual payments. (short- term) Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Open. Field Assistance has implemented in TACs, where staffing permits, the review of Form 795 and all supporting documents for accuracy by someone other than the recipient of the funds before they are transmitted to the SPCs. Additional procedures are being explored to determine a process for mitigating the circumstances that prevent proper segregation of duties in those TACs with limited staffing. Additional emphasis will be placed on development of internal controls and the oversight and accountability of both employees and managers within Field Assistance. Open. During our fiscal year 2005 audit, we found a lack of segregation of duties related to the preparation, review, and/or reconciliation of Form 795 at six of the eight TACs we visited. At three of these TACs, at times only one employee is present to carry out the functions of the office. At another TAC, there was no evidence that the Form 795 was reconciled by an employee other than the employee who received the payment from the taxpayer and recorded it on the Form 795. At this same TAC, we observed two instances where employees did not log information onto the Form 795 upon receipt. At the fifth TAC, the employee responsible for receiving and recording payments on the control log did not receive an independent reconciliation of the payments before they were mailed to the SCC for further processing. At the sixth TAC, one employee retrieved all the checks from the locked container and logged all the checks received onto a Form 795 and sent them to the SCC without a supervisor or designee review. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Closed. In July 2005, NFC demonstrated (first time) a Web version of SETS and more IRS requirements are to be accommodated in that system; a meeting is slated for early 2006 between IRS and NFC. Also, IRS/NFC dialogue continues to ensure that data flows are timely and accurate, reconciliations and error adjustments regularly occur, and monthly NFC reports are reviewed and analyzed by IRS. Agency-Wide Shared Services (AWSS) continues to monitor SETS reports for each pay period and coordinates with employment offices when corrections are needed. IRS and NFC continue to engage on-going discussions on reconciliations and error adjustments as needed. NFC controls the time table for deploying a Web version of SETS; however, no time table has been set and no meetings are being convened. Open. During our fiscal year 2005 audit, we continued to find technical limitations in IRS’s SETS database. The corrective actions cited by IRS were subsequent to our fieldwork for the fiscal year 2005 audit. We will evaluate the effectiveness of these actions during our fiscal year 2006 audit. Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. IRS and the Financial Management Service (FMS) prepared a reimbursement process. The procedures include the use of a special Lockbox Program code to delineate IRS rework costs as a result of errors made by the lockbox sites. The Lockbox Policy Reimbursement procedures are included in the 2005 LPG under LPG 2.1.9 and 2005 Lockbox Processing Procedures under IRM 3.0.230.9.3. Closed. During our fiscal year 2005 audit, we verified that IRS had incorporated reimbursement procedures in the 2005 LPG. Revise the guidance used for compliance reviews so it requires reviewers to (1) determine whether lockbox contractors, such as couriers, have completed and obtained favorable results on IRS fingerprint checks and (2) obtain and review all relevant logs for cash payments and candled items to ensure that all payments are accounted for. (short- term) Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. IRS updated the security check sheet in January 2004 to instruct reviewers to determine whether contractors have completed and obtained favorable fingerprint results and to review all relevant logs for cash payments and candling logs. In order to ensure compliance to the LPG requirements, an IRS and FMS task group developed a performance measures process to include a category for security (Courier, Physical, Remittance) that was implemented in October 2005. This process which was piloted in 2005 and implemented in January 2006 uses a data collection instrument (DCI) check sheet that lists by line item the requirements as outlined in the LPG. It is used as a tool to identify varying levels of performance and provide incentives and disincentives based on those levels of performance. This helps the IRS/FMS Security staff ensure compliance with the LPG requirements. Additionally, an internal control review is included in the reviews performed quarterly by the Lockbox coordinators. Closed. During our fiscal year 2005 audit, we verified the lockbox coordinator’s on-site review check sheet included the requirement to ensure that the cash and candling logs are being kept and updated daily and that contractors have completed and obtained favorable results on IRS fingerprint checks. Assign individuals, other than the lockbox coordinators, responsibility for completing on-site performance reviews. (short-term) Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. IRS Lockbox Field Section, IRS Policy & Procedures Section, and FMS are responsible for conducting their own on-site performance reviews during peak season at each Lockbox site. DCIs are used by the IRS Field Coordinators to review Lockbox processing requirements and processing internal controls. DCIs are also used by IRS Policy & Procedures Section in conjunction with IRS Mission Assurance and FMS Security to review courier, physical, and personnel security. FMS and IRS Policy and Procedures Section also use a check sheet to review various processing/security requirements during peak processing. DCI processing reviews are also completed daily at each IRS SPC by SPC staff after the work is received from the lockbox. The on-site DCI processing and security reviews and the SPC reviews are incorporated into the Bank Performance Standards scorecards. The scorecards are signed by both IRS and FMS management prior to being issued to each Lockbox site under an FMS cover letter. In addition, peak trip reports are completed jointly by the IRS and FMS personnel on site. These trip reports assess the banks performance by categories such as deliverables, FMS cash management cash flow, mail, processing, remittance security, and staffing. This report is used to capture any observations that may or may not have been covered on the various DCIs. The combination of these reviews serves as the checks and balances of the program. While the Field Coordinators remain responsible for the on-site processing review, these reviews constitute only a portion of the overall assessment of each lockbox site. Closed. We issued this recommendation in January 2003 when the lockbox coordinators were the only individuals responsible for conducting the performance reviews and at that time these reviews were not being performed because of competing demands. Over the years, IRS and FMS have increased their oversight of the lockbox bank program with various performance and compliance reviews. These reviews include peak season trip reports and annual security reviews conducted jointly by IRS and FMS staff. In addition, IRS has implemented a scorecard system performed, reviewed, and signed by both IRS and FMS that incorporates the results of the reviews. These procedures collectively satisfy the objective of this recommendation. Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. To provide more emphasis on security, the Lockbox Security Guidelines (LSG) is no longer included in the LPG. Beginning in 2006 LSG is a separate document. LSG 2.2.2.4(7) requires that “Bank management is ultimately responsible for access control and procedures for ensuring only authorized personnel are granted access to the processing floor. Bank management must be involved in the day to day access control process. This responsibility cannot be delegated (e.g., to temporary agency personnel, security guards, third parties).” LSG 2.2.3.1 (7) provides the requirements for guards to respond to alarms. The Security Team performs alarm testing and evaluates guards’ responses to alarms during their on-site security reviews. Security Performance Measures (effective January 2006) were developed to measure and rate each site’s overall adherence to security guidelines and provides incentives/disincentives accordingly. Mission Assurance and FMS Security staff supports the Lockbox Policy and Procedures Program Office in conducting security reviews. Reviews rate each site’s compliance to physical, personnel, courier, and information technology (IT) security. Closed. We verified that the LSG requires lockbox bank management to ensure that guards are responsive to alarms. Additionally, we verified that Security Performance Measures are in place to measure and rate each lockbox bank’s overall adherence to security guidelines. Require lockbox management to ensure that envelopes are properly candled and that IRS take steps to monitor adherence to this requirement. (short- term) Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. Effective October 2005, candling reviews are conducted at all Lockbox sites to ensure that all candling requirements are being met. These internal control reviews ensure that envelopes opened (manually or by OPEX) on three or more sides are candled once and that envelopes other than the ones opened on three or more sides are candled twice. The results of these reviews are used to calculate each bank’s score in the new bank performance measurement process. The Processing-Internal Controls (PIC) DCI that included the new candling review was first performed by Lockbox Field Coordinators at Individual Master File (IMF) lockbox sites during on- site reviews in October 2005 and at Business Master File (BMF) sites in November 2005. This element is now part of the Lockbox Performance Scorecard Measures. Open. During our fiscal year 2005 audit, we found instances at one lockbox bank where employees did not properly candle envelopes. However, the candling reviews planned by IRS were implemented subsequent to the completion of our fiscal year 2005 fieldwork. We will evaluate the effectiveness of these reviews during our fiscal year 2006 audit. Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-299, Jan. 15, 2003) Closed. The requirement to ensure that returned refund checks are restrictively endorsed immediately upon extraction was previously listed in Section 3.2.1 of the 2002 LPG issued January 1, 2002, as well as the 2003 (revised April 8, 2003) and 2004 LPG, issued December 1, 2003. During the on-site security reviews, IRS and FMS security teams reviewed adherence to this requirement. Additionally, adherence to this requirement is evaluated during the daily SPC quality reviews. Closed. During our fiscal year 2005 audit, we did not identify any instances where returned refund checks at the lockbox banks were not restrictively endorsed upon extraction. Confirm with FMS that IRS’s requirements for background and fingerprint checks for courier services are met regardless of whether IRS or FMS negotiates the service agreement. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-03-562R, May 20, 2003) Open. IRS’s IRM and lockbox bank policies require that all courier employees satisfy requirements for background and fingerprint checks regardless of who negotiated the courier service agreement. However, when we updated our review of courier contracts in March 2006, we again found that one FMS- negotiated contract did not contain IRS’s requirements for background and fingerprint checks for courier services. We will continue to evaluate the compliance of the 2006 courier agreements during our fiscal year 2006 audit. depositories. Courier policies and procedures were reinforced in IRM 3.8.45 with FRB and TGA bank offices and campus deposit managers. The NBIC program manager participated in this session. Prohibit the storage of employees’ personal belongings with cash payments and receipts at IRS’s taxpayer assistance centers. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-03-562R, May 20, 2003) Closed. In 2005, remittance training covering the procedures for remittance processing was conducted for all TAC managers. The requirement prohibiting storing personal belongings with taxpayer data was reiterated. Operational reviews are planned by Field Assistance Headquarters to ensure TACs adhere to required IRM procedures. Additional emphasis will be placed on development of internal controls and the oversight and accountability of both employees and managers within Field Assistance. Open. During our fiscal year 2005 audit, we identified an instance at one TAC where an employee’s personal belongings were stored with taxpayer receipts. In addition, IRS’s response does not specifically address the prohibition of taxpayer payments (cash and non-cash) with employees’ personal belongings as stated in our recommendation. We will continue to evaluate IRS’s corrective actions during our fiscal year 2006 audit. Revise its candling procedures to specify the precise candling methods to be used based on the dimensions of the mail processed and the extraction method used for both the first and the final candling. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-03-562R, May 20, 2003) Closed. Additional guidance was issued to Submission Processing field employees on February 28, 2005, reinforcing the importance of ensuring Submission Processing candling procedures and policies are followed. IRM 3.10.72 has been revised to specify precise candling methods, as well as specific illumination measures of light. In addition, new requirements were implemented to turn large envelopes that cannot be easily opened on all three sides, inside out. This requirement is part of the campus monthly security reviews. All findings are shared with SP field directors. Local management continues to remind employees of the importance of candling of envelopes on a regular basis through individual and group meetings to ensure compliance with this requirement. Closed. We verified that the IRM has been updated to provide specific instructions regarding the candling processes for different types of mail processed by service center campuses. Establish and implement procedures prohibiting a single employee from performing the final candling in a remote location. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-03-562R, May 20, 2003) Closed. IRM 3.10.72 has procedures prohibiting a single employee from performing the final candling in a remote location. This requirement is part of the campus monthly security reviews. All findings are shared with SP field directors. Local management continues to remind employees of candling requirements through individual and group meetings to ensure compliance with this requirement. Closed. We verified that IRS had established and implemented procedures prohibiting a single employee from performing final candling in a remote location. In addition, we did not identify any instances in which final candling were performed by only one individual. Management Report: Improvements Needed in Controls over IRS’s Excise Tax Certification Process (GAO-03- 687R, July 23, 2003) Closed. An MOU was signed December 15, 2004, by the Chairman, Excise Tax Trust Fund Working Group. The IRS Treasury Excise Tax Trust Fund Working Group MOU established a process of recording minutes of the Working Group meetings in order to document issues related to trust fund certification procedures/ processes and proposed or passed legislative changes impacting trust fund investments. Recording of minutes will be taken by a representative of Treasury member offices or bureaus on a rotating basis. Draft minutes will be shared with all participants for concurrence prior to final approval and distribution. IRS will discuss and make a presentation to advise the members of any changes to the trust fund certification process. Closed. We verified that the Treasury Excise Tax Trust Fund Working Group signed a resolution to establish a process for documenting issues related to IRS’s trust fund certifications. Our review shows the Treasury Excise Tax Working Group has established a process of recording and distributing minutes of the Working Group meetings in order to document issues related to trust fund certification procedures/ processes including procedural or legislative changes impacting trust fund investments. Require lockbox bank managers to maintain appropriate documentation on-site demonstrating that satisfactory fingerprint results have been received before contractors are granted access to taxpayer receipts and data. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. To provide more emphasis on security, LSG (2.5) requires appropriate documentation for couriers and guards before they are granted access to taxpayer receipts. To ensure compliance with the LSG, IRS/FMS Security has included this as a review item during their security reviews. Closed. We verified that the LSG does include a requirement that lockbox managers maintain documentation on-site demonstrating that satisfactory fingerprint results have been received before contractors are granted access to taxpayer receipts and data. During our fiscal year 2005 audit, we did not identify any instances in which contractors were granted access to taxpayer receipts and data without having satisfactory fingerprint results on file at the lockbox banks that we visited. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. On February 14, 2005, the 2005 LPG was updated and reinforced current courier requirements with an addendum entitled “Courier’s Additional Disclosure Statement.” Each courier is required to complete and sign the disclosure, affirming that they are not to travel with an immediate family member. In addition, each courier is required to list the name and relationship of each family member residing in the same domicile that also performs courier duties for the IRS. The disclosure statement is updated annually and maintained in the personnel file. Starting in July 2005, during the onsite reviews, the IRS/FMS Security Team began reviewing the disclosure statements to ensure adherence to this requirement. Closed. We confirmed that IRS updated its policy on two-person courier teams for lockbox banks as reflected in the revised LPG. Additionally, we identified no instances in which two-person courier teams consisted of closely related individuals during our fiscal year 2005 testing at the four lockbox banks and four service center campuses that we visited. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. Effective October 1, 2005, IRS established a new DCI review entitled “Processing-Internal Controls.” During on-site reviews, the following logs are required to be reviewed: desk and work area, date stamp, cash, candling, shred, and mail. The results of these DCI reviews are rolled into a calculation to determine each bank’s score in the new bank performance measurement process. In addition, lockbox personnel are required to perform reviews of the desk and work area, cash, candling, and shred logs. A monthly report for each review must be sent to the Lockbox Field Coordinator on the fifth business day of the month following the review. The report must contain the following: date of review, shifts reviewed, results of the review (even when no items are found), and reviewer’s and site manager’s initials and/or signature as required by the LPG. To further strengthen this internal control, effective June 1, 2006, additional review of the monthly reports (F9535/Discovered Remittance, candling log, disk checks/audits, and shred) received from the lockbox site will be performed by the Lockbox Field Coordinators. Specific check points will be added to the “Monthly Reports” DCI that is a part of the Procedural DCI performed at the SPC. In addition to confirming the receipt and timeliness of the reports, coordinators will review the reports to ensure they are completed per the LPG requirements and that all required management signatures/initials are present to provide satisfactory evidence that the managerial reviews are performed. Open. During our fiscal year 2005 audit, we verified that the LPG and LSG instruct the lockbox bank managers to perform numerous managerial reviews and to provide evidence that the reviews were performed. However, at two of the four lockbox banks we visited, we found that satisfactory evidence was not always provided to validate that these reviews were performed in accordance with established guidelines. In addition, IRS’s corrective actions addressing documentation of required reviews occurred subsequent to our fiscal year 2005 fieldwork. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Revise candling procedures at lockbox banks to require testing of automated candling machines at appropriate intervals, taking into account factors such as use time, volume processed, machine requirements and shift cycles. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. Lockbox Policy and Procedures staff assessed the candling procedures and determined that current technologies are not exempt from the candling requirement and added to the 2005 LPG section 3.2.8(1) that envelopes opened (either manually or by OPEX equipment) on three or more sides must be candled once on the candling tables. Thus, the requirement to keep tests and logs is not necessary. All other envelopes must be candled twice on the candling tables. Closed. During our fiscal year 2005 audit, we verified that the LPG requires that envelopes opened (either manually or by OPEX equipment) on three or more sides must be candled one additional time on the candling table. This change and IRS’s assessment that current technologies are not exempt from the two candling requirement satisfies the objective of our recommendation. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. Lockbox Policy and Procedures staff assessed the candling procedures and determined that current technologies are not exempt from the candling requirement and added to the 2005 LPG section 3.2.8(1) that envelopes opened (either manually or by OPEX equipment) on three or more sides must be candled once on the candling tables. Thus, the requirement to keep tests and logs is not necessary. All other envelopes must be candled twice on the candling tables. Closed. During our fiscal year 2005 audit, we verified that the LPG requires that envelopes opened (either manually or by OPEX equipment) on three or more sides must be candled one additional time on the candling table. This change and IRS’s assessment that current technologies are not exempt from the two candling requirement satisfies the objective of our recommendation. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. In 2003, IRM 3.8.46, Discovered Remittances, was issued and 10,000 copies were distributed to all campuses. Form 4287 (Record of Discovered Remittances) was revised to enhance adherence to existing instructions by including a check box for managers to indicate the reconciliation was performed. Additionally, Submission Processing revised the monthly security checklist to include a review of the discovered remittance procedures. A Discovered Remittances Job Aid was added to IRM 3.8.46 on January 26, 2005 via the SP Web site. The job aid and a PowerPoint presentation were added to the SP Web site again in August 2005. Open. We verified that the IRM contains a discovered remittances job aid to be used for recording discovered remittances. However, during our fiscal year 2005 audit we found that two of the four SCCs we visited did not adhere to the IRM procedures for securing discovered remittances. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Open. Mission Assurance revised policies and procedures in IRM 1.16.12, to require the following: (1) self-assessments which test response capabilities of guards to alarms. Mission Assurance implemented a self-assessment tool in October 2004 which is used to test response capabilities relating to alarm activation; (2) monthly, unannounced alarm tests at all campuses and computing centers; (3) mandatory reporting of the monthly alarm test results to the office of Physical Security and Emergency Preparedness (PSEP); (4) review of the monthly test results by the PSEP office, ensuring that the results are in compliance with IRM requirements, and if not, providing feedback for improvements; and (5) annual security exercises at each facility to test alarm responses. Open. During our fiscal year 2005 audit, we continued to find weaknesses in IRS’s enforcement of policies and procedures to ensure that SCC security guards respond to alarms. We identified instances at two of four SCCs visited during our fiscal year 2005 audit in which guards either did not respond or did not respond timely to our tests of door alarms. IRS’s implementation of new procedures to address guard response issues occurred subsequent to the end of our fiscal year 2005 audit fieldwork. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Establish compensating controls in the event that automated security systems malfunction, such as notifying guards and managers of the malfunction, and immediately deploying guards to better protect the processing center’s perimeter. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. Mission Assurance developed alarm testing procedures which are used to supplement the requirements in IRM 1.16.12. The IRM and supplemental procedures require the notification of local management whenever there is a malfunction of alarms. The procedures also require that guards are deployed or doors are secured, as necessary, either during tests or when otherwise identified. The contract guard force project manager is required to sign off on all unannounced alarm test reports. Test results are maintained by the PSEP office. Open. IRS indicates in its response that compensating controls have been developed and implemented in the event that automated security systems malfunction. However, from our review of the IRM and the compensating controls used in conjunction with the IRM, we did not identify any procedures outlining specific controls to be employed should automated security systems malfunction or be taken out of service for any period of time. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Until the Business Performance Management System (BPMS) is fully operational, implement procedures to ensure that all performance data reported in the MSP report are subject to effective, documented reviews to provide reasonable assurance that the data are current at interim periods. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. IRS has taken steps to ensure that the performance measures data reported in the monthly report are properly reviewed before being published. All divisions now submit most of their performance measures data directly to BPMS. The divisions are required to verify/certify the accuracy of the data before uploading to BPMS. Corporate Performance Budgeting staff implemented additional manual quality control procedures that include reviewing all tables, charts, and line graphs and visually inspecting the numbers and comparing the information to the previous month’s report for consistency. In addition, IRS is working with Treasury to streamline its current set of performance measures. Its purpose is to increase the value of the information provided to stakeholders, focus priorities, and reduce administrative burden. Open. In fiscal year 2005, we continued to find errors in IRS’s interim performance measures data at interim periods. GAO will continue to monitor IRS’s progress in this area during our fiscal year 2006 financial audit. Expedite efforts to resolve the backlog of unpostable liens, releasing liens as appropriate. (short- term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Closed. IRS conducted a review of the unpostable accounts during the period, October 31, 2005, to November 4, 2005. The remaining 1,500 accounts were resolved by May 31, 2005. Inventories are current and being resolved in a timely manner. Closed. We verified that IRS had resolved the backlog of unpostable liens. IRS’s Centralized Case Processing/ Lien Processing Unit at the Cincinnati Campus is researching and resolving unpostable liens weekly. We reviewed IRS’s report of unpostable liens from February and March 2006 and determined there was no current backlog. Keep current on all new unpostable liens. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Closed. IRS has been resolving new unpostables within 5 days since June 2004. IRS conducted a review of the unpostable accounts during the period, October 31, 2005, to November 4, 2005, which verified inventories are current and being resolved in a timely manner. Closed. Although IRS has not formally documented procedures in the IRM for weekly resolution of unpostable liens, IRS officials of the Centralized Case Processing / Lien Processing Unit told us that they research and resolve unpostable liens weekly. We reviewed six weekly reports of unpostable liens from February through March 2006 and determined that IRS was keeping current on new unpostable liens. Research and resolve the current backlog of unresolved unmatched exception reports. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Open. Managers and employees have received training on the entity portion of the Satisfied Module (SATMOD) Reject Report. Resolution of the backlog will be conducted by the centralized site. Anticipated time for resolution is being extended to May 2006 in order to complete a workshop, compile the extract from the master file, and establish a specific group of employees to work on the backlog. Open. We will review the status of IRS’s corrective actions as part of our fiscal year 2006 audit. Research and resolve unmatched exception reports weekly. (short- term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Open. IRS developed new procedures for working on the unmatched exception reports. Accounts on the unmatched exception report will be resolved by matching information between the master file and the Automated Lien System (ALS). Timely report resolution is an integral function of the Centralized Lien Unit, and time frames and managerial oversight are built into report resolution processes. Managers and employees have received training on the entity portion of the reject report. Training will be ongoing as new employees are assigned to the unit. IRM provisions require resolution of rejected accounts within 5 business days. Managers will monitor timeliness and will report weekly on the outstanding inventory. SB/SE has started working on the cumulative listings; however, additional time is needed to complete the listings. Collection Policy will conduct an onsite review in fiscal year 2006. Open. According to IRS officials we contacted in March 2006, IRS anticipates completing this review in June 2006. We will continue to review the results of IRS’s quality review as part of our fiscal year 2006 audit. Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Closed. Managers and employees have received training on the resolution of the restricted interest portion of the SATMOD reject report. IRS conducted a review during the period October 31, 2005, to November 4, 2005. All current employees have received training. Procedural changes are not required. Closed. We verified that IRS had provided training to designated staff on resolving exception reports. Research and resolve the current backlog of unresolved manual interest or penalties reports. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Open. Managers and employees have received training on the resolution of the manual computation portion of the reject report. IRM provisions require resolution of the rejected accounts within 5 business days. Managers will monitor timeliness and will report weekly on the outstanding inventory. The Collection Policy unit will conduct an on-site review. Training will be given to all new employees as they are assigned to the group. The revised anticipated completion date is May 2006. Open. According to IRS officials we contacted in March 2006, IRS anticipates completing this action in May 2006. We will continue to monitor IRS’s efforts to address its backlog of exception reports containing liens with manually calculated interest or penalties as part of our fiscal year 2006 audit. Research and resolve exception reports containing liens with manually calculated interest or penalties weekly, as called for in the IRM and the ALS User Guide. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Closed. ALS receives a master file data extract listing modules where liabilities have been fully paid. The data extract that is matched against information in the ALS automatically releases liens when there is a match. In the case of modules with restricted interest or penalty, the module is placed on a report for manual processing. In our review of 300 satisfied modules, we identified five cases with additional restricted interest or penalties. The remaining amounts due after computation were for very small amounts, less than $10. Based on those reviews, we ascertained that these cases should receive systemic release based on the status 12 information provided by master file and verified by our review. Copies of the last four weekly extract transmittals in March were reviewed to verify that there were no restricted interest and penalty entries on the listing—confirming that these cases have been systemically released. Open. According to IRS, an internal study determined that the dollar amounts of additional interest and penalties to be assessed on cases with liens requiring manual calculations was not significant. Consequently, IRS is in the process of revising the IRM to no longer require the additional manual computation and assessment of interest and penalties on such cases. In addition, IRS updated its computer programs to automatically release liens once the current account balance had been satisfied. IRS’s actions are based on its determination that the additional interest and penalty amounts are not significant. We will review the results of IRS’s internal analysis during our fiscal year 2006 audit. Provide training to designated staff on how to resolve exception reports containing accounts with manually calculated interest or penalties. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Closed. IRS conducted workshops and provided training to employees of the Centralized Case Processing Lien Teams. IRS conducted an onsite review during the period, October 31, 2005, to November 4, 2005. Procedural changes are not required. Closed. IRS created a special unit within the Centralized Case Processing Lien Processing Unit at the Cincinnati Campus to resolve accounts containing restricted interest and penalties. We verified that IRS had provided training to staff in this unit for resolving exception reports containing accounts with manually calculated interest and penalties. Unit staff we interviewed understood these procedures. Opportunities to Improve Timeliness of IRS Lien Releases (GAO-05- 26R, Jan. 10, 2005) Open. Requests for additional enhancements to cumulate the reject report have been initiated. In the interim, area managers are required to print and resolve reports based on IRM procedures. Anticipated date of completion is January 2007. Open. We will review IRS’s corrective actions during future audits. Revise the Accounts Management Mail Unit procedures, scheduled to be incorporated into the IRM, to include detailed instructions for (1) monitoring transshipped documents and (2) handling cash receipts found during extraction. Where adequate guidance exists elsewhere, IRS should include these through cross- references. (short- term) Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05- 319R, Mar. 10, 2005) Closed. IRM 3.10.72.12 and 3.10.203 were updated to include detailed procedures for mail operations where Submission Processing no longer has a presence. These instructions include monitoring transshipped documents, safeguarding taxpayer receipts and information, precise candling, and security requirements. The IRM also contains a cross-reference to the handling of cash receipts. Closed. During our fiscal year 2005 audit, we verified that IRS updated the IRM to include detailed procedures and cross- references, where applicable, for mail operations for SCCs selected for significant reductions in their submission processing functions. 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 enforced adherence to existing instructions on safeguarding taxpayer receipts and information by including this requirement in the monthly Campus Security Reviews. It is also reviewed annually by the National Office Security Review Team at selected sites. Local Management continually reinforces these requirements through employee counseling and individual and group meetings with security clerks to ensure procedures for issuance of badges, inventory of badges, and security of taxpayer receipts and information. Meetings have also been held to discuss candling procedures. Local management also conducts weekly and monthly reviews to ensure adherence to these procedures. Open. IRS’s corrective actions addressing enforcing adherence to instructions on safeguarding receipts and information occurred subsequent to our fiscal year 2005 fieldwork and will continue as future SCCs are selected for significant reductions in their submission processing functions. We will continue to evaluate IRS’s corrective actions during our fiscal year 2006 audit. Document a methodology for estimating anticipated rapid changes in mail volume at future SCCs selected for significant reductions in their submission processing functions, taking into consideration factors such as the prior rampdown experience at Brookhaven. (short- term) Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05- 319R, Mar. 10, 2005) Open. IRS will use historical data obtained from the Brookhaven Campus rampdown, and any other prior consolidations, to develop and document a methodology for estimating future mail volumes. This methodology will be used in future consolidations to ensure that IRS has reliable data to effectively manage resources during and after the consolidation period. Open. We will evaluate IRS’s efforts to develop and document a methodology for estimating mail volume for future sites selected for rampdown. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS has implemented steps to monitor and enforce the requirements issued on September 29, 2003, on the issuance of ID cards to contractors. This guidance requires that a letter from the NBIC indicating successful completion of at least an interim background investigation be received by the issuing office before a contractor can be approved for staff-like access to IRS. The guidance further stipulates that Physical Security staff would, at least every 6 months, ensure that a re- certification had been received from the contracting officer’s technical representative (COTR) confirming the contractors’ need for continued staff-like access to the IRS facility. Additionally, as part of the required records and accountability process, non- federal photo ID cards are audited annually by the issuing office to reconcile numerical and alphabetical files and ensure that ID cards have been recovered upon separation or termination of the contract. Open. IRS indicated that steps were taken in September 2003 to monitor and enforce the requirement that appropriate background investigations be completed for contractors before they are granted staff-like access to service centers. However, our recommendation was based on findings from our fiscal year 2004 audit, which occurred subsequent to the issuance of IRS’s guidance. As such, IRS’s actions are not sufficient to address the objective of this recommendation. We will continue to evaluate IRS’s enforcement, oversight, and implementation of contractor background investigation policies during our fiscal year 2006 audit. Require that background investigation results for contractors (or evidence thereof) be on file where necessary, including at contractor worksites and security offices responsible for controlling access to sites containing taxpayer receipts and information. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. A Mission Assurance policy memorandum dated September 29, 2003, requires the COTRs to complete and submit a request form for every contract employee. Implementation of the standardized form assures that all required information is provided in order for the contractor to receive its IRS photo ID card. The guidance requires a copy of the letter from NBIC indicating successful completion of at least an interim background investigation be attached to the request form or no ID card will be issued. Both documents are maintained by the issuing office. Open. IRS’s policies and procedures do not require that documentation of the results of background checks for contractors be maintained onsite at SCCs where contractors are allowed access to sites containing taxpayer receipts and information. During our fiscal year 2005 audit, we found that one SCC did not always maintain this information onsite. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS updated LPG 4.2.3.1, Courier Contingency Plan, on January 1, 2005, to require that prior to implementation of the contract, the courier service must provide the lockbox with a disaster contingency plan. The contingency plan must cover labor disputes, employee strikes, inclement weather, natural disasters, traffic accidents, and unforeseen events. Closed. During our fiscal year 2005 audit, we verified that IRS updated the LPG to require that courier service contractors must provide the lockbox bank with a disaster contingency plan. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. Contingency plans were provided by all lockbox sites by March 31, 2005, and were part of the Filing Season Readiness (FSR) Plan. LPG 4.2.3.1 states “the contingency plan must cover labor disputes, employee strikes, inclement weather, natural disasters, traffic accidents, and unforeseen events.” The lockbox coordinators reviewed the contingency plans to ensure that these issues were addressed. The lockbox coordinators interpreted the contingency plans to be complete; for example, the coordinators may have viewed contingencies covering natural disasters as sufficient to address inclement weather even though the term “inclement weather” was not specifically stated in the plan. GAO disagreed, citing continued areas of deficiencies. In September 2005, the FMS/IRS Security Team conducted an additional review of each site’s courier contingency plans to ensure compliance. Their review indicated that in order to increase consistency and ensure the plans are clearly documented, strengthening of the contingency plan requirements was necessary. The 2006 LSG 2.7 (1) and (2) includes clarification of the requirements for the courier contingency plans. Review of the contingency plans to ensure incorporation of all of the requirements is now assigned to the IRS/FMS security team as part of the on-site courier contingency review. Closed. We verified that IRS and FMS jointly reviewed the lockbox bank courier contingency plans and as a result included language in the LSG clarifying that before courier contracts are implemented, couriers must provide a disaster contingency plan to the lockbox bank addressing specific contingencies. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. LPG 4.2.3.1(1) was updated June 30, 2005, to state that all banks must maintain a signed copy of the courier contingency plan on-site. Closed. During our fiscal year 2005 audit, we verified that IRS revised the LPG to specify that courier contingency plans be available at lockbox banks. Review lockbox bank courier and shredding contracts to ensure that they address all privacy-related criteria and include clear reference to privacy- related laws and regulations. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. The LPG 4.2.3(2), was updated on January 1, 2005— Courier Services—which requires lockbox banks to ensure all bonded courier/armored car agreements address all privacy- related criteria and include clear reference to privacy-related laws and regulations. Effective January 1, 2006, in addition to the above requirement, the LSG.2.17.6 (2)(a) added the requirement that all lockbox banks ensure shred company contracts contain clear reference to the privacy-related laws and regulations. In October 2005 the Lockbox Policy and Procedures team reviewed and confirmed that all courier and shred contracts contained all privacy related criteria. Banks must submit their contracts to the Lockbox Policy and Procedures team for their review by October 1 of each year. The courier contract is also reviewed by the IRS/FMS security staff during the on-site courier security review. Closed. During our fiscal year 2005 audit, we verified that the courier and shredding contracts had the required privacy-related language and related provisions set forth in the Privacy Act of 1974. In addition, we verified that the LSG requires lockbox banks to ensure that all bonded courier agreements contain privacy- related language and reminds couriers of their responsibility to not disclose taxpayer information. Revise the LPG to require that (1) lockbox couriers promptly return deposit receipts to the lockbox banks following delivery of taxpayer remittances to depositories and, (2) lockbox banks promptly review the returned deposit receipts. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS Lockbox Policy and Procedures Section updated the LPG on January 1, 2005—LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form —which requires the lockbox site to receive back by the next business day the original completed Receipt for Transport of IRS Lockbox Bank Deposit Form with the bank representative’s name and signature, date and time the deposit was received by the depository; and each day the lockbox site must reconcile the Receipt for Transport of IRS Lockbox Bank Deposit Form(s) to ensure receipt of dedicated service (e.g., the time between release to the courier and the release to the bank is not in excess). If discrepancies are found, the lockbox field coordinator should be notified immediately. Closed. During our fiscal year 2005 audit, we verified that IRS updated the LPG to require that (1) lockbox couriers return, on the next business day, deposit receipts to the lockbox banks following delivery of the taxpayer remittances to depositories and (2) lockbox banks promptly review, on a daily basis, the returned deposit receipts. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. The LPG was updated on January 1, 2005—LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form—to require the courier service employee to return the form to the lockbox site on the next business day, ensuring the following information is completed on the form: the depository bank employee’s name and signature, the date the deposit was received by the depository, and the time the deposit was received by the depository. Closed. During our fiscal year 2005 audit, we verified that IRS updated the LPG to require that deposit receipts for taxpayer remittances include the time and date of receipt by the depository institution. Better enforce the LPG requirement that lockbox bank couriers annotate the time of delivery on receipts for deposits of taxpayer remittances. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form, was updated on January 1, 2005, to require lockbox bank couriers to annotate the time of delivery of receipts for deposits of taxpayer remittances. New Security Performance Measures have been developed to measure and rate each site’s overall adherence to security guidelines and provides incentives/disincentives accordingly. Mission Assurance and FMS Security support the Lockbox Policy and Procedures Program Office in conducting security reviews. Reviews will rate each site’s compliance to physical, personnel, courier, and IT security. Security Performance Measures is scheduled to be fully implemented by January 2006. To further prepare for filing season each year, each bank is now required to certify that they are adhering to security guidelines. Closed. During our fiscal year 2005 audit, we verified that IRS updated the LPG to require that couriers annotate the time of delivery of receipts for deposits of taxpayer remittances. We did not find any instances during our fiscal year 2005 testing in which the courier did not annotate the time the courier received the deposit from the bank personnel. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. Effective January 1, 2006, the lockbox banks must provide an annual memorandum to the courier contractor reminding them that they must adhere to all of the courier service procedures in the LSG. For the campuses, Service Center Accounting held a conference (Deposit Manager’s CPE on January 31, 2006) with FMS, the Federal Reserve Banks, and the servicing TGA banks and reinforced all policies and procedures governing the courier process as outlined in IRM 3.8.45. Open. We verified that IRS’s LSG requires lockbox banks to issue an annual memorandum to courier contractors reminding them to adhere to all courier service procedures in the LSG. However, this memorandum had not been issued by the conclusion of our fiscal year 2005 fieldwork. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Periodically verify that contractors entrusted with taxpayer receipts and information off site adhere to IRS procedures. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. The Lockbox LSG requires that while transporting the data from the lockbox facility, the courier vehicle used to transport taxpayer data/remittances must be locked and secured (LSG 2.13), driven directly to the destination (LSG 2.12) and the vehicle must always be under the supervision of the courier (LSG 2.13). All couriers are required to complete the same National Agency Check and Inquiry with Credit Investigation (NACIC) as bank management officials. For specific transport activities, deposit ticket and deposit transport timeframes are reviewed as part of Lockbox Performance Measures. Open. IRS’s corrective actions do not address the intent of this recommendation, which envisioned IRS testing courier compliance through observations or similar methods. During our fiscal year 2005 audit, we found instances where couriers did not follow IRS policies and procedures while transporting receipts and information. During our observations of couriers en route, we continued to find instances where couriers either made unauthorized stops before proceeding to the depository institution or left the vehicle unattended while it contained taxpayer receipts and information. Develop alternative, back-up plans that are consistent with IRS courier policies and procedures to address instances in which only one courier reports for transport of taxpayer receipts or information, such as requiring that a service center or lockbox bank employee accompany the courier to the depository. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. The 2005 LPG 4.2.3.1 “Courier Contingency Plan” was updated on July 18, 2005 (effective Aug. 29, 2005) to include a plan that ensures the security of receipts if courier requirements are not met, or the courier contractor is unable to send suitable replacement couriers in time to meet the bank’s deposit deadline. Submission Processing campuses submitted contingency plans in May 2005, which outline what deposit managers are to do in the event that couriers are unable to transport a deposit in the event of non-compliance with contract requirements, vehicle breakdown, or other reasons. In addition, the implementation of the Courier Daily Checklist in April 2005 has continued to work smoothly. Closed. During our fiscal year 2005 audit, we verified that IRS had updated its LPG for lockbox banks and submitted contingency plans for SCCs, which outline what to do in the event that couriers are unable to transport a deposit in the event of noncompliance with contract requirements. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Open. Mission Assurance developed policy guidelines to address protection of security or critical controls. Mission Assurance will request transfer of this corrective action to W&I to coordinate with the business operating divisions and Procurement to incorporate any revised requirements into updated and future interagency agreements with FMS. Open. During our fiscal year 2005 audit, we verified that IRS continues to develop guidelines to address protection of security of critical controls. These corrective actions were not complete at the conclusion of our fiscal year 2005 fieldwork. We will continue to evaluate IRS’s corrective actions during our fiscal year 2006 audit. Require lockbox bank management to position closed-circuit television (CCTV) cameras to enable monitoring of secured areas containing sensitive systems or controls. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. Mission Assurance has developed and incorporated a CCTV evaluation matrix into the security review process ensuring that critical areas and assets are monitored. Every camera is assessed during the review. In addition, verbiage for the CCTV requirements is being strengthened in W&I’s new proposed LSG currently under development. The LSG will require at least one camera monitor the main utility feeds. Also, the LPG requires that the IRS security controls, equipment, and utilities must be locked to prevent tampering and that keys will be controlled and limited to authorized bank employees. Mission Assurance will also include key and combination controls and management as part of its review process at the banks. Open. During our fiscal year 2005 audit, we found a sensitive area in a lockbox bank that was not monitored by a camera. The corrective actions planned by IRS had not been implemented at the conclusion of our fieldwork. We will continue to assess IRS’s corrective actions during our fiscal year 2006 audit. Periodically monitor lockbox banks’ adherence to the LPG requirement that keys be kept in secured containers within the secured perimeter. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. The LSG was revised and published on January 1, 2006. The LSG requires strict control of keys, panels, and access to rooms and areas that contain facility utilities and controls. Lockbox banks are monitored and reviewed to ensure compliance to the policy. The Lockbox Physical Security Checklist includes checks to verify compliance to the policy. Five lockbox reviews have been conducted subsequent to publication of the LSG, and IRS has not observed any instances of this finding at any of the sites reviewed. Closed. During our fiscal year 2005 audit, we verified that IRS periodically monitored adherence to this requirement during its lockbox bank security reviews. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS Lockbox Policy and Procedures staff determined that current technologies are not exempt from the candling requirement and added to the 2005 LPG 3.2.8(1) that envelopes opened (either manually or by OPEX) on three or more sides must be candled once on the candling tables. All other envelopes must be candled twice on the candling tables. Closed. IRS’s determination that current technologies are not exempt from the candling requirement, and the additional LPG guidelines added and verified by us during our fiscal year 2005 audit meets the objective of this recommendation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. W&I determined that a cost benefit analysis was not necessary because it previously assessed the candling function on the automated equipment. To provide additional risk mediation, W&I revised the LPG under section 3.2.8 (1) to require that envelopes opened (either manually or by OPEX equipment) on three or more sides must be candled once on the candling tables. W&I will monitor adherence during site reviews. Closed. IRS’s determination that current technologies are not exempt from the candling requirement and the additional LPG guidelines added, and verified by us during our fiscal year 2005 audit meet the objective of this recommendation. Clarify the LPG to eliminate confusion about the number of candlings required for different extraction methods. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS updated the 2005 LPG 3.2.8, Candling, to require that envelopes opened (either manually or by OPEX) on three or more sides must be candled once on the candling tables. All other envelopes must be candled twice on the candling tables. Closed. We verified that IRS updated the LPG to clarify requirements concerning the number of candlings. Establish guidelines and a testing requirement to ensure satisfactory lighting conditions for effective candling. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRM 3.10.72.6.2 (2) (a) requires that all candling equipment on both initial and final candling tables shall be adjusted as necessary to maintain maximum envelope recognition. Maximum envelope recognition is determined by the measurement of foot candles through use of a light meter. Minimum reading on the light meter should be 174. The testing of the candling equipment should be completed twice annually for IMF sites and quarterly for BMF sites. Testing will be completed prior to peak time-frames. Management or a designated employee will complete the candling equipment review log to verify lights are meeting minimum requirements. Light meters are available and testing has been completed at all SPCs to ensure requirements are met. Sorting table vendors have been contacted and are aware of this requirement and are adjusting all new tables that are purchased to ensure they are in compliance. Closed. During our fiscal year 2005 audit, we verified that IRS revised its IRM to include guidelines for testing lighting conditions for candling equipment. Establish policies and procedures to require appropriate segregation of duties in small business/self- employed units of field offices with respect to preparation of Payment Posting Vouchers, Document Transmittal forms, and transmittal packages. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Open. IRS will establish a procedure(s) for SB/SE field office units to track Document Transmittal forms and acknowledgments of receipt of Document Transmittal forms. IRS will also strengthen guidance to revenue officers and will develop procedures specifically for its field clerical staff. IRS’s procedures will clarify that revenue officers are responsible for submitting an appropriately labeled sealed envelope containing the Daily Report of Collection Activity form to a designated clerical contact in the post of duty (POD). This guidance will apply unless the revenue officers are working away from the POD on extended field calls, flexiplace, or are working in a single revenue officer POD. Those revenue officers will send the envelope directly to Submission Processing. Open. IRS’s proposed corrective actions to this recommendation have not been finalized and published in the IRM. We will continue to monitor future developments in this area during our fiscal year 2006 audit. Enforce the requirement that a document transmittal form listing the enclosed Daily Report of Collection Activity forms be included in transmittal packages, using such methods as more frequent inspections or increased reliance on error reports compiled by the service center teller units receiving the information. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. In 2005, Remittance Training covering the procedures for remittance processing was conducted for all TAC managers. The requirement for including a document transmittal form listing the Daily Report of Collection Activity forms in the transmittal package was emphasized. Field Assistance headquarters began operational reviews on February 28, 2006 to, among other things, ensure TAC adherence to required IRM procedures. Additional emphasis was placed on development of internal controls and the oversight and accountability of both employees and managers within Field Assistance. Specifically, Field Assurance headquarters began conducting operational reviews on February 28, 2006. The operational reviews include assessing their ability to engage employees in process and program improvement, identifying best practice ideas, ensuring elements of accountability and responsibility are clearly communicated at each level, and assessing conformance to the current policies and procedures. Open. During our fiscal year 2005 audit, we found that three of eight TACs we visited did not use a document transmittal to transmit multiple Daily Report of Collection Activity forms to their respective SCC for further processing. We will continue to evaluate IRS’s implementation of its corrective actions during our fiscal year 2006 audit. Establish a procedure for SB/SE field office units to track Document Transmittal forms and acknowledgments of receipt of Document Transmittal forms. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Open. IRS will update its procedures to clarify that the managers should ensure continuous coverage of the designated clerical contact duties so that absence due to illness or leave does not disrupt the processing of remittances. Open. IRS’s corrective actions were not implemented during our fiscal year 2005 audit. In addition, our audit continued to find numerous instances of SB/SE groups not properly tracking document transmittal forms to ensure that taxpayer receipts and information were received by the recipient. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Require evidence of managerial review of recording, transmittal, and receipt of acknowledgments of taxpayer receipts and information. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Open. IRS will establish a procedure(s) to require evidence of managerial review of recording, transmittal, and receipt of acknowledgments of taxpayer receipts and information. However, IRS will not implement any procedure requiring 100 percent managerial review. IRS’s new procedures will call for random managerial spot-checking of packages prepared for submission to Submission Processing by revenue officers working in PODs or by the designated clerical contacts in the PODs. The new procedure(s) will not call for any random managerial spot-checking of packages prepared by revenue officers working away from the POD on extended field calls or flexiplace. Instead, on those packages, IRS will continue to rely on the remittance reviews conducted by remittance processing personnel in Submission Processing. These reviews will be documented by the revenue officer group manager and be retained for the appropriate period required under record management guidelines. Open. IRS’s corrective actions were not implemented during our fiscal year 2005 audit. In addition, we continued to find numerous instances where SB/SE groups did not provide evidence that managers, or a designee, reviewed the recording, transmittal, and receipt of acknowledgements of taxpayer receipts and information to ensure that they were received and acknowledged by the recipient. We will evaluate IRS’s corrective actions during our fiscal year 2006 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS’s position is that, if followed, the procedures it has in place adequately address preventing the generation or disbursement of refunds associated with AUR accounts. IRM 3.8.45 requires employees receiving an unidentified remittance to conduct Integrated Data Retrieval System (IDRS) research to determine if there is an open account that allows for posting of the remittance. Also, AUR will partner with SP to ensure that employees receiving unidentified remittances are aware of the need to conduct IDRS research and how to properly post AUR remittances in these instances. Open. During our fiscal year 2005 audit, we found a technician in the Unidentified Remittance unit unaware of how to properly post remittances for AUR cases. We will continue to monitor IRS’s efforts in preventing the generation or disbursements of refunds associated with AUR accounts during our fiscal year 2006 financial audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. A memorandum was issued on August 3, 2005, as a reminder to solicit the annual list of authorized signatures (individuals formally delegated authority to sign manual refunds). The campuses were advised to submit a memorandum to National Office no later than October 31, certifying they had completed the request for authorized signatures. This information was also conveyed via Information Alert: W&I-IA-2002- 1149-2005, dated March 17, 2005; and will be covered by BMF headquarter staff during their unannounced visits. Open. During our fiscal year 2005 audit, we continued to find issues with the documentation requirements relating to authorizing officials charged with approving manual refunds. For example, IRS policy requires that IRS submit a memorandum identifying the personnel designated to authorize manual refunds. The list must include the name, title/position, and signature of the designated person and official issuing the memorandum. However, during our July 2005 testing, we found memorandums that were either over a year old or lacked the required information. The reminder memorandum Submission Processing issued on August 3, 2005, was issued subsequent to our July 2005 fieldwork. We will continue to follow up on IRS’s efforts to improve the documentation requirements during our fiscal year 2006 financial audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. Submission Processing issued an alert on the SP Web site on March 17, 2005. A reminder memorandum was issued on August 3, 2005. IRM check sheets were included, and campuses were required to confirm actions taken. IRS determined this item would not be included in the management accountability review process. As part of our commitment to improve the manual refund process, an attachment covering monitoring was included with the annual memorandum soliciting authorized manual refund signers. In response to the Service-wide Electronic Research Program (SERP) alert issued by Accounts Management, we included items that should be considered when Accounting Operations reviewed manual refund requests initiated by employees in the SP campuses. This will be covered by BMF headquarter staff during their unannounced visits. Open. During our fiscal year 2005 audit, we continued to find instances where the manual refund initiators did not monitor accounts to prevent duplicate refunds, and supervisors did not review the monitoring of accounts. We reviewed the alerts that IRS issued on April 1, 2005 (Monitoring Manual Refunds) and May 13, 2005 (Managerial Procedures for Manual Refunds). However, we found that some of the manual refund initiators, leads, supervisors and managers were unaware of the alerts. The reminder memorandum issued on August 3, 2005 was issued subsequent to our July 2005 testing. We will continue to review IRS’s monitoring and review efforts during our fiscal year 2006 financial audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. Submission Processing issued a reminder memorandum on August 3, 2005. IRM check sheets were included, and campuses were required to confirm actions taken. IRS determined this item would not be included in the management accountability review process. As part of our commitment to improve the manual refund process, an attachment covering monitoring was included with the annual memorandum soliciting authorized manual refund signers. In response to the SERP alert issued by Accounts Management, we included items that should be considered when Accounting Operations reviewed manual refund requests initiated by employees in the SP campuses. This will be covered by BMF headquarter staff during their unannounced visits. Open. During our fiscal year 2005 audit, we found the requirements for documenting monitoring actions and documenting supervisory review were not always enforced. The reminder memorandum issued on August 3, 2005, was issued subsequent to our July 2005 testing. We will continue to monitor IRS’s efforts in documenting the monitoring actions and documenting the supervisory review during our fiscal year 2006 financial audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. SP supports Mission Assurance in enforcing IDRS security by ensuring appropriate officials are reminded annually of their security obligations. A memorandum, including IDRS security and the Automated Command Code Access Control, was issued August 3, 2005. IRS determined this item would not be included in the management accountability review process. An overview of the Automated Command Code Access Control (ACCAC) program was included in our Annual Solicitation for Authorized Signatures – Manual Refunds memorandum, dated August 3, 2005. This will be covered by BMF headquarter staff during their unannounced visits. Open. During our fiscal year 2005 audit, we found that the requirement for the annual review of command code profiles was not always enforced. The reminder memorandum issued on August 3, 2005 was issued subsequent to our July 2005 fieldwork. We will continue to follow up on IRS’s efforts in enforcing the requirement to review command code profiles at least once annually during our fiscal year 2006 financial audit. Specify in the IRM that staff members are not to review their own command code profiles. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Open. The IRM wording will be updated, and recommendations will be included in annual reminders (memos, notices, etc.) to management officials that the approver’s manager is responsible for ensuring that approvers’ profiles have appropriate restrictions and have been reviewed. Mission Assurance updated its project Web page in January 2005, advising managers and unit security representatives to review IDRS user profiles to ensure that the appropriate restrictions have been added to the user’s profile. Limited staffing resources have impacted the actual updating of the IDRS Security Law Enforcement Manual (LEM). The LEM wording will be updated to require managers and unit security representatives to review the IDRS security profiles to ensure that appropriate restrictions have been placed against the user’s IDRS account. The LEM is expected to be revised by July 15, 2006. Open. During our fiscal year 2005 audit, we found that the IRM wording to specify that staff members to not review their own command code profiles had not been updated. We will continue to monitor IRS’s efforts in preventing staff members to review their own command code profiles during our fiscal year 2006 audit. Specify in the IRM how to properly verify interest and penalties for accounts with liens with manually calculated interest or penalties. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr. 27, 2005) Closed. IRS revised the IRM to instruct employees to check the IDRS to determine if restricted interest or penalty is due. The IRM now clearly states that there are only two instances where restricted interest and penalty should not be computed, offer-in- compromise and bankruptcy cases. Also, instructions for computing restricted interest and penalty are found in the ALS User Guide as well as in training material and desk guides. In addition, tax examiners hired to staff the Centralized Case Processing (CCP), Lien Processing Unit were provided hands-on training in the computation of restricted interest and penalty. Resolution of these cases moved to CCP effective February 2005. The centralized site has created a special group of employees who were trained in the resolution of restricted interest and penalty cases. New hires for this group will also receive this training. The LEM will be updated to reflect the changes made by the RIS. Open. According to IRS, an internal study determined that the dollar amounts of additional interest and penalty to be assessed on cases with liens requiring manual calculations was not significant. Consequently, IRS is in the process of revising the IRM to no longer require the additional manual computation and assessment of interest and penalty on such cases. In addition, IRS updated its computer programs to automatically release liens once the current account balance had been satisfied. IRS’s actions are based on its determination that the additional interest and penalty amounts are not significant. We will review the results of IRS’s internal analysis during our fiscal year 2006 audit. Require that Refund Inquiry Unit managers or supervisors document their review of all forms used to record and transmit returned refund checks prior to sending them for final processing. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Enforce compliance with existing requirements that all IRS units transmitting taxpayer receipts and information from one IRS facility to another, including SCCs, TACs, and units within LMSB and TE/GE, establish a system to track acknowledged copies of document transmittals. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Provide instructions to document the follow- up procedures performed in those cases where transmittals have not been timely acknowledged. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Require that managers or supervisors document their reviews of document transmittals to ensure that taxpayer receipts and/or taxpayer information mailed between IRS locations are tracked according to guidelines. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Equip all TACs with adequate physical security controls to deter and prevent unauthorized access to restricted areas or office space occupied by other IRS units, including those TACs that are not scheduled to be reconfigured to the “new TAC” model in the near future. This includes appropriately separating customer service waiting areas from restricted areas by physical barriers such as locked doors marked with signs barring entrance by unescorted customers. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Connect duress alarms to a central monitoring station or local police department or institute appropriate compensating controls when these alarm systems are not operable or in place. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Document supervisory visits by offsite managers to TACs not having a manager permanently on-site. This documentation should be signed by the manager and should (1) record the time and date of the visit, (2) identify the manager performing the visit, (3) indicate the tasks performed during the visit, (4) note any problems identified, and (5) describe corrective actions planned. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Enforce the requirement that all security or other responsible personnel at SCCs and lockbox banks record all instances involving the activation of intrusion alarms regardless of the circumstances that may have caused the activation. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Reemphasize the need for the security guards at all TACs to ensure that key PODs, such as entrances to facilities, are not left unattended. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Revise lockbox bank’s security review checklist to ensure that it encompasses reviewing security incident reports to validate whether security personnel are providing corrective actions related to the incidents cited. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Refine the scope and nature of its periodic reviews of candling processes at SCCs to ensure they (1) encompass tests of whether envelopes are properly candled through observation of candling in process and inquiry of employees who perform initial and final candling, and (2) document the nature and scope of the test and observation results. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. Enforce its existing policies and procedures at lockbox banks to ensure that all remittances of $50,000 or more are processed immediately and deposited at the first available opportunity. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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-06-543R, May 12, 2006) 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. Refine the scope and nature of its periodic security reviews to encompass (1) testing the effectiveness of controls intended to ensure that only individuals with proper credentials are permitted access to SCCs and lockbox banks, and (2) reviewing the integrity of perimeter security at SCCs. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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-06-543R, May 12, 2006) 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-06-543R, May 12, 2006) 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. Require IRS personnel to verify the information on the form 13094 by contacting the reference directly. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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-06-543R, May 12, 2006) 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. Establish procedures for hiring juveniles who do not have a current teacher, principal, counselor, employer or former employer, and clarify that IRS’s current policies and procedures should not be interpreted to mean that such juveniles should be allowed access to taxpayer receipts and information without a form 13094 or its equivalent. These procedures could include a list of acceptable alternatives that may serve as references for juveniles who do not have a current teacher, principal, or guidance counselor. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. To assure proper accounting treatment of expense and P&E transactions and reliable financial reporting, we recommend that IRS enforce its property and equipment capitalization policy to ensure that it is properly implemented to fully achieve management’s objectives, including recognizing assets when its capitalization criteria is met and recognizing expenses when it is not. (short- term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) 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. reports when an asset remains in pending disposal status for longer than a specified period of time. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. In March 2006 the chief information officer (CIO) property program manager informed GAO that issues raised in the FY 2005 Financial Statement Audit are being addressed via a re- engineering effort focused on the entire asset retirement and disposal process. As such, reports are currently available to monitor aging transactions during the disposal life cycle. Additionally, procedures are being developed to require reviews of aging reports for the timely recording of disposal transactions. Substantial software modifications are being designed to improve the recording of information by replacing manual data entry methods by using electronic forms, signatures, and processes. In August 2006 these modifications and review procedures will be implemented to streamline the recording of asset disposal activity as required by IRS policy. Open. This is a recent recommendation. We will review IRS’s corrective actions during future audits. Direct Facilities Management Branch managers to research and resolve the aging reports. (short-term) Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. AWSS and CIO property managers have been working on reengineering the entire asset retirement and disposal process to mitigate issues raised in GAO’s FY 2005 Financial Statement Audit. CIO staff reported on that initiative to GAO in March 2006. As such, reports are currently available for management to monitor the status of aging transaction dates until the disposal process is complete. Also, review procedures are being developed to streamline the process to ensure the timely recording of disposal transactions. In August 2006, reengineered process modifications and review procedures will be implemented and guidance for conducting reviews will be issued. Open. This is a recent recommendation. We will review IRS’s corrective actions during future audits. The following individuals made major contributions to this report: William J. Cordrey, Charles Fox, Paul Foderaro, Nina Crocker, John Davis, Charles Ego, David Elder, Ted Hu, Jerrod O’Nelio, John Sawyer, Peggy Smith, Lisa Warde, Gary Wiggins, and Mark Yoder. | In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility in annually collecting over $2 trillion 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 fit into IRS's overall management and internal control structure. IRS has made significant progress in improving its internal controls and financial management since its first financial audit in 1992, as evidenced by 6 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and the closing of over 200 financial management recommendations. This progress has been the result of hard work and 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 2005 financial statements, 84 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 2005 financial audit, IRS took actions that enabled GAO to close 34 of those recommendations. At the same time, GAO identified additional internal control deficiencies resulting in 22 new recommendations. In total, 72 recommendations currently remain open. To assist IRS in evaluating its internal controls and in making improvements, GAO categorized the 72 open recommendations by various internal control activities which, in turn, were grouped into three broad control activity groupings. 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. IRS stated that it is taking action to address the recommendations included in the report. GAO will review the effectiveness of these corrective actions and the status of IRS's progress as part of the fiscal year 2006 audit. |
Historically, the mining of hardrock minerals, such as gold, lead, copper, silver, and uranium, was an economic incentive for exploring and settling the American West. However, when the ore was depleted, miners often left behind a legacy of abandoned mines, structures, safety hazards, and contaminated land and water. Even in more recent times, after cleanup became mandatory, many parties responsible for hardrock mining sites have been liquidated through bankruptcy or otherwise dissolved. Under these circumstances, some hardrock mining companies have left it to the taxpayer to clean up the mining site. BLM, the Forest Service, EPA, and OSM play a role in cleaning up these abandoned mining sites and ensuring that currently operating sites are reclaimed after operations have ceased. BLM and the Forest Service are responsible for managing more than 450 million acres of public lands in their care, including land disturbed and abandoned by past hardrock mining activities. BLM manages about 258 million acres in 12 western states, including Alaska. The Forest Service manages about 193 million acres across the nation. In 1997, BLM and the Forest Service each launched a national Abandoned Mine Lands Program to remedy the physical and environmental hazards at thousands of abandoned hardrock mines on the federal lands they manage. According to a September 2007 report by these two agencies, they had inventoried thousands of abandoned sites and, at many of them, had taken actions to clean up hazardous substances and mitigate safety hazards. BLM and the Forest Service are also responsible for managing and overseeing current hardrock operations on their lands, including the mining operators’ reclamation of the land disturbed by hardrock mining. Although reclamation can vary by location, it generally involves such activities as regrading and reshaping the disturbed land to conform with adjacent land forms and to minimize erosion; removing or stabilizing buildings and other structures to reduce safety risks; removing mining roads to prevent damage from future traffic; and establishing self- sustaining vegetation. One of the agencies’ key responsibilities is to ensure that adequate financial assurances, based on sound reclamation plans and cost estimates, are in place to guarantee reclamation costs. If a mining operator fails to complete required reclamation, BLM or the Forest Service can take steps to obtain funds from the financial assurance provider to complete the reclamation. BLM requires financial assurances for both notice-level hardrock mining operations—those disturbing 5 acres of land or less—and plan-level hardrock mining operations—those disturbing over 5 acres of land and those in certain designated areas, such as the national wild and scenic rivers system. For hardrock operations on Forest Service lands, agency regulations require reclamation of sites after operations cease, but do not require financial assurances for the reclamation. However, according to a Forest Service official, if the proposed hardrock operation is likely to cause a significant disturbance, the Forest Service requires financial assurances. Both agencies allow several types of financial assurances to guarantee estimated reclamation costs for hardrock operations on their lands. According to regulations and agency officials, BLM and the Forest Service allow cash, letters of credit, certificates of deposit or savings accounts, and negotiable U.S. securities and bonds in a trust account. BLM also allows surety bonds, state bond pools, trust funds, and property. Neither agency centrally tracks all the types of financial assurances in place for hardrock operations on its lands. BLM’s LR2000 tracks most of the types, and BLM is updating the database to include more types of financial assurances, but data are incomplete for the types of assurances currently in the system. The Forest Service does not have readily available information on the types of financial assurances in use, but it is developing a database to collect this and other information on hardrock operations by late summer 2008, according to Forest Service officials. EPA administers the Superfund program, which was established under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to address the threats that contaminated waste sites, including those on nonfederal lands, pose to human health and the environment. The act also requires that the parties statutorily responsible for pollution bear the cost of cleaning up contaminated sites, including abandoned hardrock mining operations. Some contaminated hardrock mine sites have been listed on Superfund’s National Priorities List—a list of seriously contaminated sites. Typically, these sites are expensive to clean up and the cleanup can take many years. According to EPA’s Office of Inspector General in 2004, 63 hardrock mining sites were on the National Priorities List and another 93 sites had the potential to be added to the list. Regarding financial assurances, EPA has statutory authority under the Superfund program to require businesses handling hazardous substances on nonfederal lands to provide financial assurances, and according to agency officials, is currently exploring options for implementing this authority. OSM’s Abandoned Mine Land Program primarily focuses on cleaning up abandoned coal mine sites. However, OSM, under amendments to the Surface Mining Control and Reclamation Act (SMCRA) of 1977, can provide grants to fund the cleanup and reclamation of certain hardrock mining sites either (1) after a state certifies that it has cleaned up its abandoned coal mine sites and the Secretary of the Interior approves the certification, or (2) at the request of a state or Indian tribe to address problems that could endanger life and property, constitute a hazard to the public and safety, or degrade the environment, and the Secretary of the Interior grants the request. OSM has provided more than $3 billion to clean up dangerous abandoned mine sites. Its Abandoned Mine Land Program has eliminated safety and environmental hazards on 314,108 acres since 1977, including all high-priority coal problems and non-coal problems in 27 states and on the lands of three Indian tribes. Between fiscal years 1998 and 2007, the four federal agencies we examined—BLM, the Forest Service, EPA, and OSM—spent at least $2.6 billion to reclaim abandoned hardrock mines on federal, state, private, and Indian lands. EPA has spent the most—$2.2 billion. Although the amount each agency spent annually varied considerably, the median amount spent for the public lands by BLM and the Forest Service was about $5 million and about $21 million, respectively. EPA spent substantially more—a median of about $221 million annually—to clean up mines that are generally on nonfederal lands. Finally, OSM provided grants with an annual median value of about $18 million to states and Indian tribes through its SMCRA program for hardrock mine cleanups. Table 1 summarizes information on expenditures and hardrock mine cleanup activities at BLM, the Forest Service, EPA, and OSM. See appendix II for more detailed information on agency expenditures by fiscal year. According to available data, as of September 30, 2007, BLM had spent the largest share of its funds in Montana—about $18 million; EPA had spent the largest share of its funds in Idaho—about $352 million; and Wyoming was the largest recipient of OSM grants for cleaning up hardrock mine sites—receiving about $99 million. Wyoming was eligible for OSM grants after OSM’s acceptance of the state’s certification that it had completed its cleanup of coal mine sites. The Forest Service was unable to provide this information by state. See appendix II for BLM, EPA, and OSM total funding by state. Previous state estimates of the number of abandoned hardrock mine sites vary widely in the six studies that we reviewed because, in part, there is no generally accepted definition for a hardrock mine site and the studies rely on the states’ different definitions of hardrock mine sites. In addition, we found problems with BLM’s and the Forest Service’s estimate of 100,000 abandoned hardrock mines on their lands because the agencies included non-hardrock mines and mines that may not be on their lands. Using our consistent definition, 12 western states and Alaska estimated a total of at least 161,000 abandoned hardrock mine sites in their states on state, private, or federal lands. We identified six studies conducted in the past 10 years that estimated the number of abandoned hardrock mine sites in the 12 western states and Alaska. The estimates in each of these studies were developed by asking states to provide data on the number of abandoned hardrock mine sites in their states, generally without regard to whether the mine was on federal, state, Indian, or private lands. The estimates for a particular state do, in some cases, vary widely from study to study. For example, for Nevada, the Western Governors’ Association/National Mining Association estimated that the state had 50,000 abandoned hardrock mine sites in 1998, while in 2004 EPA estimated that the state had between 200,000 to 500,000 abandoned sites. The estimates also reflect the different definitions that states used for abandoned hardrock mining sites for a given study. For example, we found that, within the same study, some states define an abandoned mine site as a mine opening or feature, while others define a site as all associated mine openings, features, or structures at a distinct location. As a result, an abandoned hardrock operation with two mine openings, a pit, and a tailings pile could be listed as one site or four sites, depending on the definitions and methodologies used. See appendix III for more information on estimates from these studies. In addition, some regional or state estimates included coal and other non- hardrock mineral sites because it was (1) not important to distinguish between the type of minerals mined or (2) difficult to determine what mineral had been mined. In 2004, EPA commented on this problem, noting, “it is important to keep in mind that a universally applied definition of an does not exist at present…therefore, the various agencies and state-developed…inventories presented may possess inconsistencies and are not intended for exact quantitative comparisons.” BLM and the Forest Service have also had difficulty determining the number of abandoned hardrock mines on their lands and have no definitive estimates. In September 2007, the agencies reported that there were an estimated 100,000 abandoned hardrock mine sites, but we found problems with this estimate. For example, the Forest Service had reported that it had approximately 39,000 abandoned hardrock mine sites on its lands. However, we found that this estimate includes a substantial number of non-hardrock mines, such as coal mines, and sites that are not on Forest Service land. At our request, in November 2007, the Forest Service provided a revised estimate of the number of abandoned hardrock mine sites on its lands, excluding coal or other non-hardrock sites. According to this estimate, the Forest Service may have about 29,000 abandoned hardrock mine sites on its lands. That said, we still have concerns about the accuracy of the Forest Service’s recent estimate because it includes a large number of sites on lands with “undetermined” ownership, and therefore these sites may not all be on Forest Service lands. BLM has also acknowledged that its estimate of abandoned hardrock mine sites on its lands may not be accurate because it includes sites on lands that are of unknown or mixed ownership (state, private, and federal) and a few coal sites. In addition, BLM officials said that the agency’s field offices used a variety of methods to identify sites in the early 1980s, and the extent and quality of these efforts varied greatly. For example, they estimated that only about 20 percent of BLM land has been surveyed in Arizona. Furthermore, BLM officials said that the agency focuses more on identifying sites closer to human habitation and recreational areas than on identifying more remote sites, such as in the desert. Table 2 shows the Forest Service’s and BLM’s most recent available estimates of abandoned mine sites on their lands. To estimate abandoned hardrock mining sites in the 12 western states and Alaska, we developed a standard definition for these mine sites. In developing this definition, we consulted with mining experts at the National Association of Abandoned Mine Land Programs; the Interstate Mining Compact Commission; and the Colorado Department of Natural Resources, Division of Reclamation, Mining and Safety, Office of Active and Inactive Mines. We defined an abandoned hardrock mine site as a site that includes all associated facilities, structures, improvements, and disturbances at a distinct location associated with activities to support a past operation, including prospecting, exploration, uncovering, drilling, discovery, mine development, excavation, extraction, or processing of mineral deposits locatable under the general mining laws. We also asked the states to estimate the number of features at these sites that pose physical safety hazards and the number of sites with environmental degradation. See appendix I for the complete definition we used when asking states for their estimates. Using this definition, states reported to us the number of abandoned sites in their states, and we estimated that there are at least 161,000 abandoned hardrock mine sites in their states. At these sites, on the basis of state data, we estimated that at least 332,000 features may pose physical safety hazards, such as open shafts or unstable or decayed mine structures; and at least 33,000 sites have degraded the environment, by, for example, contaminating surface water and groundwater or leaving arsenic- contaminated tailings piles. Table 3 shows our estimate of the number of abandoned hardrock mine sites in the 12 western states and Alaska, the number of features that pose significant public health and safety hazards, and the number of sites with environmental degradation. While states used our definition to provide data on the estimated number of mine sites and features, these data have two key limitations. First, the methods and sources used to identify and confirm abandoned sites and hazardous features vary substantially by state. For example, some states, such as Colorado and Wyoming, indicated they had done extensive and rigorous fieldwork to identify sites and were reasonably confident that their estimates were accurate. Other states, however, relied less on rigorous fieldwork, and more on unverified, readily available records or data sources, such as published or unpublished geological reports, mining claim maps, and the Mineral Availability System/Mineral Industry Locator System (MAS/MILS), which states indicated were typically incomplete. Several of those states that relied primarily on literature used the literature only as a starting point, and then estimated the number of features on the basis of experience. For example, while one state estimated that there were about three times the number of public safety hazards as identified by the literature, another state estimated that there were four times as many, and a third state estimated that there were up to six times as many. Second, because states have markedly different data systems and requirements for recording data on abandoned mines, some states were less readily able to provide the data directly from their systems without manipulation or estimation. For example, New Mexico estimated the number of abandoned mine sites from the data it maintains on hazardous features, and Nevada estimated the number of abandoned hardrock mine sites from the data it maintains on the number of mining districts in the state. As of November 2007, hardrock mining operators had provided financial assurances valued at approximately $982 million to guarantee the reclamation costs for 1,463 hardrock mining operations on BLM lands in 11 western states, according to BLM’s Bond Review Report. The report also indicates that 52 of the 1,463 hardrock mining operations had inadequate financial assurances—about $28 million less than needed to fully cover estimated reclamation costs. We determined, however, that the financial assurances for these 52 operations should be more accurately reported as about $61 million less than needed to fully cover estimated reclamation costs. Table 4 shows total hardrock mining operations by state, the number of operations with inadequate financial assurances, the financial assurances required, BLM’s calculation of the shortfall in assurances, and our estimate of the shortfall, as of November 2007. The $33 million difference between our estimated shortfall of nearly $61 million and BLM’s estimated shortfall of nearly $28 million occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the financial assurances of other operations. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, we totaled the difference between the financial assurance in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM’s approach to determining the adequacy of financial assurances is not useful because it does not clearly lay out the extent to which financial assurances are inadequate. For example, in California, BLM reports that, statewide, the financial assurances in place are $1.5 million greater than required, suggesting reclamation costs are being more than fully covered. However, according to our analysis of only those California operations with inadequate financial assurances, the financial assurances in place are nearly $440,000 less than needed to fully cover reclamations costs. BLM officials agreed that it would be valuable for the Bond Review Report to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate and have taken steps to modify LR2000. BLM officials said that financial assurances may appear inadequate in the Bond Review Report when expansions or other changes in the operation have occurred, thus requiring an increase in the amount of the financial assurance; BLM’s estimate of reclamation costs has increased and there is a delay between when BLM enters the new estimate into LR2000 and when the operator provides the additional bond amount; and BLM has delayed updating its case records in LR2000. Conversely, hardrock mining operators may have financial assurances greater than required for a number of reasons; for example, they may increase their financial assurances because they anticipate expanding their hardrock operations. In addition, according to the Bond Review Report, there are about 2.4 times as many notice-level operations—operations that cause surface disturbance on 5 acres or less—as there are plan-level operations on BLM land—operations that disturb more than 5 acres (1,033 notice-level operations and 430 plan-level operations). However, about 99 percent of the value of financial assurances is for plan-level operations, while 1 percent of the value is for notice-level operations. While financial assurances were inadequate for both notice- and plan-level operations, a greater percentage of plan-level operations had inadequate financial assurances than did notice-level operations—6.7 percent and 2.2 percent, respectively. Finally, over one-third of the number of all hardrock operations and about 84 percent of the value of all financial assurances are for hardrock mining operations located in Nevada. See appendix IV for further details on the number of plan- and notice-level operations in each state. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Robin M. Nazzaro, Director, Natural Resources and Environment (202) 512-3841 or [email protected]. Key contributors to this testimony were Andrea Wamstad Brown (Assistant Director); Casey L. Brown; Kristen Sullivan Massey; Rebecca Shea; and Carol Herrnstadt Shulman. To determine the (1) federal funds spent to clean up abandoned hardrock mine sites since 1998, (2) number of abandoned hardrock mine sites and the number of associated hazards, and (3) value and coverage of the financial assurances operators use to guarantee reclamation costs on the Department of the Interior’s Bureau of Land Management (BLM) land, we interviewed officials at the BLM, the U.S. Department of Agriculture’s Forest Service, the Environmental Protection Agency (EPA), and the Department of the Interior’s Office of Surface Mining Reclamation and Enforcement (OSM); examined agency documents and data; and reviewed relevant legislation and regulations. Specifically, to answer our first objective, we interviewed officials involved with the abandoned mine cleanup programs at BLM, the Forest Service, EPA, and OSM to request expenditure data, to understand how they tracked and monitored expenditures to clean up abandoned hardrock mines, and to request and ensure that we would receive the data we needed. We reviewed agency documents, budget justification reports and reports detailing agencies’ cleanup efforts and programs. We obtained data on total expenditures for cleaning up and reclaiming abandoned hardrock mine sites that were compiled from BLM’s Financial Accounting and Reporting System, EPA’s Superfund eFacts Database, OSM’s Abandoned Mine Land Inventory System, and Forest Service officials. BLM officials told us that in addition to the expenditure data they provided, the agency receives funding allocations from other sources, such as the Department of the Interior’s Central Hazardous Materials fund. Since BLM does not track the expenditures from these other sources, we were unable to provide this information. Because the four agencies’ abandoned hardrock mine programs started in different years, start years for expenditure data vary. Specifically, BLM’s data were for fiscal years 1997 through 2007; Forest Service’s data, for fiscal years 1996 through 2007; EPA’s data, for fiscal years 1988 through 2007; and OSM’s data, for fiscal years 1993 to 2007. We performed a limited reliability assessment of the expenditure data and determined that we would limit our year-by-year presentation of expenditure data to the past 10 years (1998 through 2007) because of (1) variability in the program start year across the agencies, (2) inconsistencies across the agencies in their methods for tracking and reporting the data, and (3) some data recording errors in early years at some agencies. We presented these data in 2008 constant dollars. Because of limited time in preparing this testimony, we were unable to fully assess the reliability of the agencies’ expenditure data and the data are therefore of undetermined reliability. However, we concluded that the data are appropriate as used and presented to meet our objectives because we (1) attribute the data to what agencies report as their expenditures, (2) present rounded data to minimize the perception of precision, and (3) do not base any conclusions or recommendations on the data. To answer our second objective, we summarized selected prior survey efforts by federal agencies and organizations to document differences in estimates, definitions, and methodologies. We also consulted experts in mining and abandoned mine land programs at the National Association of Abandoned Mine Land Programs; the Interstate Mining Compact Commission; and the Colorado State Department of Natural Resources, Division of Reclamation, Mining and Safety, Office of Active and Inactive Mines to develop a standard definition for estimating the number of abandoned hardrock mine sites, features, and sites with environmental degradation. Other efforts to assess the magnitude of the abandoned mine situation have acknowledged limitations in their efforts to develop a nationwide estimate because of inconsistencies in states’ definitions and methods for estimating abandoned sites. Consequently, through iterative consultation with state and other mining experts, the definition we ultimately chose was clear and incorporated enough flexibility for all major hardrock mining states—the 12 western states and Alaska—to reasonably comply with our request, despite differences in how the states might define and maintain abandoned mine data. We then provided states with an edit-controlled data collection instrument that requested data specifically tailored to our definitions and methods. Our definition of abandoned hardrock mine sites includes all associated facilities, structures, improvements, and disturbances at a distinct location associated with activities to support a past operation, including prospecting, exploration, uncovering, drilling, discovery, mine development, excavation, extraction, or processing of mineral deposits locatable under the general mining laws; can range from an isolated prospect shaft and its associated waste rock pile and adjacent prospect pits, to a complex site with multiple entries, shafts, open pits, mill buildings, waste rock piles, a tailings pond, and associated environmental problems; and includes only hardrock (also known as locatable), non-coal sites. Features that pose a significant hazard to public health and safety include features, such as mine openings, structures, and highwalls; and impoundments that pose a threat to public health and safety and require actions to secure, remedy or reclaim. Sites with environmental degradation include features that lead to environmental degradation, and, consequently, require remediation of air, water, or ground pollution. Rather than reporting, as requested, the number of features leading to environmental degradation, most states reported only the number of sites with environmental degradation, if they reported data for this request at all. Because most states do not maintain environmental degradation data by feature, states could only speculate about this figure, or compute it by estimating an average number of features per site and multiplying that by the overall number of sites with environmental degradation. Because of these limitations with feature-level data, we report only the number of sites with data on environmental degradation in order to ensure more reliable and consistent reporting across the states. As a secondary confirmation that states provided data consistent with the definition, our data collection instrument included a section for states to provide a brief description of how the various data points were calculated, and whether the data provided were actual or estimated values. Based on comments in these fields, and basic logic checks on the data, we followed up as needed through telephone interviews to clarify and confirm problematic responses. Our definitional and editing processes provided us with reasonable assurance that the data were as clean and consistent as possible, and using these final edited data, we calculated the estimated number of abandoned mine sites, the number of features that pose physical safety and environmental hazards, and the number of abandoned mine sites with environmental degradation in the 12 western states and Alaska. To answer our third objective—to determine the value and coverage of financial assurances in place to guarantee coverage of reclamation costs— we requested the BLM Bond Review Report from BLM’s Legacy Rehost System 2000 (LR2000) database. Because we had previously reported reliability problems with data on financial assurances in LR2000, we conducted a limited reliability assessment of the bond report data. This limited assessment included (1) basic logic checks on the data we received, (2) interviews with BLM minerals management officials knowledgeable of the changes made to LR2000 to address GAO’s 2005 recommendations, and (3) a review of BLM’s June 14, 2006, Instruction Memorandum 2006-172 for processing and entering Bond Review Report data in LR2000. Although the data are of undetermined reliability, our limited assessment indicates that management controls were improved for the generation of bond review reports from LR2000. We concluded that the data are appropriate as used and presented, and we did not base any conclusions or recommendations on these data. This appendix provides information on federal expenditures used to clean up abandoned hardrock mines by fiscal year (table 5) and by state (table 6). Range of estimated abandoned mines previously (2001) (2007) Mineral Policy Center (2003) Earthworks (formerly Mineral Policy Center) (2007) (2004) “openings” No data provided Western Governors’ Association and National Mining Association, Cleaning Up Abandoned Mines: A Western Partnership, 1998. This appendix provides information from BLM’s November 2007 Bond Review Report, which includes information on the number of financial assurances in place for hardrock operations on BLM lands in 11 western states (table 7); the value of these financial assurances by state (table 8); the number of inadequate financial assurances for notice- and plan-level operations, by state (table 9); and BLM’s and our analyses of the differences between financial assurance requirements and actual value of financial assurances in place for notice- and plan-level operations by state (table 10). | The Mining Act of 1872 helped foster the development of the West by giving individuals exclusive rights to mine gold, silver, copper, and other hardrock minerals on federal lands. However, miners often abandoned mines, leaving behind structures, safety hazards, and contaminated land and water. Four federal agencies--the Department of the Interior's Bureau of Land Management (BLM) and Office of Surface Mining Reclamation and Enforcement (OSM), the Forest Service, and the Environmental Protection Agency (EPA)--fund the cleanup of some of these sites. To curb further growth in the number of abandoned hardrock mines on federal lands, in 1981 BLM began requiring mining operators to reclaim lands when their operations ceased. In 2001, BLM began requiring all operators to provide financial assurances to guarantee funding for reclamation costs if the operator did not complete the task as required. This testimony provides information on the (1) federal funds spent to clean up abandoned hardrock mine sites since 1998, (2) number of abandoned hardrock mine sites and hazards, and (3) value and coverage of financial assurances operators use to guarantee reclamation costs on BLM land. To address these issues, GAO, among other steps, asked 12 western states and Alaska to provide information on the number of abandoned mine sites and associated features in their states using a consistent definition. Between fiscal years 1998 and 2007, BLM, the Forest Service, EPA, and OSM spent at least $2.6 billion (in 2008 constant dollars) to reclaim abandoned hardrock mines. BLM and the Forest Service have reclaimed abandoned hardrock mine sites on the lands they manage; EPA funds the cleanup of these sites, primarily on nonfederal lands through its Superfund program; and OSM provides some grants to states and Indian tribes to clean up these sites on their lands. Of the four agencies, EPA has spent the most--about $2.2 billion (in 2008 constant dollars) for mine cleanups. BLM and the Forest Service spent about $259 million (in 2008 constant dollars), and OSM awarded grants totaling about $198 million (in 2008 constant dollars) to support the cleanup of abandoned hardrock mines. Over the last 10 years, estimates of the number of abandoned hardrock mining sites in the 12 western states and Alaska have varied widely, in part because there is no generally accepted definition for a hardrock mine site. Using a consistent definition that GAO provided, 12 western states and Alaska provided estimates of abandoned hardrock mine sites. On the basis of these data, GAO estimated a total of at least 161,000 such sites in these states with at least 332,000 features that may pose physical safety hazards and at least 33,000 sites that have degraded the environment. According to BLM's information on financial assurances as reported in its November 2007 Bond Review Report, mine operators had provided financial assurances valued at approximately $982 million to guarantee reclamation costs for 1,463 hardrock operations on BLM land. The report also estimates that 52 mining operations have financial assurances that amount to about $28 million less than needed to fully cover estimated reclamation costs. However, GAO found that the financial assurances for these 52 operations are in fact about $61 million less than needed to fully cover estimated reclamation costs. The $33 million difference between GAO's estimated shortfall and BLM's occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This calculation approach has the effect of offsetting the shortfalls in some operations with the financial assurances of other operations. However, financial assurances that are greater than the amount required for an operation cannot be transferred to another operation that has inadequate financial assurances. BLM officials agreed that it would be valuable for the Bond Review Report to report the dollar value of the difference between financial assurances in place and required for those operations where financial assurances are inadequate, and BLM has taken steps to correct this. GAO discussed the information in this testimony with officials from the four federal agencies, and they provided GAO with technical comments, which were incorporated as appropriate. |
At the federal level, CMS, within the Department of Health and Human Services (HHS), is responsible for overseeing the design and operation of states’ Medicaid programs, and states administer their respective Medicaid programs’ day-to-day operations. In conformance with federal requirements, states establish beneficiaries’ eligibility for Medicaid, and determine the services that will be provided to beneficiaries and how they will be provided in their state. Eligibility for Medicaid is based on a variety of categorical and financial requirements. Historically, categories of Medicaid eligibility included pregnant women, low-income children and their parents, individuals who are aged, and individuals with disabilities. In 2014, certain low-income adults who did not fall into one of these groups may be eligible for Medicaid in states that chose to expand coverage to these individuals under PPACA. Dual-eligible beneficiaries, who are eligible for both Medicaid and Medicare, generally fall into two categories: (1) low-income seniors (individuals aged 65 years old and over) and (2) individuals with disabilities under the age of 65. While some characteristics of state programs vary, Medicaid generally covers a wide range of health care services. These include hospital care; outpatient services, such as physician services, laboratory and other diagnostic tests; prescription drugs; dental care; and LTSS in institutions Non-institutional LTSS include home health and and in the community.personal care services, among other services. Medicaid is the nation’s primary payer for LTSS, and provided approximately 41 percent of LTSS funding in the United States in 2010. As we have previously reported, nearly all states enroll some Medicaid beneficiaries in a form of managed care. the scope of services they provide and the populations they enroll in managed care. Some states contract with managed care organizations to provide the full range of covered Medicaid services to certain enrollees, for which they pay a set, or capitated, amount per member per month. Alternatively, states may rely on arrangements, such as limited benefit plans—which provide a limited set of services, including dental care or behavioral health services—or primary care case management programs in which enrollees are assigned a primary care provider who is responsible for providing primary care services and for coordinating other needed health care. States often provide long-term care services outside of managed care arrangements. GAO, Medicaid: States’ Use of Managed Care, GAO-12-872R (Washington, D.C.: Aug. 17, 2012). top 10 percent of Medicaid spending were responsible for 51 percent of Medicaid spending on dual-eligible beneficiaries. The research also indicates that there is a subset of Medicaid-only beneficiaries who are very costly, such as those with institutional care needs or chronic conditions. One study showed that high-expenditure Medicaid beneficiaries in 2001 included subgroups from each eligibility category, with the elderly and disabled making up the greatest shares of this high-expenditure group. The largest portions of spending were for hospital care for children and adults, intermediate care for individuals with disabilities, and nursing home care for the elderly. showed that annual per capita expenditures ranged from $8,000 to nearly $16,000 for Medicaid beneficiaries with chronic conditions, including asthma, coronary heart disease, congestive heart failure, diabetes, or hypertension. This study also noted that annual per capita expenditures may double and sometimes triple when single chronic conditions are coupled with mental illness and a drug or alcohol disorder. Intermediate care included intermediate care facility services for persons with intellectual disabilities, services in institutions for mental disease for the elderly, and inpatient psychiatric care under age 21. Kaiser Family Foundation, Medicaid’s High Cost Enrollees (Washington, D.C.: March 2006). beneficiaries (less than 1 percent of the total Medicaid population) and 21.9 percent of total Medicaid expenditures on other dual-eligible beneficiaries (13.8 percent of total Medicaid beneficiaries). (See fig. 1). At the beneficiary level, per-capita spending on high-expenditure Medicaid-only beneficiaries greatly exceeded that of all other Medicaid- only beneficiaries, but was less than what was spent on high-expenditure dual-eligible beneficiaries. (See table 1.) Overall, per capita spending by states on high-expenditure Medicaid-only beneficiaries was approximately 18 times higher than per capita spending on all other Medicaid-only beneficiaries. This was similar to the pattern of spending for dual-eligible beneficiaries, with per capita spending significantly higher for high- expenditure dual-eligible beneficiaries compared with all other dual- eligible beneficiaries. At the state level, there was wide variation in spending per capita on high- expenditure Medicaid-only beneficiaries. (See fig. 2.) Per-capita expenditures by state per beneficiary ranged from $20,896 to $83,365. Key characteristics—such as having a disability, having certain conditions, delivery/childbirth, and residing in a LTC facility—were strongly associated with being a high-expenditure Medicaid-only beneficiary. These key characteristics had consistently strong associations with being a high-expenditure Medicaid-only beneficiary even when the data were examined separately for each eligibility group. We found that about two-thirds of the high-expenditure group was comprised of beneficiaries who were eligible for Medicaid due to disability. only beneficiary was 18.3 percent for disabled Medicaid-only beneficiaries, which was higher than for any other eligibility group. (See table 2.) In contrast, non-disabled children and adult beneficiaries each had less than a 3 percent probability of being in the high-expenditure group, but made up 16.1 and 15 percent, respectively, of the high- expenditure Medicaid-only beneficiaries. Overall, hospital services and LTSS represented the bulk of spending for high expenditure Medicaid-only beneficiaries—almost 65 percent. In contrast, payments to managed care organizations and premium assistance constituted the largest proportion of expenditures for all other Medicaid-only beneficiaries. In addition, when we examined Medicaid- only high-expenditure and other beneficiaries separately by eligibility group, the differences in service use were generally consistent, but the proportion of expenditures for the different services varied. Separately examining high-expenditure Medicaid-only beneficiaries in LTC institutions and beneficiaries with spending in the top 1 percent of expenditures showed that these beneficiaries had the highest spending for hospital services and LTSS. For high-expenditure Medicaid-only beneficiaries as a whole, hospital services comprised 30.6 percent, LTSS in non-institutional settings comprised 24.3 percent, and LTSS in institutions comprised 9.7 percent of their expenditures. Other expenditures were for drugs, managed care and premium assistance, and non-hospital acute care. In contrast to high- expenditure Medicaid-only beneficiaries, the largest share of total expenditures for all other Medicaid-only beneficiaries was for managed care and premium assistance (57.2 percent), followed by non-hospital acute care (16.6 percent), hospital services (11.9 percent), drugs (9.7 percent) and LTSS in non-institutional settings (4.5 percent). (See fig. 3.) The general pattern of greater hospital and LTSS service use by high expenditure Medicaid-only beneficiaries compared with greater spending on managed care and premium support by all other Medicaid-only beneficiaries was consistent across eligibility groups. However, there were some differences in expenditures by eligibility category among high- expenditure Medicaid-only beneficiaries and all other Medicaid-only beneficiaries. Beneficiary Profile Beneficiary A was a 61-year-old disabled African American male in 2009, with $73,539 in total Medicaid expenditures in that year. He was not enrolled in managed care at any point in the year. He was indicated to have diabetes, a mental health condition, and resided in a long-term care facility. His expenditures were highly concentrated in LTSS non-institutional care (81.9 percent). About 10 percent of his expenditures were for prescription drugs. Disabled: For high expenditure Medicaid-only beneficiaries in the disabled category, LTSS non-institutional (27.5 percent), hospital (24.8 percent), and LTSS institutional services (11.9 percent) represent almost two-thirds of their expenditures. (See fig. 4.) In contrast, all other Medicaid-only beneficiaries in the disabled category had over half of their expenditures for managed care and premium assistance (52.1 percent), and had almost no LTSS institutional expenditures (0.1 percent). Overall, 79.5 percent of expenditures for Medicaid-only beneficiaries in the disabled group were for the high- expenditure beneficiaries. Children: Medicaid-only children had almost no LTSS institutional expenditures (less than 1 percent), whether in the high-expenditure group or not. (See fig. 5.) High-expenditure Medicaid-only children had 70 percent of their expenditures for hospital (46.1 percent) and LTSS non-institutional services (23.9 percent). For all other Medicaid-only children, over 58 percent of their expenditures were for managed care and premium assistance, followed by non-hospital acute (18.8 percent) and hospital services (9.8 percent). About 22 percent of expenditures for Medicaid-only children were for those in the high-expenditure group. Adults: Similar to children, Medicaid-only adult beneficiaries had almost no LTSS institutional expenditures (less than 1 percent of each of their total expenditures) whether in the high-expenditure group or not. (See fig. 6.) Hospital services represented over half the expenditures for high-expenditure adult beneficiaries. The remaining expenditures were almost equally distributed between non-hospital acute care (15.2 percent), drugs (14.2 percent), and managed care and premium support (14.1 percent). LTSS non-institutional services were a relatively small part of their total expenditures (3.4 percent). The greatest share of expenditures for all other Medicaid-only adult beneficiaries were for managed care and premium support (58.4 percent) followed by hospital (16.2 percent) and non-hospital acute care (15.4 percent) services. About 22 percent of expenditures for Medicaid-only adult beneficiaries were for the high-expenditure group. Aged: For the aged, both high-expenditure and all other Medicaid- only beneficiaries had LTC institutional expenditures, but the share of those expenditures differed—28.2 percent compared with 4.2 percent. Among the high-expenditure Medicaid-only aged beneficiaries, hospital (28.6 percent), LTSS institutional (28.2 percent), and LTSS non-institutional (15.4 percent) services represented over 70 percent of total expenditures. (See fig.7.) For all other Medicaid-only aged beneficiaries, managed care and premium support represented 48.3 percent of their expenditures, followed by drugs (18.2 percent), hospital (13.7 percent), and non-hospital acute care (10.6 percent) services. Over 73 percent of expenditures for the Medicaid-only aged were for those in the high-expenditure group. LTSS spending differed for high expenditure Medicaid-only beneficiaries living in LTC facilities and those living in the community. (See fig. 8.) Among high-expenditure Medicaid-only beneficiaries residing in a LTC facility, expenditures for LTSS in institutional settings (50 percent), hospital services (27.2 percent), and LTSS in non-institutional settings (7.3 percent) accounted for almost 85 percent of their total expenditures. Among high-expenditure beneficiaries not residing in a LTC facility, expenditures for LTSS in non-institutional settings (28.4 percent) were much greater, and expenditures for hospital services were similar (31.4 percent)—and these two services represented almost 60 percent of their total expenditures. In addition, the percentage of expenditures on drugs and non-hospital acute care was greater for high expenditure Medicaid-only beneficiaries who were not living in LTC facilities. While hospital services were the largest expenditure category among high-expenditure beneficiaries not residing in a LTC facility, per-capita hospital expenditures for beneficiaries residing in a LTC facility were over two times as much ($21,589 compared with $9,978). (See table 4.) Beneficiaries with expenditures within the top 1 percent for their state— the top one-fifth of the high-expenditure group—had a greater share of spending on hospital services, LTSS in non-institutional settings, and LTSS in institutional settings compared with all of the high-expenditure beneficiaries. Spending on these services comprised almost 80 percent of the total expenditures for beneficiaries with expenditures within the top 1 percent for their state. (See app. IV for complete table of results, and app. V for the demographic characteristics and spending for some randomly selected beneficiaries in that group.) HHS reviewed a draft of this report and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of HHS and to 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) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. This appendix describes the methodology for addressing three objectives that examine: (1) states’ spending for high-expenditure beneficiaries, both Medicaid-only and dual-eligible beneficiaries, compared with other Medicaid beneficiaries; (2) the characteristics associated with high- expenditure Medicaid-only beneficiaries; and (3) the services that contributed to high expenditures for Medicaid-only beneficiaries, and how they compared with service usage by all other Medicaid-only beneficiaries. We analyzed data from the fiscal year 2009 Medicaid Statistical Information System (MSIS) Annual Person Summary File. The summary file consolidates individual beneficiaries’ claims for the fiscal year, including data on their enrollment and information on their expenditures. The summary file also includes beneficiary specific information regarding enrollment categories, expenditures among six categories, dual eligibility status, age, gender, payment arrangements—including fee-for-service payments and capitated payments made to managed care organizations—and indicators for five conditions and two service categories.in the full claims files (for example, the summary file may not include The summary file excludes some encounter details included details regarding the care encounter, such as individual cost per encounter; however, it does include monthly enrollment data). We made several adjustments to the summary file in order to ensure that the data were reliable for our purposes. Specifically we excluded: records with unknown eligibility status (eliminated 5,166,648 records, or 7.21 percent of total records); all records associated with duplicate MSIS IDs or Social Security numbers within a state (eliminated 277,363 records, or 0.39 percent of total records); records with negative total spending amounts (eliminated 975,869 records, or 1.36 percent of total records), which may reflect adjustments to claims made in the prior year; records of individuals who were only enrolled in a stand-alone, separate Children’s Health Insurance Program during the year (eliminated 471,507 records, or 0.66 percent of total records); records associated with a payment adjustment rather than an individual (eliminated 202,456 records, or 0.28 percent of total records); records of individuals whose age appeared to conflict with their identified eligibility group (eliminated 65,016 records, or 0.09 percent of total records). For example, records of individuals in the child eligibility group whose age was 85 and older; records with unknown dual status (eliminated 698 records, or less than 0.01 percent of total records); and, records of individuals whose age was over 65, but indicated as having delivered a child (eliminated 126 records, or less than 0.01 percent of total records). After making these adjustments, we were able to retain 64,457,343, or 90 percent, of the summary file’s 71,617,026 original records. In order to determine variations in states’ spending for high-expenditure Medicaid-only beneficiaries compared with other Medicaid beneficiaries, we calculated the total number of Medicaid enrollees and total Medicaid expenditures in each state. We then calculated these same statistics for our subpopulations of Medicaid-only and dual-eligible beneficiaries based on the “last-best” indicator of dual eligibility status available in the summary file. Medicaid-only beneficiaries were eligible for Medicaid but not Medicare. Dual-eligible beneficiaries were eligible for both Medicaid and Medicare. Next, we determined the number of beneficiaries whose total expenditures fell within the top 5 percent of total expenditures within each state (we calculated these figures separately for Medicaid-only and dual-eligible beneficiaries). We termed these 2,763,407 beneficiaries as high-expenditure beneficiaries. We then separately calculated the total expenditures for our high-expenditure beneficiaries and other beneficiaries in each state for Medicaid-only and dual-eligible beneficiaries, and summed this data at a national level. To examine the characteristics associated with high-expenditure Medicaid-only beneficiaries, we determined the percentage of high- expenditure Medicaid-only beneficiaries with key characteristics and used logistic regression to examine the effect of having key beneficiary characteristics on the probability of being a high-expenditure Medicaid- only beneficiary. The key beneficiary characteristics for which we describe the high-expenditure beneficiary population and represented as independent variables in our logistic regression model included: eligibility group (disabled, child, adult, aged), age, gender, race/ethnicity, geographic location, participation in capitated managed care, period of enrollment in Medicaid (whether full year or partial year), as well as whether the beneficiaries had any of five health conditions or had received any of two services. Finally, our logistic regression models included characteristics of states’ Medicaid programs, including their spending on high-expenditure beneficiaries and long-term services and supports (LTSS) in non-institutional settings (also called home and community based services) and capitated managed care penetration rates.beneficiary population, as well as the probabilities that demonstrate the association of each characteristic with the likelihood of being in the high- expenditure group if all beneficiaries had a particular characteristic while holding all other characteristics constant. Probabilities were calculated by converting the odds that resulted from our logistic regression models. The size of the independent effect of each enrollee characteristic is expressed as a probability, with greater values reflecting a greater chance that the characteristic increased the likelihood of being a high-expenditure beneficiary. Medicaid-only beneficiaries had a hypothetical 5 percent probability of being in the high-expenditure group by chance alone. All probabilities were significant at the 0.05 level. We report percentages that describe the high-expenditure In order to determine which service categories contributed to expenditures for high-expenditure Medicaid-only beneficiaries, we examined how total expenditures for high-expenditure Medicaid-only beneficiaries were distributed among the following six expenditure categories: (1) hospital care, (2) non-hospital acute care, (3) drugs, (4) managed care and premium assistance, (5) long-term services and supports (LTSS) in non-institutional settings, and (6) long-term services and supports in institutional settings. of spending among each of the six expenditure categories for beneficiaries in our high-expenditure group compared to the distribution of spending among each of the six expenditure categories for all other Medicaid-only beneficiaries. The summary file includes information on spending for 30 types of services. We consolidated 28 of these types of services into the six categories we report. We conducted this performance audit from September 2012 through 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. The table below demonstrates the characteristics of high-expenditure Medicaid-only beneficiaries, and how expenditures were distributed within each characteristic of interest. For each subpopulation, we also calculated the per-capita expenditures in dollars. High-expenditure Medicaid-only beneficiaries who resided in a long-term care (LTC) facility during fiscal year 2009 had the highest per capita expenditures ($79,464). Our logistic regression analysis found that key characteristics—such as having a disability, having certain conditions, delivery/childbirth, and residing in a LTC facility—were consistently strongly associated with being a high-expenditure Medicaid-only beneficiary when looking at all records, and when the data was examined separately for each eligibility group. The table below demonstrates the characteristics of Medicaid-only beneficiaries with expenditures in the top 1 percent of total expenditures (558,798 beneficiaries). For each subpopulation, we also calculated the per capita expenditures in dollars. The top 1 percent of Medicaid-only beneficiaries had per capita spending of $94,821, over 2.5 times that of beneficiaries in the top 5 percent of total expenditures whose per capita spending was $35,983 (top 1 percent included). We examined individual cases of a random group of Medicaid-only beneficiaries in the top 1 percent of expenditures. Some of these beneficiaries illustrated the trends identified in our analysis, but we also found beneficiaries who demonstrated that there was diversity among the high-expenditure group. Below are some examples of the characteristics and spending patterns for individual beneficiaries. Overall, per capita spending in the top 1 percent ranged from $19,068 to $43,728,641, with an average expenditure of $94,821. In addition to the contact named above, Sheila K. Avruch, Assistant Director; Giselle Hicks; Drew Long; Vikki Porter; Kristal Vardaman; Eric Wedum; Jennifer Whitworth; and Carla Willis made key contributions to this report. Medicaid: States Reported Billions More in Supplemental Payments in Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012. High Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. Medicaid: CMS Needs More Information on the Billions of Dollars Spent on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 2008. Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.: January 31, 2008. Medicaid Long-Term Care: Information Obtained by States about Applicants’ Assets Varies and May Be Insufficient. GAO-12-749. Washington, D.C.: July 26, 2012. Medicaid: Data Sets Provide Inconsistent Picture of Expenditures. GAO-13-47. Washington, D.C.: October 29, 2012. Medicaid Home and Community-Based Waivers: CMS Should Encourage States to Conduct Mortality Reviews for Individuals with Developmental Disabilities. GAO-08-529. Washington, D.C.: May 23, 2008. Medicaid: States’ Use of Managed Care. GAO-12-872R. Washington, D.C.: August 17, 2012. | Medicaid is an important source of health coverage for millions of low-income individuals. Research on Medicaid has demonstrated that a small percentage of beneficiaries account for a disproportionately large share of Medicaid expenditures. Understanding states' expenditures for high-expenditure populations—both those dually eligible for Medicare and Medicaid, and those who are Medicaid-only—could enhance efforts to manage Medicaid expenditures. GAO was asked to examine the demographics and service usage of Medicaid beneficiaries, particularly those who are not eligible for Medicare. This report examines high-expenditure Medicaid-only beneficiaries, considering (1) states' spending on them compared with all other Medicaid beneficiaries; (2) their key characteristics; and (3) their service usage compared with all other Medicaid-only beneficiaries. GAO analyzed beneficiary and expenditure data from the Medicaid Statistical Information System Annual Person Summary File for 2009, the most recent year available at the time GAO conducted its work. GAO defined high-expenditure beneficiaries as those with total expenditures in the top 5 percent of expenditures within each state. GAO combined these data at a national level, and analyzed the characteristics associated with being a high-expenditure beneficiary, the probability of being a high-expenditure Medicaid beneficiary, and what services contributed to high expenditures. In fiscal year 2009, states spent nearly a third (31.6 percent) of all Medicaid expenditures on the most expensive Medicaid-only beneficiaries, who were 4.3 percent of total Medicaid beneficiaries. States spent another third (33.1 percent) on all other Medicaid-only beneficiaries, who represented 81.2 percent of total Medicaid beneficiaries. Among dual eligible beneficiaries, a similar pattern existed, with a small proportion of the population accounting for a disproportionate share of expenditures. Certain characteristics significantly increased the probability of being a high-expenditure Medicaid-only beneficiary. Specifically, the results of GAO's analyses indicate that the probability of being a high-expenditure Medicaid-only beneficiary was: 24.4 percent for those residing in a long-term care facility, 20.8 percent for those with human immunodeficiency virus/acquired immunodeficiency syndrome, 18.3 percent for those with disabilities, and 13.3 percent for new mothers or infants. Overall, hospital services and long-term services and supports in non-institutional and institutional settings comprised nearly 65 percent of the total expenditures for high-expenditure Medicaid-only beneficiaries, with smaller proportions for drugs, payments to managed care organizations and premium assistance, and non-hospital acute care. In contrast to high-expenditure beneficiaries, payments to managed care organizations and premium assistance comprised 57.2 percent of total expenditures for all other Medicaid-only beneficiaries. HHS provided technical comments on a draft of this report, which were incorporated as appropriate. |
In 1989, the Congress established the National Commission on Severely Distressed Public Housing (the Commission) to explore the factors contributing to structural, economic, and social distress in public housing; identify strategies for remediation; and propose a national action plan to eradicate distressed conditions by the year 2000. In 1992, the Commission reported that approximately 86,000, or 6 percent, of the nation’s public housing units were severely distressed. According to the Commission, these units qualified as severely distressed because of their physical deterioration and uninhabitable living conditions; high levels of poverty; inadequate and fragmented services; institutional abandonment; and location in neighborhoods often as blighted as the sites themselves. Although the Commission did not identify specific locations as severely distressed, it recommended that funds be made available to address distressed conditions, and that these funds be added to the amounts traditionally appropriated for modernizing public housing. The Commission also encouraged the development of supportive services for residents in distressed housing developments. In response to the Commission’s report, Congress established the Urban Revitalization Demonstration Program, more commonly known as HOPE VI, at HUD. By providing funds for a combination of capital improvements and community and supportive services, the program seeks to (1) improve the living environment for public housing residents of severely distressed public housing through the demolition, rehabilitation, reconfiguration, or replacement of obsolete public housing; (2) revitalize sites on which such public housing is located, and contribute to the improvement of the surrounding neighborhood; (3) provide housing that will avoid or decrease the concentration of very low-income families; and (4) build sustainable communities. To achieve these objectives, the program provides demolition and revitalization grants to public housing authorities (PHA). Demolition grants fund the demolition of distressed public housing, the relocation of residents affected by the demolition, and the implementation of supportive services for permanently relocated residents. Revitalization grants fund, among other things, the capital costs of major rehabilitation, new construction, and other physical improvements; demolition of severely distressed housing; and community and supportive service programs for residents, including those relocated as a result of revitalization efforts. Through fiscal year 2001, HUD had awarded 177 demolition grants totaling approximately $293 million and 165 revitalization grants totaling about $4.5 billion. According to HUD, HOPE VI started as an embellished modernization program but has evolved into a comprehensive and complex transformation in how housing authorities provide affordable housing to low-income families. A significant stage in that evolution was the issuance of the Mixed-Finance Rule in 1996. Under this rule, for the first time PHAs were allowed to use public housing funds designated for capital improvements, including HOPE VI funds, to leverage other public and private investment to develop public housing units. The rule also permitted PHAs to provide public housing capital funds to a third party so that the third party could develop public housing units. The third party would then own the resulting public housing units and could receive capital or operating assistance for the units from HUD through the PHA. HUD emphasizes that this mixed-finance approach to public housing development is the single most important development tool currently available to PHAs. The approach encourages the formation of new public and private partnerships to ensure the long-term sustainability of the public housing development and surrounding community. The mixed- finance approach can produce developments that include both public housing and nonpublic housing units, such as low-income housing tax credit units or market rate units. Mixed-finance HOPE VI projects are often undertaken in development phases. A housing authority may not begin a phase to be financed with a combination of public and private funds until it has submitted, and HUD has approved, a mixed-finance proposal for that phase. The mixed-finance proposal presents the fundamental information that HUD needs to evaluate a mixed-finance phase. For example, it contains basic descriptive information such as the number and types of units planned, the development schedule, the sources and uses of funding, and the operating budget for the phase. Because of the time that is needed to plan HOPE VI projects and develop specific proposals, most of the proposals that HUD approved through fiscal year 2001 were funded with revitalization grants awarded several years earlier. PHAs with revitalization grants can use a variety of other public and private funds to develop their HOPE VI sites. Public funding can come from federal, state, and local sources. For example, PHAs can use federal resources HUD has already awarded for capital improvements at public housing developments. These capital funds can be used for a variety of purposes, including the development, financing, and modernization of public housing and the replacement of obsolete utility systems and dwelling equipment. PHAs can also use funds raised through federal low- income housing tax credits. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. After the state allocates tax credits to developers, the developers typically offer the credits to private investors. The private investors use the tax credits to offset taxes otherwise owed on their tax returns. The money private investors pay for the credits is paid into the projects as equity financing. In addition, PHAs may obtain some of the funding needed for infrastructure and public improvements from state and local governments. Private sources can include private mortgage financing and financial or in-kind contributions from nonprofit organizations. See appendix II for more information on the types of funds that may be invested at HOPE VI sites. According to our analysis of HUD data, housing authorities expect to leverage, for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001, an additional $1.85 in funds from other sources. Our figure is slightly lower than the $2.07 that HUD considers to be the projected amount leveraged per HOPE VI dollar because, unlike HUD, we do not consider funds such as HOPE VI demolition grants to be leveraged funds. Also, HUD data indicate that, of the total funds that housing authorities with revitalization grants have budgeted for their HOPE VI sites, 46 percent come from federal sources. However, this percentage does not include funds that grantees receive through low- income housing tax credits, which are a direct cost to the federal government. Our analysis of all mixed-finance proposals HUD approved through fiscal year 2001 indicates that 79 percent of the budgeted funds came from federal sources, when low-income housing tax credit funding was included. Our analysis of data in HUD’s HOPE VI reporting system shows that housing authorities that received HOPE VI revitalization grants in fiscal years 1993 to 2001 expect to leverage an additional $1.85 for every HOPE VI dollar received. However, HUD considers the amount of leveraging to be an additional $2.07 for every HOPE VI dollar received because it includes other HUD-provided public housing funds as leveraged funds. In total, $964 million in public housing funds have been budgeted for HOPE VI sites. The $964 million includes capital funds and $150 million in HOPE VI demolition grant funds. Grantees would have received the capital funds regardless of whether they received a HOPE VI revitalization grant, and the demolition grants are another category of HOPE VI funds. When the $964 million in public housing funds are not included as leveraged funds, the overall projected leveraging per HOPE VI dollar is reduced from $2.07 to $1.85. Even when public housing funds are excluded from leveraged funds, our analysis of HUD data shows that leveraging has increased over the life of the HOPE VI program. According to HUD’s HOPE VI reporting system, housing authorities that received a revitalization grant in fiscal year 1993 expected to raise an additional $0.58 (excluding public housing funds) for every HOPE VI grant dollar awarded to them. By fiscal year 2001, housing authorities expected to augment every HOPE VI revitalization grant dollar awarded to them with an additional $2.63 from other sources (excluding public housing funds). Though mixed-finance development was not an official option for housing authorities until 1996, housing authorities were permitted, prior to 1996, to use a mix of public funds to redevelop distressed public housing sites. According to HUD officials, the amounts leveraged by housing authorities should increase over time, as potential investors become more familiar with the HOPE VI program and housing authorities become more sophisticated in seeking and securing other sources of funds. Figure 2 shows that amounts leveraged by housing authorities have generally increased over time. Our analysis of the mixed-finance proposals that HUD approved through fiscal year 2001 shows that 79 percent of the funding comes from federal sources. However, HUD’s data shows that 46 percent of all resources budgeted for HOPE VI sites come from the federal government. HUD’s HOPE VI reporting system contains funding projections for all revitalization grants awarded through fiscal year 2001. As shown in figure 3, the reporting system divides budgeted resources into four categories, as follows: HOPE VI funds—HOPE VI revitalization grant funds awarded to a housing other public housing funds—other HOPE VI funding, such as demolition grants, and resources HUD allocates to housing authorities, such as capital funds; other federal funds—all other federal sources of funding; and nonfederal funds—funds from state and local governments, private funds, and equity raised from low-income housing tax credits. The sale of low-income housing tax credits to investors generates private capital to acquire, construct, or rehabilitate housing targeted to households earning less than 60 percent of median income; therefore, HUD defines the funds generated as private funds. However, tax credits represent forgone federal income and, therefore, are a direct cost to the federal government. Our reports have consistently described low-income housing tax credits as federal housing assistance. Because housing authorities do not have to report individually each source included in the nonfederal funding category, we could not use the data in HUD’s HOPE VI reporting system to determine the specific amounts raised through low-income housing tax credits. In order to distinguish low- income housing tax credit funds from nonfederal funds, we examined 85 mixed-finance proposals that HUD had approved through the end of fiscal year 2001. These proposals list all of the funding sources and amounts separately. As shown in figure 4, our analysis shows that 79 percent of all the budgeted funds come from federal sources—HOPE VI funds, other public housing funds, and other federal funds, including equity raised from low-income housing tax credits. Equity raised from low-income housing tax credits made up 27 percent of total budgeted sources. Nonfederal funds comprised 21 percent of all budgeted resources—12 percent from private sources and 9 percent from state and local sources. Overall, housing authorities that received revitalization grants in fiscal years 1993 to 2001 have budgeted a total of about $714 million for community and supportive services—$418 million in HOPE VI funds (59 percent) and $295 million (41 percent) in leveraged funds. The $418 million in HOPE VI funds accounts for 9 percent of total revitalization grant funds awarded. HUD’s annual notice of funding availability—which sets forth the program’s current requirements and available funds—sets a limit on the amount of grant funds that housing authorities can spend on supportive services. All of the notices since 1999 have included incentives that encourage housing authorities to leverage additional funds for supportive services. There is no cap on the amount of leveraged funds that housing authorities can spend on supportive services. Housing authorities are encouraged to obtain in-kind, financial, and other types of resources necessary to carry out and sustain supportive service activities from organizations such as local Boards of Education, public libraries, private foundations, nonprofit organizations, faith-based organizations, and economic development agencies. As shown in figure 5, the amount of funds set aside by each year’s grantees for supportive services has varied over the life of the program. Although the majority of funds budgeted overall for supportive services are HOPE VI funds, the amount of non-HOPE VI funds budgeted for supportive services has increased dramatically since the program’s inception. As shown in figure 6, the percentage of total supportive services funding made up of leveraged funds jumped significantly after 1997. Specifically, while 22 percent of the total funds budgeted for supportive services by fiscal year 1997 grantees consisted of leveraged funds, 59 percent of the total funds budgeted by fiscal year 2001 grantees consisted of leveraged funds. This increase may be attributable, in part, to the fact that, starting in fiscal year 1998, HUD began to consider the leveraging of additional resources (for physical improvements and supportive services) as one of its criteria for evaluating grant applications. Since 1999, HUD has specifically considered the extent to which PHAs have leveraged funds for supportive services. Housing authorities have complied with HUD’s limits on the amounts of public housing funds that may be used to develop public housing units at HOPE VI sites. They have also budgeted funds from other sources that are not subject to these limits. As required by the Quality Housing and Work Responsibility Act of 1998, HUD adopted a revised total development cost policy in 1999. This policy, as specified in the Act, limits the amount of public housing funds, including HOPE VI funds, that housing authorities can spend to construct public housing units. These funding limits are the amounts that HUD has determined are adequate to develop units of good and sound quality. As mandated in the Act, some demolition, site remediation, and extraordinary site costs—costs that HUD has determined are not purely development-related costs—are excluded. Specifically, demolition and site remediation costs are prorated with respect to the number of new public housing units being developed on the site. For example, if a PHA is planning to demolish 300 public housing units and to put 100 new public housing units back on the site, it has to consider only one-third of the demolition and remediation costs when comparing public housing development costs with the funding limit. Extraordinary site costs—such as removal or replacement of extensive underground utility systems, construction of extensive street and other public improvements, and dealing with flood plains—are also excluded. An independent engineer must verify extraordinary site costs. Our analysis of 77 (out of 87) approved mixed-finance proposals shows that housing authorities have complied with HUD’s cost policy. The actual costs of developing units at HOPE VI sites are often higher than the public housing funds budgeted for developing public housing units. In the 64 mixed-finance proposals for which there was sufficient detailed information to perform our analysis, $525 million in public housing funds, including HOPE VI funds, were subject to HUD’s established funding limits. However, total funds of $1.3 billion were approved in the mixed- finance proposals. Therefore, the average amount of public housing funds (including HOPE VI funds, capital funds, and other public housing development funds) budgeted per public housing unit subject to HUD’s funding limits was $98,097, while the average amount of total funds budgeted per unit was $171,541. HUD has been required to report leveraging and cost information annually to the Congress since 1998; however, it has not done so. Section 535 of the Quality Housing and Work Responsibility Act of 1998 requires HUD to submit an annual report to the Congress on the HOPE VI program. As provided by the Act, this annual report is to include, among other things, the cost of public housing units revitalized under the program and the amount and type of financial assistance provided under and in conjunction with the program. Agency officials in charge of the HOPE VI program acknowledge that HUD has not issued the annual reports to the Congress required under the Act. They noted that they have provided program information through other means. In June 2002, HUD submitted a report to the House and Senate appropriation committees as directed by House Conference Report 107- 272. This report discusses best practices and lessons learned in the HOPE VI program between 1992 and 2002. It also includes some of the information required in the annual report, such as the extent of leveraging. HOPE VI officials also noted that they have provided information to the Congress through other means that the agency has deemed appropriate, such as budget documents, the agency’s performance and accountability reports, and testimonies by HUD officials. However, neither HUD’s most recent budget justification nor its most recent performance and accountability report contains detailed information on leveraging or the cost of public housing units developed under the HOPE VI program. Although HUD’s fiscal year 2003 budget justification provides information on the amount of outside funds leveraged by HOPE VI funds, it does not describe the sources of these funds or provide cost information. Further, HUD’s fiscal year 2001 performance and accountability report focuses on four key outputs of the HOPE VI program: families relocated, units demolished, new and rehabilitated units completed, and units occupied. The report does not provide information on HOPE VI leveraging or the cost of units developed under the program. Agency officials responsible for administering HOPE VI agreed that preparing the annual report as required under the Act would help provide the Congress and other interested stakeholders with useful information with which to assess the cost effectiveness and results of the program. The Congress faces difficult choices when deciding how to provide affordable housing. One of the objectives of the HOPE VI program is to leverage program funds, and such leveraging has increased over the life of the HOPE VI program—albeit primarily from other federal sources. However, HUD’s HOPE VI reporting system does not identify funds that housing authorities obtain specifically from low-income housing tax credits, which are a direct cost to the federal government, as federal funds. Furthermore, applying HUD’s total development cost policy does not provide a comprehensive picture of the actual costs of developing units at HOPE VI sites. This policy, which HUD established in accordance with the Quality Housing and Work Responsibility Act of 1998, was not intended to determine the actual cost of development at HOPE VI sites. Instead, it is designed to determine cost limits for the development of public housing with public housing funds. The type of data that HUD is required to report annually to the Congress would provide information needed to evaluate the program’s cost to the federal government and its cost effectiveness. We recommend that the Secretary of Housing and Urban Development provide annual reports on the HOPE VI program to the Congress as required by law and include in these annual reports, among other things, information on the amounts and sources of funding used at HOPE VI sites, including equity raised from low-income housing tax credits, and the total cost of developing public housing units at HOPE VI sites, including the costs of items subject to HUD’s development cost limits and those that are not. We provided a draft of this report to HUD for its review and comment. In a letter from the Assistant Secretary for Public and Indian Housing (see app. III), HUD stated that it found the report to be fair and accurate in its assessment of HOPE VI financing. HUD also agreed with our recommendation to submit annual reports and noted that it plans to submit an annual report for fiscal year 2002 by December 31, 2002. According to the agency, the fiscal year 2002 report will include the amounts and sources of funding used at HOPE VI sites, including equity raised by low-income housing tax credits categorized as private sources, and the total cost of developing public housing units at HOPE VI sites. HUD also provided clarifications on several technical points, which have been included in the report as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will send copies of this report to the Ranking Member, Subcommittee on Housing and Transportation, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman, Vice Chairman, and Ranking Minority Member, Subcommittee on Housing and Community Opportunity, House Committee on Financial Services; and the Chairman and Vice Chairman, House Committee on Financial Services. We will also send copies to the Secretary of Housing and Urban Development and the Director of the Office of Management and Budget. We will make copies available to others upon request. This letter will also be available at no charge on GAO’s home page at http://www.gao.gov. Please call me at (202) 512-8678 if you or your staff have any questions about this report. Key contributors to this report are listed in appendix IV. Our objectives were to describe the extent to which housing authorities with HOPE VI revitalization grants have (1) leveraged funds from other sources, particularly other federal sources; (2) leveraged funds specifically for community and supportive services; and (3) complied with HUD’s funding limits for developing public housing units and budgeted additional funds not subject to these limits. We also determined the extent to which HUD has reported cost information to the Congress. To determine the extent to which grantees have leveraged federal and nonfederal funds, we analyzed data from HUD’s HOPE VI reporting system and reviewed all mixed-finance proposals approved through September 30, 2001. Specifically, we obtained data as of the quarter that ended June 30, 2002, for all 165 revitalization grants awarded through fiscal year 2001. We used this data to determine the projected amount of funds leveraged per HOPE VI dollar. In addition, we analyzed HUD’s data to determine the percentage of total funding that grantees expect to derive from HOPE VI revitalization grants, other public housing funds, other federal funds, and nonfederal funds. To assess the reliability of HUD’s data, we reviewed information about the system and performed electronic testing to detect obvious errors in completeness and reasonableness. To determine the federal and nonfederal funds actually obtained by grantees, we requested excerpts from all of the mixed-finance proposals approved through the end of fiscal year 2001. For example, we requested the budget that shows the sources and uses of funds and the total development cost limit analysis. Although HUD reported that it had approved 87 mixed-finance proposals through September 30, 2001, it was able to provide the documentation we needed to analyze funding sources only for 85 proposals. The two remaining proposals lacked sufficient budget information for us to perform our analysis. The 85 mixed-finance proposals we reviewed were for phases to be constructed under 48 different revitalization grants and represented 13 percent of all funds budgeted through June 30, 2002, and 16 percent of all revitalization grant funds budgeted over the life of the program. To gain an understanding of the mixed-finance development approach, we interviewed headquarters officials in HUD’s Office of Public Housing Investments and reviewed HUD’s Mixed-Finance Guidebook. To determine the extent to which grantees have budgeted leveraged funds specifically for community and supportive services, we analyzed financial data from HUD’s HOPE VI reporting system reported as of June 30, 2002. Specifically, we used this data to identify the amounts of HOPE VI revitalization funds and leveraged funds budgeted for supportive services overall and by grant year. We also used this data to determine the proportion of HOPE VI funds budgeted for supportive services relative to the total amount of HOPE VI revitalization grant funds awarded. Moreover, we used this data to identify trends in the use of leveraged funds for supportive services. To determine why the use of leveraging increased after 1997, we interviewed headquarters officials in HUD’s Office of Public Housing Investments and reviewed HUD’s guidance to grantees and the notices of funding availability for fiscal years 1993 through 2001. To determine the extent to which grantees have complied with HUD’s funding limits for developing public housing units and have budgeted additional funds not subject to these limits, we reviewed HUD’s total development cost policy and established what costs are subject to the policy and what costs are excluded. We then analyzed all 87 mixed-finance proposals approved through fiscal year 2001 to determine if they complied with HUD’s cost policy. We were not able to determine compliance for 10 of the 87 proposals because the documentation provided did not contain the level of detail required. In order to compare the per-unit cost of a public housing unit according to HUD’s cost policy with the actual cost of developing the unit, we again analyzed the mixed-finance proposals. For 64 of the 87 mixed-finance proposals, we determined the per-unit cost of a public housing unit according to HUD’s cost policy, which includes only public housing funds and excludes certain costs. For the same 64 proposals, we then determined the actual per-unit cost by dividing the total funds budgeted by the total number of units. We were not able to perform these analyses for 23 of the 87 proposals because the Office of Public Housing Investments could not provide the detailed total development cost limit analysis needed. For example, in some cases, the office was able to provide only the information necessary to calculate the per-unit cost of a public housing unit for an entire HOPE VI project, as opposed to the particular phase for which we had the approved budget. To determine the extent to which HUD has reported cost information to the Congress, we reviewed the HOPE VI reporting requirements in the Quality Housing and Work Responsibility Act of 1998. We then interviewed headquarters officials in HUD’s Office of Public Housing Investments to determine the type of program information the Department has reported to the Congress, and in what format. Finally, we reviewed HUD’s fiscal year 2003 budget justification and its fiscal year 2001 performance and accountability report. We performed our work from November 2001 through September 2002 in accordance with generally accepted government auditing standards. Public housing authorities (PHA) with HOPE VI revitalization grants use funds from a variety of federal and nonfederal sources to develop their HOPE VI sites. Federal sources include additional public housing funds, other HUD funds, and low-income housing tax credits. Nonfederal sources include state and local funds, private donations, and tax-exempt bonds. Listed below are brief descriptions of some of these funding sources. Capital Fund Program (CFP) Under CFP, HUD provides annual formula grants to PHAs for capital and management activities, including the development, financing, and modernization of public housing. The funds may not be used for luxury improvements, direct social services, costs funded by other HUD programs, or ineligible activities, as determined by HUD on a case-by-case basis. Community Development Block Grant (CDBG) Program The CDBG funding that HUD provides is split between states and local jurisdictions called “entitlement communities.” Funds are awarded on a formula basis to entitled metropolitan cities and urban counties. States distribute the funds to localities that do not qualify as entitlement communities. CDBG funds can be used to implement a wide variety of community and economic development activities directed toward neighborhood revitalization, economic development, and improved community facilities and services. Comprehensive Grant Program (CGP) Under CGP, HUD provided funds, on a formula basis, to help large PHAs (those with at least 250 units) correct physical, management, and operating deficiencies and keep units in the housing stock as safe and desirable homes for low-income families. The Quality Housing and Work Responsibility Act of 1998 shifted CGP into the Capital Fund. Comprehensive Improvement Assistance Program (CIAP) Under CIAP, HUD provided competitive grants to help smaller PHAs (those with fewer than 250 units) to correct physical, management, and operating deficiencies and keep units in the housing stock as safe and desirable homes for low-income families. The Quality Housing and Work Responsibility Act of 1998 shifted assistance to smaller PHAs from the competitive CIAP to a formula grant under the Capital Fund in 1999. Historic rehabilitation tax credits are available to rehabilitate certified historic structures that will need substantial rehabilitation. Eligible applicants receive a tax credit equal to 20 percent of the amount of qualified rehabilitation expenditures. Home Investment Partnership Program (HOME) Through HOME, HUD provides annual formula grants to states and localities to fund a wide range of activities designed to build, buy, or rehabilitate affordable housing or provide direct rental assistance to low- income people. Specifically, states and localities use HOME funds for grants, direct loans, loan guarantees or other forms of credit enhancement, rental assistance, and security deposits. Low-Income Housing Tax Credits (LIHTC) Under the LIHTC program, states are authorized to issue federal tax credits for the acquisition, rehabilitation, or new construction of affordable rental housing. The credits are generally sold to outside investors to raise development funds for a project. These outside investors use the tax credit to offset taxes otherwise owed on their tax returns. To qualify for credits, a project must have a specific proportion of its units set aside for lower-income households, and the rents on these units must be limited to 30 percent of qualifying income. The amount of credit that can be provided to a project is determined by size of the allocation, eligible costs, number of tax credit units, type of credit, and investor pricing. Credits are provided for 10 years. State housing credit agencies usually award tax credits through competitive rounds. Each state receives an annual allocation of $1.75 per capita. States must reserve a minimum of 10 percent of the credits for nonprofit developers. Major Reconstruction of Obsolete Projects (MROP) Under MROP, which last funded new development in 1994, HUD provided funds to PHAs to perform major reconstruction of obsolete public housing or to maintain or expand the supply of housing for low-income families. Projects formerly funded as MROP are now funded through the Capital Fund. Through the Operating Fund, HUD provides PHAs with a subsidy, on a formula basis, to fund the operating and maintenance expenses of the developments they own or operate. It enables PHAs to keep rents affordable for lower-income families and to cover a variety of expenses, including maintenance, utilities, and tenant and protective services. Public Housing Drug Elimination Program (PHDEP) Eligible PHAs received PHDEP grants from HUD to reduce or eliminate drug-related crime in and around public housing. Grantees were encouraged to develop a plan that included initiatives that could be sustained over a period of several years for addressing the problem of drug-related crime in and around public housing. The program was eliminated in the fiscal year 2002 HUD budget. Renewal Community/Empowerment Zone/Enterprise Community Initiative (RC/EZ/EC) In urban areas that HUD has designated as Renewal Communities, Empowerment Zones, and Enterprise Communities, grants and tax incentives are provided. They stimulate the creation of new jobs empowering low-income persons and families receiving public assistance to become economically self-sufficient, and they promote the revitalization of economically distressed areas. The program subsidizes long-term financing for very low- , low- , and moderate-income families. The Federal Home Loan Banks provide from their annual net earnings low-cost funding and other credit to stockholder members on a districtwide competitive basis. Members—which include commercial banks, savings institutions, credit unions, and insurance companies—use this credit to meet the housing finance and credit needs of their communities. Housing trust funds are distinct funds established by cities, counties, and states that permanently dedicate a source of public revenue to support the production and preservation of affordable housing. There are at least 257 housing trust funds in the United States. Housing trust funds support a variety of housing activities for low- and very low-income households, including new construction, preservation of existing housing, emergency repairs, homeless shelters, housing-related services, and capacity building for nonprofit organizations. Nonprofit and faith-based organizations, developers, private banks and lending institutions, universities, large corporations, independently owned businesses, and residents of the HOPE VI projects provide resources for various purposes. For example, developers may have equity at risk, and future residents provide down payments on homeownership units. Universities donate land and assist in developing educational programs. National corporations provide training and employment for public housing residents. State and local governments provide a range of resources, including capital improvement funds for infrastructure and community facilities and direct financial contributions or provision of in-kind services. Some municipalities provide tax-foreclosed properties for redevelopment, matching funds for community and supportive services, and assistance with zoning and other local requirements. Eligible issuers, such as housing finance agencies and local governments, sell bonds to investors with interest not subject to federal income tax and use proceeds to finance below-market rate–mortgage loans. The lower interest rate on the bond is passed on to borrowers as a reduced mortgage interest rate. The uses of the proceeds raised through tax-exempt bond financing include acquisition, rehabilitation, and construction. Tax Increment Financing (TIF) allows a municipality to provide financial incentives to stimulate private investment in a designated area (a TIF district) where blight has made it difficult to attract new development. The TIF program can be used to support new development or the rehabilitation of existing buildings in industrial, commercial, residential, or mixed-use development proposals. Funding for TIF eligible activities is derived from the increase in incremental tax revenues generated by new construction or rehabilitation projects within the boundaries of the TIF district. States determine what activities are eligible with TIF funds, and these activities may include land acquisition, site preparation, building rehabilitation, public improvements, and interest subsidy. In addition to those named above, Anne Dilger, John McGrail, Sara Moessbauer, Lisa Moore, Ginger Tierney, Paige Smith, Mijo Vodopic, Carrie Watkins, and Alwynne Wilbur made key contributions to this report. | The Department of Housing and Urban Development (HUD) requested that we review the HOPE VI program. Because of the scope of the request, we agreed with the office of the Chairman, Senate Subcommittee on Housing and Transportation, Committee on Banking, Housing, and Urban Affairs, to provide the information in a series of reports. This first report focuses on the financing of HOPE VI developments. We describe the extent to which grantees have (1) leveraged funds from other sources, particularly other federal sources; (2) leveraged funds specifically for community and supportive services; and (3) complied with HUD's funding limits for developing public housing units and budgeted additional funds not subject to these limits. Because the Quality Housing and Work Responsibility Act of 1998 requires HUD to report HOPE VI cost information to Congress, we also discuss the extent to which HUD has complied with this requirement. Housing authorities expect to leverage, for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001, an additional $1.85 in funds from other sources. HUD considers this amount to be slightly higher because it treats as "leveraged" both (1) HOPE VI grant funds competitively awarded for the demolition of public housing units and (2) other public housing capital funds that the housing authorities would receive even in the absence of the revitalization grants. Our analysis of the mixed-finance proposals HUD approved through fiscal year 2001 indicates that, when low-income housing tax credit funding is included, 79 percent of the budgeted funds are from federal sources. The remainder of budgeted funds are from nonfederal sources, including private sources and state and local governments. Housing authorities that have received revitalization grants expect to leverage $295 million in additional funds for community and supportive services and have budgeted a total of about $714 million in HOPE VI revitalization grant funds and leveraged funds for community and supportive services. Leveraging for community and supportive services increased dramatically after 1997, when HUD instituted incentives to encourage this practice--from 22 percent in FY 1997 to 59 percent in FY 2001. Housing authorities have complied with HUD's total development cost policy when developing public housing units at HOPE VI sites. However, housing authorities have often budgeted additional funds that are not subject to the funding limits in the policy. HUD's policy applies only to the use of public housing funds, and it excludes some costs from counting against the limits. Although HUD has been required to report leveraging and cost information to Congress annually since 1998, it has not done so. Section 535 of the act requires HUD to submit an annual report to Congress on the HOPE VI program. This annual report is to include the cost of public housing units revitalized under the program and the amount and type of financial assistance provided under and in conjunction with the program. HUD has not issued these required annual reports to Congress. However, in June 2002, HUD submitted a report to the House and Senate appropriation committees as directed by House Conference Report 107-272. This report includes some of the information required in the annual report, such as the extent of leveraging. However, neither HUD's most recent budget justification nor its most recent performance and accountability report contains detailed information on the amount of leveraged funds or the cost of public housing units revitalized under the HOPE VI program. |
In recent years there has been a significant increase in apprehensions of unaccompanied children from El Salvador, Guatemala, and Honduras (see table 1). We previously reported that children from El Salvador, Guatemala, and Honduras often leave their home country due to crime, violence, and lack of economic opportunity, among other reasons. In particular, the decision to migrate to the United States is also influenced by a desire for family reunification, educational opportunities, perception of U.S. immigration policy, and the role of smuggling networks that encourage migration. Historically, most unaccompanied children have been adolescents 14 to 17 years of age, with males representing a higher percentage of the children; however, the population is diverse and includes children of all ages, as well as pregnant and parenting teens. Under the William Wilberforce Trafficking Victims Protection Reauthorization Act of 2008 (Trafficking Victims Protection Reauthorization Act), except in the case of exceptional circumstances, unaccompanied children in the custody of any federal department or agency, including DHS, must be transferred to ORR within 72 hours after determining that they are unaccompanied children. The Homeland Security Act of 2002 gives ORR responsibility for coordinating and implementing the care and placement of unaccompanied children— individuals younger than 18 years old with no lawful immigration status and no parent or legal guardian in the United States available to provide care and physical custody. While these children may have parents or guardians already in the United States, if the parent or guardian is unable to provide immediate care, the children are considered unaccompanied. The children remain in the custody of the federal government throughout their stay in ORR care, but are in the physical custody of ORR residential care providers (see fig. 1). ORR solicits residential care providers, referred to as grantees in this report, through funding opportunity announcements, and funds these grantees through 3-year cooperative agreements. When making funding decisions, ORR evaluates applications against a set of established criteria. The grantees are private nonprofit and for-profit organizations and must be licensed by a state licensing agency to provide residential, group, or foster care services for dependent children, for example, in a shelter setting. The aim of shelter care is to provide the least restrictive environment commensurate with the safety, emotional, and physical needs of the child. In keeping with the 1997 Flores v. Reno Settlement Agreement (Flores Agreement), which articulates a number of broad principles and policies applicable to the detention of unaccompanied children, grantees are required to provide proper physical care and shelter for children that ORR has interpreted to include suitable living accommodations (e.g., bed, chair, desk, storage for clothing and other personal items), culturally appropriate meals and snacks, several sets of new clothing, and personal grooming items. The facilities where children are housed are required by ORR to have designated common areas, including space for education, recreation, and case management as well as space to hold confidential services, such as health services and counseling. The primary settings in which children receive care include: Shelters. These residential facilities are operated by state-licensed ORR grantees aiming to provide the least restrictive shelter environment based on the safety, emotional, and physical needs of the child. The majority of children going through ORR are placed in shelter care. Foster care. Transitional foster care is short term care that is designed for children under the age of 13, sibling groups with one sibling under the age of 13, pregnant and parenting teens, and children with special needs. Long-term foster care is designed for children who ORR expects to be eligible for immigration relief and who are expected to have an extended stay within the ORR system, for example trafficking victims or orphaned children. Therapeutic foster care is for unaccompanied children whose exceptional needs cannot be met in regular family foster care homes and consists of intensive supportive and clinical services in the homes of specially trained foster parents. Foster family homes must be licensed according to their state’s licensing regulations. Foster care placements are the least restrictive placement option in the ORR continuum. Staff-secure shelters. These facilities maintain a heightened level of security measures within a licensed shelter care context. The population is primarily made up of children with an offender history, but does not typically include children with serious offenses, a violent or assaulting history, or serious sex offenders. Service provision is to be tailored to address the individual needs and underlying behavior and reasons for such a placement. Secure shelters. These are ORR’s most restrictive residential settings. These facilities are designed for a child who requires very close supervision and may need the additional internal controls and physical structure of a secure facility. This secure population is primarily made up of children with a serious offender history; children who are serious escape risks; children who have attempted to escape or escaped from a staff-secure care provider; or children who have been severely disruptive in a staff-secure setting. A secure facility may be a licensed juvenile detention center or a highly structured therapeutic facility. Residential treatment centers. These facilities are considered therapeutic placements for children diagnosed with a mental health disorder by a psychiatrist or psychologist. These centers provide services in a highly structured clinical program and have the ability to provide services to children with various diagnoses, such as bipolar, depressive, and conduct disorders. Group home. A group home specializes in caring for specific populations (e.g., teen mothers). A group home is run by 24-hour staff or house parent and typically houses 4 to 12 unaccompanied children. Extended care group homes are for children who may be in ORR custody for an extended period. In addition to caring for the children, ORR’s grantees assess the suitability of potential sponsors—generally parents or other relatives in the country who can care for the child after they leave ORR custody. This assessment includes background checks, and in some cases, conducting home studies when there are questions about the ability of the sponsors to meet the needs of a child and provide a safe environment. In cases in which a child is considered to have mental health or other needs that could benefit from ongoing assistance from a social welfare agency, ORR may arrange for post-release services. Additionally, in cases in which a favorable home study was conducted, post-release services are automatically provided. Post-release service providers refer sponsors and children to community resources, such as legal, psycho-social, or educational services. Children released to sponsors may attend public schools and use other services they are eligible for, such as health care provided by state or local agencies or nonprofit organizations in the communities in which they reside. Release to a sponsor does not grant legal immigration status to these children. Children are scheduled for removal proceedings in EOIR immigration courts to determine whether they will be ordered to be removed from the United States or granted immigration relief. ORR requires sponsors to ensure that children attend their removal proceedings. Immigration judges, who are located in courts around the country, hear children’s cases and make determinations regarding whether they should be ordered removed from the United States or granted legal immigration status. Children who wish to apply for asylum or Special Immigrant Juvenile (SIJ) status do so through DHS’s USCIS. USCIS has initial jurisdiction over all asylum applications filed by unaccompanied children, including those in removal proceedings. If USCIS does not grant asylum, an immigration judge considers the asylum claim anew. When applicable, ICE is responsible for the removal and repatriation of children. In response to an increased number of referrals of unaccompanied children from DHS in recent years, particularly in fiscal year 2014, ORR increased its shelter capacity (the number of beds it has available) and updated its policies and procedures to reduce the number of days children spend in ORR custody. From fiscal years 2003 through 2011, ORR cared for less than 10,000 unaccompanied children per year (see fig. 2). Beginning in fiscal year 2012, the number of unaccompanied children apprehended at the southwest border by DHS and transferred to ORR custody rose to unprecedented levels, and peaked in fiscal year 2014 at nearly 57,500. The vast majority (95 percent) of the children in ORR’s care from January 2014 through April 2015 were from Guatemala, Honduras, and El Salvador according to our analysis of ORR data (see table 2). As noted earlier, some children from contiguous countries such as Mexico who meet certain conditions are also referred to ORR. Over half of the children were 16 or 17 years old; the remainder were 15 and younger. Examples of Experiences of Unaccompanied Children Reasons for Migration: Children in ORR care reported a variety of reasons for traveling to the United States. Several children reported a desire to reunite with a parent or relative in the United States and pursue better education opportunities. One child reported being threatened by a gang member who wanted to date her, while others were being pressured to join local gangs. Another child described leaving his biological parents and siblings to find work in the United States in order to send money home to provide for his family. The Journey: Children described diverse experiences during their journeys to the United States. A number of children or their relatives paid professional smugglers or “coyotes” to facilitate their journey to the United States. One child described a journey that took a month traveling by buses, a plane, several stays in a house with other migrants and finally a boat crossing into the United States. Another child reported that it took nearly 45 days to make it to the border by bus. Some children traveled with other relatives. One child described traveling for 10 days with a cousin, taking a combination of cars, buses, taxis, walking, and swimming across the Rio Grande together. In some cases children faced troubling circumstances during their journey. One girl describes being physically assaulted by Mexican border officials who took money and belongings from migrants traveling from countries outside of Mexico. Sponsors Shortened time frame for identifying and approving sponsors, and simplified sponsor application. Established priority categories for approving sponsors based on relationship to child. Streamlined procedures and simplified documentation requirements for sponsors, including elimination of fingerprinting requirement for parents/legal guardians with no criminal or child abuse history. Release Reduced the maximum number of days between approval of a child’s release and actual discharge, and paid for travel of child to sponsor, if needed, during the height of the surge. Clarified policy to staff that optional medical services should not delay a child’s release. Collaborated with Executive Office for Immigration Review on a pilot to expedite requests for voluntary departure; streamlining voluntary departure process. Internal Policies Reduced various paperwork requirements and standardized case management forms. Standardized mechanisms for tracking providers’ performance on release processing, for example, created tools to track timeframes from ORR approval of release to the physical discharge of the child, by the care provider. Revised care provider policies including child assessments, safety planning, and services mandated by Flores Settlement Agreement. Staffing Expanded duties for field staff. Provided training on sponsor identification and approval procedures to all care providers. Additionally, ORR implemented several policy changes to address fluctuations in the number of children in its custody. In November 2014, ORR implemented a new policy in order to address fluctuations in its standard capacity needs by defining a “high” season (April through July) and a “low” season (August through March), and providing 25 percent less funding during the low season to shelters with more than 50 beds. Generally, this means ORR is paying less money per bed, while still maintaining capacity in case those beds at the larger shelters are needed. However, the fluctuations in seasons can create challenges for grantees, according to shelter staff. For example, grantees employ and train professional staff (such as licensed counselors) which makes it difficult for them to downsize shelter operations during the low season while remaining sufficiently staffed for the high season or an influx of children. Another policy change that occurred in June 2014 decreased the number of children staff served. The number of children per case manager decreased from 20:1 to 8:1 and per clinician from 25:1 to 12:1. According to ORR officials, these changes helped ensure that children received needed services and facilitated the timely release of children. Agency officials said that while these policy changes could improve service provision for children and sponsors, the changes also increased shelter staffing costs, making it more difficult for grantees to decrease their budgets to account for the low season. Although grantees told us the low season is used to train staff while fewer children are in care, it is possible staff may not be fully utilized from August through March. ORR has taken additional steps to prepare to meet ongoing and future capacity needs by developing a framework to guide its efforts and is continuing to participate in an interagency group created in response to the influx of unaccompanied children. Bed Capacity Framework—ORR developed a bed capacity framework for fiscal year 2015 that outlines its plans to continually monitor data on the referrals of unaccompanied children and other indicators, such as apprehensions and releases, to help it assess its capacity needs. The framework also includes key information ORR should have and mechanisms that should be in place to meet its needs, such as an inventory of available beds, timelines and decision points for determining if and when bed capacity should be increased, and ways to operationalize these decisions. ORR officials said that prior to 2014, ORR’s shelter capacity was based on the number of children referred to its care in previous years. The new capacity framework provides bed capacity based on two possible scenarios: (1) a baseline scenario similar to fiscal year 2014 in which about 58,000 children would be served during fiscal year 2015, and (2) a surge scenario that can serve 104,000 children over the fiscal year. The framework also includes three types of beds: “standard” beds, which are available year-round through the annual grant process; “temporary” beds, which are part of the annual grant process but provide additional capacity for a portion of the year as needed; and “surge” beds, which can be made available during surges and outside of the annual grant process. The Unified Coordination Group—The President established this interagency effort, led by the DHS’s Federal Emergency Management Agency, to enhance coordination among HHS, DHS, and other agencies in response to the significant increase in the number of unaccompanied children. The Unified Coordination Group issued a strategic plan in March 2015 that outlines indicators (for example, when a certain percent of ORR beds are occupied) for determining when partnering agencies need to meet and for deciding appropriate levels of response. Even with these efforts in place and as we have previously reported, ORR officials said predicting the number of unaccompanied children that will be apprehended each year is difficult because there are many factors that affect a child’s decision to leave his or her home country and come to the United States. ORR officials added that determining appropriate capacity levels for ORR shelters is challenging because the agency must be prepared for a large increase of children without overspending on unused beds if fewer children arrive. In ORR’s bed capacity framework for fiscal year 2015, its baseline scenario was informed by the 2014 influx (58,000 children annually with the peak need of 10,600 beds). The actual number of children placed in ORR’s care in fiscal year 2015 was over 33,700 with almost 6,000 children in ORR’s custody in September 2015 (see fig. 4). Generally, children needing care in fiscal year 2015 numbered well below the fiscal year 2014 baseline and below the actual number of beds available, particularly during the “low” season months at the beginning of fiscal year 2015. As discussed earlier, ORR has reduced funding levels for some facilities during this low time period to help manage costs and two of the grantees we spoke with said this time was used to train employees. The children served in fiscal year 2015 were less than one-third of ORR’s alternative scenario of 104,000 children needing care. The number of children in ORR’s care increased during the “high” season in 2015 and reached more than 50 percent of ORR’s bed capacity in June. This percentage of capacity in use—one of the indicators developed by the Unified Coordination Group—triggered a meeting of the group. Because fewer children were arriving than expected, officials decided that a higher level response was not needed and ORR did not increase shelter capacity at that time. However, as shown in figure 4, the number of children in ORR’s care increased in August, departing from historical trends in which August marked the start of the “low” season. In our testimony on October 21, 2015, we provided analyses of DHS data that indicated that unlike the prior year, apprehensions at the border in the month of August 2015 increased compared to previous months in 2015, and exceeded by nearly 50 percent August 2014 apprehensions. In mid-August 2015, ORR had 5,500 children in its care and approximately 7,800 available beds. ORR officials told us that information it received from DHS and the Department of State through its work with the Unified Coordination Group suggest that the rate of referrals will remain steady or increase in fiscal year 2016. As a result, ORR plans to increase its bed capacity to between 8,500 and 8,700 as of November 15, 2015, adding beds through its existing network of shelter providers. As noted above, ORR is taking several actions, including working with related agencies, to minimize the risks of not meeting its charge of providing care and services to unaccompanied children by ensuring it has capacity to meet demand. At this point, given the uncertainty of the number and timing of children’s journeys from Central America, ORR has supported some levels of unused capacity in order to be prepared. The bed capacity framework it developed for fiscal year 2015 included plans and steps to manage its capacity and ORR officials said they continue to use it as a roadmap. However, they have not updated this framework for fiscal year 2016 and have not established a systematic approach to update their framework on an annual basis to account for new information so that it remains current and relevant to changing conditions. For example, adjustments may be warranted for baseline and alternative scenarios that influence plans for bed capacity. According to federal standards for internal control, an agency’s processes for decision making should be relevant to changing conditions and completely and accurately documented. Not having a documented and continually updated process for capacity planning may hinder ORR’s ability to be prepared for an increase in unaccompanied children while at the same time minimizing excess capacity to conserve federal resources. ORR policy requires certain care and services be provided to unaccompanied children while in ORR facilities (see table 4). During our site visits to nine facilities, staff described providing services to children that ranged from intake, orientation, and medical screening processes, to recreational activities and supervised field trips to museums. Staff also provided information to us about the Know Your Rights presentations, which provide basic legal information to children, and other legal screening services, through arrangements with various nonprofit organizations. Staff also shared with us information about ORR’s program to provide children with independent advocates. In addition, we saw children’s rooms, and we observed staff distributing clothing and personal hygiene items to children. We also visited dining and recreational areas, health clinics where children are vaccinated and receive medical care, and classrooms. Classrooms and course instruction varied across the facilities that we visited. Some facilities had classrooms dedicated to single subjects, while others taught all subjects in the same space. In some instances, teachers from local school districts provided on-site instruction. In other instances, grantees employed teachers. One facility we visited bused children to a school off-site. Children placed in transitional foster care attended school at the facility. ORR requires grantees to document in case files many of the services they provide to children and review of case files figures prominently in ORR’s monitoring of grantees. However, we found that required documents were often missing from the 27 randomly selected case files that we reviewed. Facility staff must maintain numerous documents in children’s case files to ensure that care is provided and that facilities are in compliance with ORR policy and applicable laws, according to ORR policy. For example, ORR’s case file checklist includes admission, legal, and medical documents; education services, case management, clinical services and discharge records; acknowledgement of program forms; and significant incident reports. The checklist also includes the reunification packet, which contains sponsor information, such as proof of identification, including a birth certificate; proof of relationship to the child, including the child’s birth certificate; and a completed reunification application. While our site visits suggest that the ORR facilities were generally providing care to children as required by ORR policy; none of the 27 case files we reviewed contained all of the required documents to verify the services provided. Specifically, 14 case files were missing the Know Your Rights legal presentation acknowledgement form, 10 were missing a record of group counseling sessions, and 5 were missing clinical progress notes. In addition, we identified several cases in which forms that were present in the files were not signed or dated. Although ORR uses its web- based data system, the UAC portal, to track some information about the services children receive, and grantees report on the services they provide in their annual reports, the documents contained in case files are the primary source of information about the services provided to individual children. ORR staff told us that some of the documents were probably not included in the case files we reviewed for the following reasons: Facility staff sometimes forget to place copies of acknowledgements in case files. Some group activities are documented through sign-in forms that may not get placed in individual case files. Staff may not place documents in files until cases are closed. However, because all of the cases we reviewed were closed cases, this explanation does not apply to the files we reviewed. ORR officials added that missing documentation is often a routine reason for corrective action. Without all of the documents included in the case files, it is difficult for ORR to verify that required services were actually provided in accordance with ORR policy and grant agreements during its monitoring visits. ORR’s most comprehensive monitoring of its grantees occurs during on- site monitoring visits, however we found that on-site visits of facilities has been inconsistent. According to ORR documents, during on-site monitoring visits, ORR project officers spend a week at facilities touring, reviewing children’s case files and personnel files, and interviewing children and staff. Additionally, prior to visiting the facilities, ORR guidance directs project officers to review quarterly reports, recent audit reports, organization charts, grant applications and agreements, facility leases, safety and sanitation certificates, and other items. They are also to consult with other ORR staff who work with grantees. Also, according to ORR, on-site monitoring typically includes a review of a random sample of case files for children cared for at a facility. ORR officials noted that, in addition to on-site monitoring, they monitor grantees in other ways, such as desk monitoring where project officers, review, among other things, significant incident, quarterly reports, and obtain feedback from facility staff. Additionally, according to ORR officials, ORR field staff—contract field specialists and federal field specialists—provide oversight and work directly with facility staff. For example, field staff provide technical assistance, attend facility staffing meetings, and advise ORR headquarters officials on decisions involving the placement, transfer, discharge, and special needs of unaccompanied children. Prior to fiscal year 2014, project officers were supposed to conduct on- site monitoring of facilities at least once a year. However, our review of data provided by the agency found that many facilities went several years without receiving a monitoring visit. For example, ORR did not visit 15 facilities for as many as 7 years. ORR officials acknowledged that some facilities went many years without on-site monitoring and attributed it to lack of staff resources. The officials noted that in 2009, four project officers were responsible for 45 facilities, as well as other tasks. By 2013, although the number of facilities had increased, there were two project officers responsible for on-site monitoring. In 2014, ORR implemented a biennial on-site monitoring program, hiring new project officers whose sole responsibility is to provide on-site monitoring of all of its facilities. Nevertheless, ORR did not meet its goal to visit all of its facilities by the end of fiscal year 2015. ORR officials said they rescheduled some monitoring visits because of limited resources and administrative challenges, such as limited travel funds. In fiscal year 2014, project officers visited 12 of 133 facilities, and by August of fiscal year 2015, they completed 22 of 29 scheduled visits to 140 facilities. ORR rescheduled 11 other monitoring visits from fiscal 2015 to 2016, bringing the total number of visits scheduled for 2016 to 70. Given ORR’s recent history, its ability to visit 70 facilities in a single year is uncertain. According to standards for internal control, management should establish and operate monitoring activities to monitor the internal control system and evaluate the results. Monitoring generally should be designed to assure that it is ongoing and occurs in the course of normal operations, is performed continually, and is ingrained in the agency’s operations. In addition to ORR’s scheduled onsite monitoring, officials said that project officers occasionally visited facilities out of cycle. However, they did not use specific criteria to determine when out-of-cycle visits were warranted. Instead, they assessed facility risks on a case-by-case basis. According to ORR officials, as part of ORR’s desk monitoring of facilities, project officers looked for patterns that indicated a possible lack of oversight by facility staff, such as an increase in significant incident reports, and the need for a monitoring visit. Officials said that staff were more likely to provide technical assistance or schedule a 1-day site visit, rather than a week-long on-site monitoring visit. During fiscal year 2015, ORR officials said that they scheduled one out-of-cycle visit after an unaccompanied child ran away from a facility under unclear circumstances. Monitoring visits are intended to provide an opportunity to identify program deficiencies or areas where programs are failing to comply with ORR policies. For example, according to ORR site visit monitoring reports that we reviewed, during two separate visits to one facility project officers found that facility staff had failed to medicate children properly, including, in one instance, accidental overdoses of medicine. At another facility, children informed ORR staff that they were not meeting regularly with their case managers. All of the monitoring reports that we reviewed included findings that were gleaned from case file reviews about grantees failing to document services. Project officers prepare monitoring reports, citing remedial steps or corrective actions that programs must take to comply with ORR policies. According to ORR officials, in 2014, grantees typically implemented corrective actions within 30 days of receiving notice of a program deficiency. Without consistently monitoring its grantees, ORR cannot know whether they are complying with their agreements and that children are receiving needed services. ORR has delegated the responsibility for identifying and screening sponsors to its grantees. In addition to the day-to-day care that grantees provided to children, facilities’ staff are responsible for identifying and screening potential sponsors. During the initial intake process, case managers ask children about potential sponsors with whom they hope to reunite. Within 24 hours of identifying potential sponsors, case managers are required to send them a Family Reunification Application to complete. The application includes questions about the sponsor and other people living in the sponsor’s home, including whether anyone in the household has a contagious disease or criminal history. Additionally, the application asks for information about who will care for the child if the sponsor is required to leave the United States or becomes unable to provide care. Sponsors also are asked to provide documents to establish their identity and relationship to a child. The manner in which grantees screen the sponsor varies based on the sponsor’s relationship to the child (see table 5). The Trafficking Victims Protection Reauthorization Act requires home studies in cases in which it is determined that the child is a victim of a trafficking; the child has a disability as defined by the Americans with Disabilities Act; the child has been a victim of physical or sexual abuse significantly affecting their health or welfare; or the child’s sponsor clearly presents a risk of abuse, maltreatment, exploitation or trafficking to the child. In addition, ORR policy requires home studies in cases where the sponsor is a non-relative and a child is 12 years old or younger, the individual is seeking to sponsor multiple children to whom he or she is not related, or as required by the Trafficking Victims Protection Reauthorization Act. ORR officials reported that 2.2 percent of released cases received a home study in fiscal year 2014. Table 5 identifies the types of background checks that are conducted as part of the reunification process to help ensure the safety of the child once released to a sponsor. In these rare instances, children remain in ORR facilities or are placed in ORR’s long-term foster care. Legend: ● A full-circle indicates that the background check is required in all cases. ◑ A half-circle indicates that the background check is only required in cases in which there is a documented risk to the safety of the unaccompanied child, the child is especially vulnerable, and/or the case is being referred for a mandatory home study. Prior to children’s release to sponsors, sponsors sign a Sponsor Care Agreement, which stipulates, among other things, that they will: provide for the physical and mental well-being of the child; ensure that the child appears for all removal proceedings in ensure that the child reports to ICE in the event that they are ordered removed from the United States by an immigration judge; notify DHS of address changes; and if not the parent or legal guardian of the child, attempt to establish legal guardianship through the local court system. Between January 7, 2014, and April 17, 2015, ORR released 51,984 children from El Salvador, Guatemala, or Honduras to sponsors. Of these children, nearly 60 percent were released to a parent. Fewer than 9 percent of these children were released to a non-familial sponsor, such as a family friend, and less than 1 percent of these children were released to a sponsor to whom their family had no previous connection (see table 6). In fiscal year 2014, ORR released a total of 53,518 children to sponsors, and these children were released in every state except one. The largest number of children were placed in Texas, New York, California, Florida, and the Washington, D.C. area, respectively, with Harris County, TX receiving 4,028 children in fiscal year 2014, more children than any other single county (see fig. 5). Often children were placed in counties with large Latino populations. The Trafficking Victims Protection Reauthorization Act requires ORR to provide post-release services in cases in which a home study was conducted prior to a child’s release to a sponsor, and authorizes ORR to provide post-release services to other children, such as those with mental health needs, who may benefit from them. These services include direct assistance to the child and sponsor by ORR grantees in the form of guidance to the sponsor to ensure the safest environment possible for the child, as well as assistance accessing legal, medical, mental health, and educational services, and initiating steps to establish guardianship if necessary. These services can also include providing information about resources available in the community and referrals to such resources. According to ORR officials, a relatively small percentage of unaccompanied children received post-release services, and ORR’s responsibility for the other children typically ended once it transferred custody of the children to their sponsors. According to information provided by ORR, the number of children receiving post-release services increased from fiscal year 2012 through fiscal year 2014, but, due to the overall increase in the number of unaccompanied children served by ORR, the percentage receiving these services decreased from 24 percent to 9.5 percent over this timeframe. However, ORR officials also stated that they had not confirmed that these data provided by grantees are accurate. Post-release services are limited in nature and typically last for 6 months; however, in cases in which a home study was conducted, ORR is required to provide post-release services until the child’s immigration case is resolved. According to ORR, in these cases, post- release services last, on average, a year to a year and a half. Although ORR provides post-release services to a small percentage of children after they leave its care, the office has recently taken several steps to expand access to services to children. For example, according to ORR officials, the agency recently expanded the eligibility criteria for post- release services to include all children released to a non-relative or distant relative. In addition, on May 15, 2015, ORR began operating a National Call Center help-line. Children who contact ORR’s National Call Center within 180 days of release who have experienced or are at risk of experiencing a placement disruption are also now eligible for post- release services according to ORR officials. In its first month of operation, ORR officials stated that the call center received 25 calls from children and sponsors related to placements that had been disrupted or were in danger of becoming disrupted. Lastly, in August 2015, ORR instituted a new policy requiring facility staff to place follow-up calls to all children and their sponsors after the children are released. The purpose of these calls is to determine whether the children are still living with their sponsors, enrolled in or attending school, aware of upcoming removal proceedings, and safe. ORR guidance requires the “Safety and Well Being” calls to occur 30 days after the children are released from ORR care to sponsors. Staff are required to make a “reasonable effort” to contact the children and document the results of the call in the children’s case files. Facilities are also required to submit a tracking report to ORR monthly to document these follow-up calls. In cases in which additional services are needed, the case manager will refer the child and sponsor to ORR’s National Call Center. In cases in which the child is believed to be unsafe, ORR’s policy requires that the case manager comply with mandatory reporting laws, state licensing requirements, and federal laws and regulations regarding reporting to child protective agencies and law enforcement. ORR officials told us these policy changes were made as a result of an overall review of ORR policies, including those related to post-release services. These changes expand post-release services to children and families who may need additional support, but were not assigned such services when the child was initially placed with the sponsor. ORR already has some information from its post-release grantees on services provided to children after they leave ORR custody, and its newly instituted well-being calls and National Call Center allow it to collect additional information about these children. However, ORR does not have processes to ensure that all of these data are reliable, systematically collected, and compiled in summary form to provide useful information about this population for its use and for other government agencies. Regarding post-release services, as noted previously, ORR officials had not confirmed that data provided on the number of children served by their grantees were reliable and had not compiled or summarized information on post-release services. In addition, ORR officials told us that reports on post-release services are not currently entered in ORR’s web-based database; although they said they had plans to incorporate this information into the database in the future. Because post-release information is currently stored in grantees’ individual quarterly program performance reports, it is difficult to compile and summarize. Regarding the National Call Center, ORR officials said they did not have a process in place for systematically summarizing information collected from these calls. According to ORR officials, for the National Call Center that began operation in May 2015, ORR receives weekly and monthly reports from the contractor operating the call center with information on calls related to child abuse and neglect; placement disruptions; domestic violence; and children who have run away from their sponsors. ORR officials told us that they plan to analyze the call center data for trends, but as of October 2015, they had not yet begun to do so. Federal internal control standards require that an agency must have relevant, reliable, and timely information to enable it to carry out its responsibilities. According to ORR officials, the agency is generally not required by law to track or monitor the well-being of these children once they are released to sponsors. However, because of its expansion of post-release services, the new call center, and the new well-being calls, ORR will have access to information on children’s well-being. Compiling and sharing this information presents an opportunity that could help ORR and other federal and state agencies better understand and respond to changing circumstances, such as the potential involvement of unaccompanied children with state child welfare services and emergency medical services. Without processes to ensure that the data from its activities are reliable, systematically collected, and compiled in summary form, ORR may be missing an opportunity to provide useful information about this population for the use of other government agencies. Once children are released from ORR custody to their sponsors, ORR policy states the sponsors are responsible for providing for their physical and mental well-being. Services available to unaccompanied children through local service providers are typically the same as those available to other children without lawful immigration status. For example, children without lawful immigration status are generally not eligible for federal benefits, such as the Supplemental Nutrition Assistance Program, Medicaid, and Temporary Assistance for Needy Families; however they are eligible for other federal benefits such as emergency medical assistance. Local service providers we spoke with in six counties told us that the children’s status would have no effect on eligibility for many of the services they provide. For example, school districts are required to educate students regardless of their immigration status. Similarly unaccompanied children were not precluded from receiving services at health clinics we spoke with. Overall, the level of awareness about, and services available to, unaccompanied children varied across the jurisdictions we spoke with. For example, in two of the counties in which we conducted phone interviews, representatives from mayors’ offices told us that they were unaware that unaccompanied children were living in their city or had limited knowledge about the issue. However, in another jurisdiction we visited, the mayor’s office had established a working group related to unaccompanied children that included representatives from several city departments and nonprofits. In this city, representatives from the health and education departments regularly attended immigration court to screen and enroll children in the state’s Children’s Health Insurance Program and to help with school enrollment. In some locations, non-profit organizations work specifically with unaccompanied children, providing legal, medical, or other services. In one community, we spoke with a staff member at a nonprofit organization that provides services to unaccompanied children from Central America, such as case management, individual and family counseling, support group services, and educational services. This organization also has other programs that serve unaccompanied children, along with other at- risk children, that focus on gang prevention and intervention services. Program staff told us they receive the bulk of their referrals from gang prevention coordinators and school social workers, but also receive referrals from courts, mental health counselors, and parents. Program staff told us the program is “overwhelmed” by the number of recently immigrated youth referred to it. Unaccompanied children may also receive some services through local or national nonprofit organizations that other children without lawful immigration status do not. For example, services provided through post-release service grants with ORR or by legal service organizations under DOJ’s Executive Office for Immigration Review’s (EOIR) Legal Orientation Program for Custodians of Unaccompanied Alien Children. Local service providers we spoke with expressed concerns that unaccompanied children might have unmet needs or face barriers to receiving some necessary services. For example, representatives we spoke with in four of the six school districts, as well as representatives from a County Office of Education, discussed the mental and behavioral health needs of these children and several noted barriers to meeting these children’s needs. We were also told by seven local service providers who worked with these children that they had previous exposure to violence and trauma. Four local service providers noted that in some cases children have experienced challenges related to reunification with parents they had not seen for many years. Six service providers said that these factors could contribute to behavioral and mental health needs or make them more susceptible to gang recruitment and trafficking. A staff member in a local health clinic and a school district official told us that some children disclosed harrowing stories of their journeys to the United States, including incidents such as being tied to a tree for several days, experiencing a sexual assault, and watching a fellow train rider’s execution by beheading. One health care provider estimated that about 50 percent of unaccompanied children he served required mental health services. Some counties reported challenges attracting bilingual professionals, such as mental health providers, making it difficult for these children to obtain needed services. Officials we spoke with in five of the six school districts also noted that newly arrived children from Central America—many of whom may have been unaccompanied—often have limited or disrupted educational histories and face language barriers. Officials from four of these school districts said that these issues can make academic achievement or graduation challenging. According to officials we spoke with, state and local requirements may also create barriers for unaccompanied children. Officials we spoke with in one county told us that non-parental sponsors lack the rights of a parent or legal custodian under state law. In this county, such sponsors must apply for legal custodianship in court. However, until they have obtained custodianship, it can be difficult to enroll children in school or access health services for them, according to court and social service agency officials in this county. Unaccompanied children also face barriers similar to those faced by other children without lawful immigration status. Staff we spoke with at all three of the clinics, as well as other local agency officials told us that lack of health insurance, lack of knowledge about where to seek services, and/or fear of disclosing their immigration status made it challenging to access certain health care services and other services. Staff at the three clinics and local agency officials in one county told us that lack of health insurance made obtaining some health care services especially difficult, such as dental care and care for more specialized health needs, which tend to be more expensive and not available through local clinics. Officials in two school districts told us that finding teachers who are bilingual or teach English as a second language was a challenge for them and ensuring that they had appropriate personnel to serve these children was therefore difficult. However, officials in some school districts we spoke with appeared to have more resources available to serve these students. Specifically, one official we spoke with said the school district was establishing a “newcomers division” within its Multilingual Education Department, which would serve newly arrived immigrant students— including formerly unaccompanied children. Another school district we contacted had a contract with a nonprofit organization to provide services to these students, including socio-emotional supports. Under the Trafficking Victims Protection Reauthorization Act, unaccompanied children are generally required to be transferred to ORR and await immigration removal proceedings while in the custody of either ORR or a qualified sponsor. Upon apprehension by DHS, unaccompanied children are given a Notice to Appear before EOIR for removal proceedings. During these proceedings, EOIR’s immigration judges, who are located in courts around the country, decide whether the child is removable from the United States and, if so, whether he or she is eligible for relief or protection from removal. In 2007, EOIR issued guidance for immigration judges concerning cases involving unaccompanied children, which sets out basic principles that immigration judges should use in court proceedings. These include employing child- sensitive procedures and how the best interest of the child should be taken into account in the context of the judge’s discretion. In addition, ORR requires sponsors to ensure that children attend their removal proceedings. An unaccompanied child who is in removal proceedings could apply for various types of lawful immigration status with DHS’s U.S. Citizenship and Immigration Services (USCIS), including asylum and Special Immigration Juvenile (SIJ) status. USCIS’s asylum officers have initial jurisdiction of any asylum application filed by an unaccompanied child, even where such child is in removal proceedings. If, for example, an unaccompanied child intends to apply for asylum with USCIS, an immigration judge may administratively close (i.e., temporarily remove the case from the immigration judge’s calendar) or continue the removal proceeding pending the adjudication of the asylum application with USCIS. According to EOIR officials, administrative closure does not grant the child lawful immigration status, but the child is not at risk of removal while the proceeding is closed. In general, an individual is eligible for asylum if he or she (1) applies from within the United States; (2) suffered past persecution, or has a well-founded fear of future persecution, based on race, religion, nationality, membership in a particular social group, or political opinion; and (3) is not statutorily barred from applying for or being granted asylum. If USCIS determines that the unaccompanied child is ineligible for asylum and does not otherwise have lawful immigration status in the United States, USCIS asylum officers refer the asylum application for review by an immigration judge, who will reopen the case and reinitiate the child’s removal proceedings. In addition to asylum, unaccompanied children may seek to apply for SIJ status through USCIS, which is designed to help immigrant children who have been abused, abandoned, or neglected. According to USCIS, certain children who are unable to be reunited with a parent can obtain lawful permanent resident (or green card) status as a SIJ, and children who obtain a green card through the SIJ program can live and work permanently in the United States. To be eligible for SIJ status, among other things, a child must be declared dependent on a state court or such court must decide to legally place the child with a state agency, or an individual or entity appointed by a state or juvenile court; it must be determined not in the best interests of the child to be returned to his or her home country; and it must be that reunification of the child with a parent is not viable due to abuse, neglect, abandonment, or a similar basis found under state law. Once an unaccompanied child has met all the eligibility requirements for SIJ status, he or she must then file for adjustment of status to receive an SIJ- based green card. In July 2015, the Associate Director of the Refugee, Asylum and International Operations Directorate at USCIS testified that USCIS has received increasing numbers of asylum applications from unaccompanied children in recent years and, in particular, from fiscal years 2012 through 2014. Specifically, the Associate Director testified that USCIS received 534 asylum applications from unaccompanied children who were apprehended in fiscal year 2011 as compared to 6,990 asylum applications from such children who were apprehended in fiscal year 2014. In addition, according to USCIS, when compared to the number of unaccompanied children apprehended annually over the 2011 through 2014 time period, the percent of children applying for asylum with USCIS has also increased (from 3 percent in fiscal year 2011 to 10 percent in fiscal year 2014). Further, the Associate Director testified that since fiscal year 2009, USCIS granted asylum to unaccompanied children at a rate of 42.6 percent (according to USCIS, the overall rate at which all new asylum applicants with USCIS were granted asylum was 41 percent). From fiscal year 2009 through May 31, 2015, USCIS’s testimony statement indicated that 92 percent of the unaccompanied children who applied for asylum with USCIS were from El Salvador, Guatemala, or Honduras. If unaccompanied children have not yet sought, or are not granted, certain immigration benefits within the jurisdiction of USCIS, there are several other possible outcomes, and various forms of relief that may be available to them during immigration proceedings. For example: Removal order: An immigration judge rules that the child is removable, not otherwise eligible for relief or protection from removal, and therefore is to be removed from the United States. ICE is responsible for carrying out such orders. Administrative closure: When a case is temporarily removed from an immigration judge’s calendar or from the Board of Immigration Appeals’ docket. According to EOIR, a judge may administratively close a case, for example, if a child applies for asylum during their removal hearing. EOIR officials said that such an action does not grant the child legal immigration status, but the child is not at risk of removal while the case is closed. Cases that are administratively closed can be reopened at a later date. Termination: A decision by an immigration judge that dismisses the case related to a particular charging document. In such cases, the child is not subject to removal relating to the dismissed charging document, but this decision does not grant the child legal immigration status. Voluntary departure: An order from the immigration judge that allows a child who is removable to voluntarily leave the country in a designated time frame in lieu of formal removal. Relief: An immigration judge may grant relief or protection from removal to a child who is otherwise removable, provided the applicable eligibility requirements are satisfied. In July of 2014, DHS began noting on Notices to Appear whether the juvenile who was apprehended was accompanied or unaccompanied. With this information, EOIR began using a specific code in its automated case management system to identify unaccompanied children. According to EOIR data, from July 18, 2014, through July 14, 2015, DHS initiated more than 35,000 removal proceedings for unaccompanied children. Of these 35,000 removal proceedings, EOIR data indicate that as of July 14, 2015, an immigration judge issued an initial decision in nearly 13,000 proceedings (or 36 percent). Of those 13,000 decisions, about 7,000 (or 55 percent) resulted in a removal order for the unaccompanied child. According to EOIR data, about 6,100 (or 88 percent) of those initial decisions that resulted in removal orders were issued in absentia, which is when a child fails to appear in court for their removal proceedings and the immigration judge conducts the proceeding in the child’s absence. However, a judge’s initial decision does not necessarily indicate the end of the removal proceedings. For example, cases that are administratively closed can be reopened, and new charges may be filed in cases that are terminated. In addition, children who receive a removal order in absentia, and with respect to whom a motion to reopen their case has been properly filed, are granted a stay of removal pending a decision on the motion by the immigration judge. Moreover, a child may seek to appeal a removal order; thus, it is unclear from the data pertaining to orders of removal whether such orders were deemed administratively final as a result of all avenues for appeal with EOIR to remain in the United States being exhausted or waived. Overall, according to ICE data, from fiscal year 2010 through August 15, 2015, based on final orders of removal, ICE removed 10,766 unaccompanied children, 6,751 of whom were from El Salvador, Guatemala, or Honduras. According to EOIR data, as of July 14, 2015, there were over 23,000 pending cases for unaccompanied children. Therefore, the ultimate legal outcome for many unaccompanied children has not yet been determined. To accommodate the increase in the number of unaccompanied children, ORR has increased its number of grantees and bed capacity in recent years and developed a framework to help it prepare for future demand, starting with fiscal year 2015. The number of children referred to ORR through most of fiscal year 2015, while high by historical standards, was less than expected, and ORR grantees had many unoccupied beds. However, the number of referrals began increasing towards the end of the summer and has remained high through the beginning of what is typically ORR’s “low” season. Although ORR may not be able to predict the exact number of facilities and beds needed in any given year, developing a process for updating its bed capacity framework on an annual basis may help ensure an adequate response while minimizing the use of federal funds and provide documentation of its analysis and decisions in support of its capacity levels. In addition, ORR brought new grantees online quickly and increased the number of its staff responsible for monitoring these grantees. Now, ORR has to determine how best to leverage its resources and use its staff to monitor these grantees. Grantees provide care and services to unaccompanied children, many of whom have been exposed to trauma and violence and travelled great lengths to get to the United States. It is important that grantees comply with ORR’s policies to ensure these children receive, among other things, medical, clinical and educational services, and that children are quickly reunified with sponsors. However, ORR does not regularly monitor its grantees, and cannot ensure that they are providing these needed services and properly documenting them. Lastly, in addition to many questions about the children’s well-being and whether they have access to needed services, there are questions about their potential involvement with state child welfare services, and whether these children will return to their country of origin or legally remain in the United States. Although ORR has recently taken steps to gather more information on the children once they are released, it does not have a process to ensure that the data are reliable, systematically collected, and summarized. While ORR is not required to gather this information, an opportunity would be lost to help ORR and other government agencies better understand and respond to issues related to unaccompanied children if this information is not collected in a reliable and consistent manner. We recommend that the Secretary of the Department of Health and Human Services direct the Office of Refugee Resettlement to take the following three actions: Develop a process to update its bed capacity framework on an annual basis to include the most recent data related to numbers of unaccompanied children who may be referred to its care and adjust its planning scenarios that guide its bed capacity as appropriate. Review its monitoring program to ensure that onsite visits are conducted in a timely manner, case files are systematically reviewed as part of or separate from onsite visits, and that grantees properly document the services they provide to children. Develop a process to ensure all information collected through its existing post-release efforts are reliable and systematically collected so that they can be compiled in summary form and provide useful information to other entities internally and externally. We provided a draft of this report to the Departments of Health and Human Services (HHS), Homeland Security, and Justice for review and comment. Each of the departments provided technical comments that we incorporated in the report as appropriate. HHS also provided written comments that are reproduced in appendix III. HHS concurred with all of our recommendations and stated that it is committed to continuously working to improve its operations. HHS agreed to update its bed capacity framework annually. Additionally, HHS agreed to improve its monitoring of grantees. HHS described several of its monitoring efforts, for example day long site visits, desk monitoring, and monthly reporting, which we discuss in the report, and stated that it has created a new monitoring initiative workgroup to examine opportunities for further improvement. These are all important efforts, but it is also important for HHS to take steps to strengthen its most comprehensive monitoring of grantees, its weeklong on-site monitoring, through timely visits, systematic reviews of case files, and properly documenting services provided to children. HHS also agreed to improve its data collection process to provide more systematic and standardized information on post-release services. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to relevant congressional committees, the Secretaries of Health and Human Services and Homeland Security, and the U.S. Attorney General. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512–7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. We used several approaches to address our objectives, including reviewing relevant laws and regulations, court settlement agreements, and agency policies. In addition, we interviewed relevant ORR and HHS officials and officials from the Departments of Homeland Security and Justice. To address how ORR responded to the increased number of unaccompanied children, we analyzed changes in the number of ORR’s grantees and ORR’s average monthly bed capacity from fiscal year 2010 through 2015. We reviewed ORR documents, such as ORR’s Bed Capacity Framework for fiscal years 2015, funding opportunity announcements, and other relevant planning documents. We also reviewed a plan developed by the Unified Coordination Group and interviewed ORR and ACF officials about the Unified Coordination Group’s activities. In addition, we reviewed ORR’s policy guide for its unaccompanied children program, updates to this guidance, and ORR’s schedule for additional policy updates. To gather information about how children were cared for while in ORR custody, we analyzed information from ORR’s web-based UAC portal for children admitted to and discharged from ORR care between January 7, 2014, when ORR began using the portal, and April 17, 2015. This database contains information such as children’s date and country of birth, intake, placement, and sponsor information, among other data. To assess the reliability of these data, we conducted electronic testing of the data, reviewed ORR business rules to ensure data reliability, and interviewed ORR officials and contractors knowledgeable about the data. We determined the data were sufficiently reliable for our purposes. We also visited nine ORR facilities in three states—New York, Texas, and Virginia—to interview ORR grantee staff. Locations were selected to ensure variation in the types of care provided by ORR grantees, shelter size, and location. We visited shelters, staff-secure shelters, secure shelters, and transitional foster care providers. We also reviewed a nongeneralizable random sample of 27 case files of children who were released from the nine shelters we visited. This sample was generated using alien identification numbers from data from ORR’s UAC portal for all children with a status of discharged and a valid discharge date. Each case file was reviewed by two GAO analysts to assess the extent to which documents required by the Flores Agreement and specific ORR policies were present and complete. After both analysts reviewed the files, they reconciled any differences between their reviews. To assess ORR’s monitoring of its grantees, we reviewed ORR and grantee documents, including monitoring schedules, reports, and corrective actions. We also analyzed data provided by ORR on the frequency of past monitoring and levels of staffing devoted to monitoring activities. In addition, we discussed monitoring with grantees’ staff during site visits and with ORR officials. Lastly, to learn what is known about these children once they leave ORR’s custody, we conducted phone interviews with school districts and other local government officials and nonprofit groups in 6 counties where 50 or more children were released to sponsors in fiscal year 2014. We interviewed individuals representing 19 local entities including—six school districts, one county office of education, five human services agencies or organizations, one county health system, one county executive’s office, one county juvenile court system, one mayor’s office, and three local health clinics. We also corresponded via email with a representative from a second mayor’s office. The counties include Fairfax County, VA; Harris County, TX; Nobles County, MN; Pulaski County, AR; San Mateo County, CA; and Scott County, MS. These counties were selected to represent a diversity of size, geographic location, and demographics, including variation in the size of the Latino population. We used publically available ORR data on the number of children released to sponsors by county and county demographic data from the United States Census Bureau to select counties. We then obtained additional data on the cities within selected counties children were being released to from ORR to select localities within counties to contact. Separately, we conducted interviews with city officials and nonprofit service providers in one of the cities in which we conducted a site visit. We also analyzed Department of Justice’s Executive Office for Immigration Review (EOIR) data and interviewed relevant officials from EOIR. To assess the reliability of EOIR data we reviewed related documentation and interviewed officials knowledgeable about the data. We also spoke with DHS officials. DHS’s Immigration and Customs Enforcement (ICE) and U.S. Citizenship and Immigration Services (USCIS) responded to written questions regarding the reliability of their data. We found these data to be sufficiently reliable for our purposes. We conducted this performance audit from October 2014 to February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Gale Harris (Assistant Director), Kathryn Larin (Assistant Director), Ramona L. Burton (Analyst-in-Charge), David Barish, Erika Huber, and Jesse Lamarre-Vincent made key contributions to this report. In addition, key support was provided by Lucas M. Alvarez, Sandra L. Baxter, James Bennett, Kathryn Bernet, Justin Fisher, Alison Grantham, Jean L. McSween, Jon Najmi, James Rebbe, Almeta J. Spencer, and Kathleen van Gelder. Unaccompanied Alien Children: Improved Evaluation Efforts Could Enhance Agency Programs to Reduce Migration from Central America. GAO-16-163T. Washington, D.C.: October 21, 2015. Central America: Improved Evaluation Efforts Could Enhance Agency Programs to Reduce Unaccompanied Child Migration. GAO-15-707. Washington, D.C.: July 29, 2015. Unaccompanied Alien Children: Actions Needed to Ensure Children Receive Required Care in DHS Custody. GAO-15-521. Washington, D.C.: July 14, 2015. Central America: Information on Migration of Unaccompanied Children from El Salvador, Guatemala, and Honduras. GAO-15-362. Washington, D.C.: February 27, 2015. | ORR is responsible for coordinating and implementing the care and placement of unaccompanied children. The number of children placed in ORR's care rose from nearly 6,600 in fiscal year 2011 to nearly 57,500 in fiscal year 2014. GAO was asked to review how ORR managed their care. This report examines (1) ORR's response to the increase in unaccompanied children, (2) how ORR cares for children in its custody and monitors their care, (3) how ORR identifies and screens sponsors for children, and (4) what is known about services children receive after they leave ORR custody. GAO reviewed relevant federal laws and regulations, ORR policies, and ORR and Executive Office for Immigration Review data. GAO also visited nine ORR grantee facilities in three states selected to vary in the type of care provided, shelter size, and location, and conducted a random, non-generalizable case file review of 27 case files of children released from these facilities. GAO interviewed agency officials and community stakeholders in six counties that received unaccompanied children, representing diversity in geographic location, size, and demographics. In fiscal year 2014, nearly 57,500 children traveling without their parents or guardians (referred to as unaccompanied children) were apprehended by federal immigration officers and transferred to the care of the Department of Health and Human Services' Office of Refugee Resettlement (ORR). Most of these children were from Central America. GAO found that ORR was initially unprepared to care for that many children; however, the agency increased its bed capacity to accommodate up to 10,000 children at a time. Given the unprecedented demand for capacity in 2014, ORR developed a plan to help prepare it to meet fiscal year 2015 needs. The number of children needing ORR's care declined significantly through most of fiscal year 2015, but began increasing again toward the end of the summer. Given the inherent uncertainties associated with planning for capacity needs, ORR's lack of a process for annually updating and documenting its plan inhibits its ability to balance preparations for anticipated needs while minimizing excess capacity. ORR relies on grantees to provide care for unaccompanied children, including housing and educational, medical, and therapeutic services. GAO's review of a sample of children's case files found that they often did not contain required documents, making it difficult to verify that all required services were provided. ORR revised its on-site monitoring program in 2014 to ensure better coverage of grantees. However, ORR was not able to complete all the visits it planned for fiscal years 2014 and 2015, citing lack of resources. By not monitoring its grantees consistently, ORR may not be able to identify areas where children's care is not provided in accordance with ORR policies and the agreements with grantees. ORR grantees conduct various background checks on potential sponsors prior to releasing children to them. These potential sponsors are identified and screened by the grantees as part of their responsibilities for the unaccompanied children in their care. The extent of the checks conducted depends on the relationship of the sponsor to the child. Between January 2014 and April 2015, ORR released about 50,000 children from Central America to sponsors to await their immigration hearings. In nearly 90 percent of these cases, the sponsors were a parent or other close relative already residing in the United States. Sponsors do not need to have legal U.S. residency status. There is limited information available on post-release services provided to children after they leave ORR care. In part, this is because ORR is only required to provide services to a small percentage of children, such as those who were victims of trafficking. In May 2015, ORR established a National Call Center to assist children who may be facing placement disruptions, making post-release services available to some of them. Also, in August 2015, ORR began requiring well-being follow-up calls to all children 30 days after their release. ORR is collecting information through these new initiatives, but does not currently have a process to ensure that the data are reliable, systematically collected, or compiled in summary form. Service providers GAO spoke with also noted that some of these children may have difficultly accessing services due to the lack of bilingual services in the community, lack of health insurance, or other barriers. GAO recommends that HHS (1) develop a process to regularly update its capacity plan, (2) improve its monitoring of grantees, and (3) develop processes to ensure its post-release activities provide reliable and useful summary data. HHS agreed with GAO's recommendations. |
As part of its efforts to ensure the safety and quality of imported drugs, FDA may conduct inspections of foreign establishments manufacturing drugs, including APIs, that are imported into the United States. FDA relies on these establishment inspections to determine compliance with current good manufacturing practice regulations (GMP). The purpose of these inspections is to ensure that foreign establishments meet the same requirements as domestic establishments to ensure the quality, purity, potency, safety, and efficacy of drugs marketed in the United States. Requirements governing FDA’s inspection of foreign and domestic establishments differ. Specifically, FDA is required to inspect every 2 years those domestic establishments that manufacture drugs in the United States, but there is no comparable requirement for inspecting foreign establishments that market their drugs in the United States. However, drugs manufactured by foreign establishments that are offered for import may be refused entry to the United States if FDA determines— through the inspection of an establishment, a physical examination of drugs when they are offered for import at a point of entry, or otherwise— that there is sufficient evidence of a violation of applicable laws or regulations. FDA conducts two primary types of drug manufacturing establishment inspections. Preapproval inspections of domestic and foreign establishments may be conducted before FDA will approve a new drug to be marketed in the United States. In addition, FDA conducts GMP inspections at establishments manufacturing drugs already marketed in the United States to determine ongoing compliance with laws and regulations. Although inspections of foreign drug manufacturing establishments— which are intended to assure that the safety and quality of drugs are not jeopardized by poor manufacturing practices—are an important element of FDA’s oversight of the supply chain, our previous work has shown that FDA conducts relatively few inspections of the establishments that it considers subject to inspection. Specifically, in our 2008 report, we estimated that FDA inspected 8 percent of such foreign drug establishments in fiscal year 2007. At this rate, we estimated that it would take FDA about 13 years to inspect all foreign establishments the agency considers subject to inspection. In 2010, we reported that FDA had increased its inspection efforts in fiscal year 2009. We estimated that FDA inspected 11 percent of foreign establishments subject to inspection and it would take FDA about 9 years to inspect all such establishments at this rate. FDA’s inspection efforts in fiscal year 2009 represent a 27 percent increase in the number of inspections the agency conducted when compared to fiscal year 2007—424 and 333 inspections, respectively. In contrast, FDA conducts more inspections of domestic establishments and the agency inspects these establishments more frequently. For example, in fiscal year 2009, FDA conducted 1,015 domestic inspections, inspecting approximately 40 percent of domestic establishments. We estimated that at this rate FDA inspects domestic establishments approximately once every 2.5 years. To address these discrepancies, we recommended that FDA conduct more inspections to ensure that foreign establishments manufacturing drugs currently marketed in the United States are inspected at a frequency comparable to domestic establishments with similar characteristics. FDA agreed that the agency should be conducting more foreign inspections, but FDA officials have since acknowledged that the agency is far from achieving foreign drug inspection rates comparable to domestic inspection rates and, without significant increases to its inspectional capacity, the agency’s ability to close this gap is highly unlikely. In addition to conducting few foreign drug manufacturing inspections, the types of inspections FDA conducts generally do not include all parts of the drug supply chain. For example, FDA officials told us during our review of the contaminated heparin crisis that the agency typically does not inspect manufacturers of source material—which are not required to be listed on applications to market drugs in the United States—and generally limits its inspections to manufacturers of the finished product and APIs. Furthermore, once FDA conducts an inspection of a foreign drug manufacturer, it is unlikely that the agency will inspect it again, as the majority of the foreign inspections FDA conducts are to inform decisions about the approval of new drugs before they are marketed for sale in the United States. Despite increases in foreign drug establishment inspections in recent years, FDA continues to face unique challenges conducting inspections abroad. Specifically, as we identified in our 2008 report on FDA’s foreign drug inspections, FDA continues to experience challenges related to limits on the agency’s ability to require foreign establishments to allow the agency to inspect their facilities. For example, while inspecting establishments in China during the heparin crisis, Chinese crude heparin consolidators refused to provide FDA full access during inspections—in particular, one consolidator refused to let FDA inspectors walk through its laboratory and refused FDA access to its records. As a result, FDA officials said they focused on the manufacturers’ responsibilities to ensure that these establishments could trace their crude heparin back to qualified suppliers that produce an uncontaminated product and requested that manufacturers conduct their own investigations of any heparin products for which they received complaints or that did not meet specifications. Furthermore, FDA faces other challenges conducting foreign inspections, such as logistical issues that necessitate the agency notifying the manufacturer of the agency’s intention to inspect the establishment in advance. In contrast to domestic inspections which are conducted without prior notice, FDA contacts foreign manufacturers prior to inspection to ensure that the appropriate personnel are present and that the establishment is manufacturing its product during the time of the inspection. In some cases, FDA must obtain permission from the foreign government of the country in which an establishment is located in order to conduct an inspection. FDA officials report that inspections may be conducted several months after an establishment has been notified of FDA’s intent to conduct an inspection due to the need to obtain visas and other delays. As a result of such advance notice, FDA staff conducting inspections may not observe an accurate picture of the manufacturer’s day-to-day operations. Our previous reports indicated that FDA has experienced challenges maintaining complete information on foreign drug manufacturing establishments. This lack of information, which is critical to understanding the supply chain, hampers the agency’s ability to inspect foreign establishments. In 2008, we reported that FDA did not maintain a list of foreign drug establishments subject to inspection, but rather the agency relied on information from their drug establishment registration and import databases to help select establishments for inspection. However, we found that these databases contained incorrect information about foreign establishments and did not contain an accurate count of foreign establishments manufacturing drugs for the U.S. market. For example, in our 2008 report, we identified that for fiscal year 2007, FDA’s registration database contained information on approximately 3,000 foreign drug establishments that registered with FDA to market drugs in the United States, while the import database contained information on about 6,800 foreign establishments that offered drugs for import into the United States. Some of the inaccuracies in the registration database reflected the fact that, despite being registered, some foreign establishments did not actually manufacture drugs for the U.S. market. Additionally, the inaccurate count of establishments in the import database was the result of unreliable manufacturer identification numbers generated by customs brokers when a drug is offered for import. As a result of these inaccuracies, FDA did not know how many foreign establishments were subject to inspection. To address these inaccuracies, we recommended that FDA enforce the requirement that establishments manufacturing drugs for the U.S. market update their registration annually and establish mechanisms for verifying information provided by the establishment at the time of registration. Since then, FDA has taken steps to address these deficiencies and improve the information it receives from both the registration and import databases, though these efforts have not yet fully addressed the concerns we raised in 2008. For example, in June 2009, FDA began requiring all drug establishments marketing their products in the United States to submit their annual registration and listing information electronically, rather than submitting the information on paper forms to be entered into the registration database. FDA indicated that, as of September 2011, the implementation of this requirement has eliminated the human error that has been associated with the transcription of information from paper forms to electronic files. As part of electronic registration, FDA has also requested the each establishment provide a unique identification number—a Dun and Bradstreet Data Universal Numbering System (D-U-N-S®) Number—as a way to help avoid duplications and errors in FDA’s data systems. In addition, in September 2011, FDA officials reported that the agency had begun to take steps to enforce its annual registration requirement. They indicated that FDA will now conduct outreach to establishments that have not submitted an annual registration to confirm that they are no longer producing drugs for the U.S. market or to ensure they register, as required, if they are continuing to manufacture drugs for the U.S. market. They said that if an establishment does not respond to FDA’s outreach, it is to be removed from the registration database. To further address concerns with the import database, FDA has an initiative underway to eliminate duplicate information by taking steps to identify and remove all duplicate drug establishment records from existing import data over the next few years. Given the difficulties that FDA has faced in inspecting and obtaining information on foreign drug manufacturers, and recognizing that more inspections alone are not sufficient to meet the challenges posed by globalization, the agency has begun to explore other initiatives to improve its oversight of the drug supply chain. We reported that FDA’s overseas offices had engaged in a variety of activities to help ensure the safety of imported products. These included establishing relationships with foreign regulators, industry, and U.S. agencies overseas; gathering information about regulated products to assist with decision making; and, in China and India, conducting inspections of foreign establishments. Although we noted that the impact of the offices on the safety of imported products was not yet clear, FDA staff, foreign regulators, and others pointed to several immediate benefits, such as building relationships. However, they also described challenges related to some of their collaborations with domestic FDA offices and the potential for increasing demands that could lead to an unmanageable workload. We reported that FDA was in the process of long-term strategic planning for the overseas offices, but had not developed a long-term workforce plan to help ensure that it is prepared to address potential overseas office staffing challenges, such as recruiting and retaining skilled staff. We recommended that FDA enhance its strategic planning and develop a workforce plan to help recruit and retain overseas staff and FDA concurred with our recommendations. In September 2011, FDA indicated that it had developed a 2011 to 2015 strategic plan and was in the process of updating it, and it had initiated a workforce planning process. FDA has also implemented collaborative efforts with foreign regulatory authorities to exchange information about planned inspections as well as the results of completed inspections. In December 2008, FDA, along with its counterpart regulatory authorities of the European Union and Australia, initiated a pilot program under which the three regulators share their preliminary plans for and results of inspections of API manufacturing establishments in other countries. For example, FDA could receive the results of inspections conducted by these regulatory bodies and then determine if regulatory action or a follow-up inspection is necessary. FDA contends that prospectively sharing this information could allow these regulatory bodies to more efficiently use their resources by minimizing the overlap in their inspection plans. According to agency officials, the agency had used inspection reports from the other regulators to improve its knowledge of a small number of API manufacturing establishments, most of which had not been inspected in the last 3 years, but that it was interested in inspecting due to a pending drug application. FDA has also taken other steps to improve the information that the agency maintains on foreign establishments shipping drugs to the United States. In August 2008, FDA contracted with two external organizations to implement the Foreign Registration Verification Program. Through this program, contractors conduct site visits to verify the existence of foreign establishments that are registered with FDA and confirm that they manufacture the products that are recorded in U.S. import records. According to FDA officials, establishments that are new to the U.S. market or are importing products not typically manufactured at the same establishment are considered candidates for the verification program. For example, FDA officials told us about an establishment that was selected for the program because, according to agency records, it was offering for import into the United States pickles and an API—two products not normally manufactured at the same establishment. As of September 2011, the contractors had visited 142 foreign drug establishments located in Asia, Australia, Africa, Canada, and Europe, 27 of which did not appear to exist at the address provided by the establishments at the time of registration. According to FDA, the agency uses the information obtained from the contractors as screening criteria to target drug products from those establishments for review at the border. FDA is also developing initiatives that would assist its oversight of products at the border. For example, FDA is in the process of establishing its Predictive Risk-based Evaluation for Dynamic Import Compliance Targeting (PREDICT) import screening system. The system is intended to automatically score each entry based on a range of risk factors and identify high-risk items for review. FDA piloted this system on seafood products in the summer of 2007. FDA determined that the system expedited the entry of lower-risk products, while identifying a higher rate of violations among products that were tested when they were offered for import. The agency planned to have the system implemented in all locations and for all FDA-regulated products by June 2011, although its deployment has been delayed. According to FDA, full deployment of PREDICT is currently slated for December 2011. FDA also identified statutory changes that would help improve its oversight of drugs manufactured in foreign establishments. These include authority to (1) suspend or cancel drug establishment registrations to address concerns, including inaccurate or out-of-date information; (2) require drug establishments to use a unique establishment identifier; and (3) implement a risk-based inspection process, with flexibility to determine the frequency with which both foreign and domestic establishments are inspected, in place of the current requirement that FDA inspect domestic establishments every 2 years. Globalization has fundamentally altered the drug supply chain and created regulatory challenges for FDA. In our prior reports we identified several concerns that demonstrate the regulatory difficulties that FDA faces conducting inspections of, and maintaining accurate information about, foreign drug establishments. While inspections provide FDA with critical information, we recognize that inspections alone are not sufficient to meet all the challenges of globalization. FDA should be credited for recent actions, such as collaborating with and exchanging information on drug establishments with foreign governments, that represent important initial steps toward addressing these challenges. However, as the agency has acknowledged, there are additional steps that it still needs to take. We have previously made recommendations to address some challenges, such as poor information and planning, and the agency has identified additional authorities that could provide it with necessary enforcement tools. In light of the growing dependence upon drugs manufactured abroad and the potential for harm, FDA needs to act quickly to implement changes across a range of activities in order to better assure the safety and availability of drugs for the U.S. market. Chairman Harkin, Ranking Member Enzi, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions you may have at this time. For further information about this testimony, please contact Marcia Crosse 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. GAO staff who made key contributions to this testimony include Geraldine Redican-Bigott, Assistant Director; William Hadley; Cathleen Hamann; Rebecca Hendrickson; and Lisa Motley. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Food and Drug Administration: Response to Heparin Contamination Helped Protect Public Health; Controls That Were Needed for Working With External Entities Were Recently Added. GAO-11-95. Washington, D.C.: October 29, 2010. Drug Safety: FDA Has Conducted More Foreign Inspections and Begun to Improve Its Information on Foreign Establishments, but More Progress Is Needed. GAO-10-961. Washington, D.C: September 30, 2010. Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-term Planning Is Needed. GAO-10-960. Washington, D.C.: September 30, 2010. Food and Drug Administration: FDA Faces Challenges Meeting Its Growing Medical Product Responsibilities and Should Develop Complete Estimates of Its Resource Needs. GAO-09-581. Washington, D.C.: June 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Drug Safety: Better Data Management and More Inspections Are Needed to Strengthen FDA’s Foreign Drug Inspection Program. GAO-08-970. Washington, D.C.: September 22, 2008. Medical Devices: FDA Faces Challenges in Conducting Inspections of Foreign Manufacturing Establishments. GAO-08-780T. Washington, D.C.: May 14, 2008. Drug Safety: Preliminary Findings Suggest Recent FDA Initiatives Have Potential, but Do Not Fully Address Weaknesses in Its Foreign Drug Inspection Program. GAO-08-701T. Washington, D.C.: April 22, 2008. Medical Devices: Challenges for FDA in Conducting Manufacturer Inspections. GAO-08-428T. Washington, D.C.: January 29, 2008. Drug Safety: Preliminary Findings Suggest Weaknesses in FDA’s Program for Inspecting Foreign Drug Manufacturers. GAO-08-224T. Washington, D.C.: November 1, 2007. Food and Drug Administration: Improvements Needed in the Foreign Drug Inspection Program. GAO/HEHS-98-21. Washington, D.C.: March 17, 1998. 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. | Globalization has placed increasing demands on the Food and Drug Administration (FDA) in ensuring the safety and effectiveness of drugs marketed in the United States. The pharmaceutical industry has increasingly relied on global supply chains in which each manufacturing step may be outsourced to foreign establishments. As part of its efforts, FDA may conduct inspections of foreign drug manufacturing establishments, but there are concerns that the complexity of the drug manufacturing supply chain and the volume of imported drugs has created regulatory challenges for FDA. FDA has begun taking steps to address some of these concerns, such as the establishment of overseas offices. This statement discusses (1) FDA's inspection of foreign drug manufacturing establishments, (2) the information FDA has on these establishments, and (3) recent FDA initiatives to improve its oversight of the supply chain. The statement presents findings based primarily on GAO reports since 2008 related to FDA's oversight of the supply chain. These reports include Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-Term Planning Is Needed ( GAO-10-960 , Sept. 30, 2010) and Drug Safety: FDA Has Conducted More Foreign Inspections and Begun to Improve Its Information on Foreign Establishments, but More Progress Is Needed ( GAO-10-961 , Sept. 30, 2010). GAO supplemented this prior work with updated information obtained from FDA in August and September 2011. Inspections of foreign drug manufacturers are an important element of FDA's oversight of the supply chain, but GAO's prior work showed that FDA conducts relatively few such inspections. In 2008, GAO reported that in fiscal year 2007 FDA inspected 8 percent of foreign establishments subject to inspection and estimated that, at that rate, it would take FDA about 13 years to inspect all such establishments. GAO recommended that FDA increase the number of foreign inspections it conducts at a frequency comparable to domestic establishments with similar characteristics. FDA subsequently increased the number of foreign establishment inspections. FDA's inspection efforts in fiscal year 2009 represent a 27 percent increase in the number of inspections it conducted, when compared to fiscal year 2007--424 and 333 inspections, respectively. However, FDA officials acknowledged that FDA is far from achieving foreign drug inspection rates comparable to domestic inspection rates--the agency inspected 1,015 domestic establishments in fiscal year 2009. Also, the types of inspections FDA conducts generally do not include all parts of the drug supply chain. Conducting inspections abroad also continues to pose unique challenges for the agency. For example, FDA faces limits on its ability to require foreign establishments to allow it to inspect their facilities. Furthermore, logistical issues preclude FDA from conducting unannounced inspections, as it does for domestic establishments. GAO previously reported that FDA lacked complete and accurate information on foreign drug manufacturing establishments--information critical to understanding the supply chain. In 2008, GAO reported that FDA databases contained incorrect information about foreign establishments and did not contain an accurate count of foreign establishments manufacturing drugs for the U.S. market. FDA's lack of information hampers its ability to inspect foreign establishments. GAO recommended that FDA address these deficiencies. FDA has taken steps to do so, but has not yet fully addressed GAO's concerns. Given the difficulties that FDA has faced in inspecting and obtaining information on foreign drug manufacturers, and recognizing that more inspections alone are not sufficient to meet the challenges posed by globalization, the agency has begun to implement other initiatives to improve its oversight of the drug supply chain. FDA's overseas offices have engaged in a variety of activities to help ensure the safety of imported products, such as training foreign stakeholders to help enhance their understanding of FDA regulations. GAO recommended that FDA enhance its strategic and workforce planning, which FDA agreed it would do. FDA has also taken other positive steps, such as developing initiatives that would assist its oversight of products at the border, although these are not yet fully implemented. Finally, FDA officials identified statutory changes that FDA believes it needs to help improve its oversight of drugs manufactured in foreign establishments. For example, in place of the current requirement that FDA inspect domestic establishments every 2 years, officials indicated the agency would benefit from a risk-based inspection process with flexibility to determine the frequency with which both foreign and domestic establishments are inspected. In light of the growing dependence upon drugs manufactured abroad and the potential for harm, FDA needs to act quickly to implement changes across a range of activities in order to better assure the safety and availability of drugs for the U.S. market. |
The Occupational Safety and Health Act of 1970 authorizes OSHA to set occupational safety and health standards, rules, and regulations and to enforce their compliance. OSHA uses two approaches—enforcement and compliance assistance. Enforcement is carried out primarily by using compliance officers to inspect employer work sites. Employers whose work sites fail to meet federal safety and health standards face sanctions, such as paying penalties for violations of safety and health standards. In this enforcement capacity, OSHA targets employers for inspection using injury and illness rates for industries and specific work sites. OSHA also conducts inspections when employers report fatalities or serious injuries and when workers file complaints alleging that a violation of a safety or health standard exists that threatens physical harm or that an imminent danger exists at their work sites. Cooperative programs, in contrast, use a variety of incentives to encourage employers to work with OSHA to reduce hazards and institute practices that foster safer and healthier working conditions. Such incentives include free consultations, recognition for exemplary safety and health systems, and exemption from routine inspections. OSHA has direct enforcement responsibility for federal workers in all states and for private sector workers in about half the states. In the remaining states, OSHA has granted approval for the states to conduct their own enforcement of private sector, state, and local government work sites. None of the three states most affected by Hurricane Katrina conducts its own worker safety and health program; OSHA provides direct oversight for workers in these states. OSHA is organized by regional and area offices. The three states most affected by Hurricane Katrina are located in OSHA’s Region 4 (Mississippi and Alabama) and Region 6 (Louisiana). Its area offices in these states are located in Jackson, Mississippi; Mobile, Alabama; and Baton Rouge, Louisiana Federal and private sector employers are required by OSHA to maintain records documenting certain work-related injuries and illnesses: those that result in death, 1 or more days away from work, restricted work, loss of consciousness, or a significant injury or illness diagnosed by a physician. Each employer’s work site is required to record illness and injury data on a form known as an “OSHA 300 log.” While employers are not required to submit these logs to OSHA, they must be available for inspection upon request. Federal agencies are required to submit summary information to OSHA about their safety and health programs on an annual basis, but these reports generally do not contain information on specific injuries and illnesses sustained by their workers. Based on lessons learned during the response to the World Trade Center disaster, OSHA now uses its statutory enforcement discretion during a disaster to exempt selected employers from normal enforcement operations and provide technical assistance and consultation in combination with traditional enforcement as required by the incident. At the World Trade Center, OSHA made this decision based on the recognition that a rescue effort should not be hampered, that enforcement takes time and can affect the speed of the correction of safety and health hazards, and that its goal was protection, not citation. The Assistant Secretary of OSHA, in conjunction with regional administrators, makes the decision when to exercise its enforcement discretion and move to a technical assistance role, and when to return to traditional enforcement While federal, state, and local agencies as well as private sector employers are responsible for ensuring the safety and health of their workers, OSHA is responsible for coordinating with other federal cooperating agencies to provide safety and health technical assistance to response and recovery workers involved in the response to a disaster. The federal cooperating agencies are DOD; the Departments of Energy, Health and Human Services, and Homeland Security; and EPA. As the lead coordinating agency for the Worker Safety and Health Support Annex (the Annex), OSHA’s coordination responsibilities include 1. providing occupational safety and health technical advice and support to safety officials at the Joint Field Office, a temporary federal facility established at the site of a disaster to coordinate federal assistance to affected jurisdictions; 2. developing and implementing site-specific occupational safety and health plans and ensuring that the plans are coordinated and consistent among multiple sites; 3. identifying and assessing health and safety hazards and characterizing the incident environment, to include continued monitoring of incident safety on a 24-hours-a-day, 7-days-a-week basis; 4. monitoring responder personal exposure on a 24-hours-a-day, 7-days-a-week basis, including monitoring for chemical and biological contaminants, noise, heat or cold, and ionizing radiation; 5. monitoring the medical condition of responders and, in conjunction with the Department of Health and Human Services, evaluating the need for longer term monitoring; 6. assessing responder safety and health resource needs and identifying sources for those assets; 7. developing, implementing, and monitoring an incident personal protective equipment program—including the selection, use, and decontamination of the equipment; implementation of a respiratory protection fit-test program—and distribution of equipment; 8. collecting and managing data on exposures, accidents, and injuries to facilitate consistent formatting and data sharing among response organizations; 9. communicating with labor unions, contractors, and other organizations regarding responder safety and health issues; 10. coordinating and providing incident-specific responder training; 11. providing psychological first aid during and after incident response and recovery activities; and 12. identifying, in coordination with the Department of Health and Human Services, appropriate immunization and prophylaxis for responders and recovery workers. Even though OSHA has been assigned responsibility for coordinating the activities in the Annex, during an actual disaster, FEMA must issue a “mission assignment” that authorizes OSHA to receive reimbursement for carrying out some or all of these activities, depending on the needs of the disaster and which groups are covered during each response effort. Without a mission assignment, services provided by an agency cannot be reimbursed by FEMA. For Hurricane Katrina, FEMA issued mission assignments to OSHA tasking it with 11 of the 12 activities listed in the Annex for federal agencies and their workers, including federal contractor employees. The only activity in the Annex for which OSHA was not assigned responsibility for Hurricane Katrina was monitoring the medical conditions of responders, including assessing the need for long-term medical monitoring because, according to FEMA, it does not have the authority under the Stafford Act to pay for the collection and management of data for long-term studies or analysis. FEMA also did not assign responsibility to OSHA, or any other federal agency, for coordinating the safety and health of nonfederal workers, except workers employed by federal contractors. State and local agency employees, private sector employees other than those employed by federal contractors, and volunteers were not covered under the Annex. OSHA had difficulty addressing the needs of nonfederal workers not covered under its mission assignment, but was able to provide some assistance to these workers using its own funds. No one, including OSHA, was assigned responsibility for collecting data on the total number of response and recovery workers deployed to the Gulf and no one collected it, but 10 federal agencies were able to provide estimates of the number of federal workers they deployed to the Gulf for specific points in time. However, only six of them tracked the number of workers employed by their contractors. According to FEMA and OSHA, 10 federal agencies deployed response and recovery workers to the Gulf in response to Hurricane Katrina: the Departments of Agriculture, the Interior, and Health and Human Services; the Coast Guard; DOD; EPA; FEMA; OSHA; USACE; and the National Guard. We asked officials from these 10 agencies to provide us with the total number of response and recovery workers they had in the Gulf Coast from August 2005 through April 2006. Agency officials said they did not collect data in a way that would enable them to provide us with unduplicated counts of workers who rotated in and out of the Gulf Coast area. All 10 agencies, however, told us they could provide us with estimates of the number of workers they had in the Gulf Coast area at any specific point in time. Therefore, we asked them to provide us with information on the number of workers they employed in the three states on the first of each month for the period from September 2005 to April 2006. As shown in figure 1, the agencies estimated that they had about 31,000 federal employees in the Gulf Coast area on September 1, 2005. That number increased to approximately 49,000 workers on October 1, 2005, and dropped to about 8,500 workers on April 1, 2006. The National Guard reported having the largest number of federal employees—about 31,000—in the Gulf Coast area on October 1, 2005, and FEMA reported the second largest number—about 4,800 workers. The Coast Guard reported the third largest number of federal employees in October—approximately 3,100 workers. OSHA reported that it had 84 staff in the Gulf Coast area on the first of October and November 2005. Of these 10 federal agencies, only six of the agencies that employed contractors in the Gulf area—EPA, OSHA, FEMA, and the Departments of Agriculture, Health and Human Services, and the Interior could provide data on the number of employees their contractors employed. These agencies estimated that their contractors had over 5,100 workers in the Gulf Coast area on December 1, 2005, the month with the largest total number. FEMA and EPA reported the most contractor employees: FEMA estimated that it had approximately 3,800 contractor employees at one point, and EPA estimated that its contractors had about 1,200 workers in the Gulf area. The other agencies reported much smaller numbers of contractor employees, ranging from 1 worker to 150. USACE and Coast Guard officials told us they could provide us with information on the number of contracts they issued, but they did not know the number of workers employed under each of these contracts. Officials with DOD told us that, although DOD employed contractors in the Gulf area, they did not track the number of workers employed by their contractors. National Guard officials told us that they did not employ any contractors. Although OSHA was directed by FEMA to collect information from federal agencies on injuries and illnesses sustained by federal workers during the response to Hurricane Katrina, the agency was unable to collect useable information from all of the agencies that deployed workers to the Gulf. Four federal agencies provided some information to us on their workers who were injured or became ill, and OSHA and other agencies provided information on worker fatalities that occurred during the response. Although the Annex assigned responsibility to OSHA for collecting data on workers’ injuries and illnesses during disasters, and FEMA directed OSHA to collect this information from federal agencies for Hurricane Katrina, several factors hindered OSHA’s efforts to collect these data as required. OSHA did not establish a process for gathering these data between the time the Annex was issued in December 2004 and when Hurricane Katrina hit the Gulf Coast in late August 2005. According to OSHA officials, during this 8-month period, they focused their efforts on introducing federal, state, and local agencies to OSHA’s new role under the Annex in a disaster rather than developing a process for collecting data on workers’ injuries and illnesses during a response. The second factor that hindered OSHA’s ability to collect data on workers’ injuries and illnesses was that fact that FEMA did not issue a mission assignment directing OSHA to collect these data for federal agencies’ workers until more than 3 weeks after the hurricane hit the Gulf. FEMA instructed OSHA to track workers’ injuries and illnesses across all federal agencies that deployed workers to the Gulf in the mission assignment it issued to OSHA on September 21, 2005, more than 3 weeks after the hurricane struck on August 29, 2005. Third, OSHA tried to collect data on injuries and illnesses for federal workers in the Gulf Coast area from the logs that OSHA requires agencies to maintain at each worksite on workers’ injuries and illnesses but received incomplete or unreliable data from federal agencies. In November 2005, OSHA asked federal agencies and their contractors to submit their injury and illness logs for worksites located in the Gulf area to OSHA headquarters on a monthly basis. However, according to OSHA officials, because they did not request agencies to provide their injury and illness logs to OSHA until five or six weeks after the hurricane hit, and because agencies are normally not required to send their logs to OSHA, not all agencies submitted their logs. In addition, many of the agencies could not separate data for workers assigned to the Gulf Coast area temporarily since employers are not required to establish separate logs for temporary worksites expected to be in operation for one year or less. Some agencies provided their logs to OSHA, but the data they provided were incomplete and unreliable, according to OSHA officials. For example, one agency’s logs included information on accidents involving heavy equipment but did not contain information on the related injuries to workers. OSHA officials cited several reasons for the poor quality of the data, including the fact that the agencies may have placed a low priority on recording injuries and illnesses while responding to a disaster. In technical comments on the draft report, OSHA officials stated that neither their efforts to educate the federal community about the Annex nor the more than 3-week delay in receiving its mission assignment prevented them from developing a system for collecting injury and illness data. In a mission assignment, FEMA tasked OSHA to collect these data in order to facilitate consistent formatting and data sharing among response organizations. OSHA could then use the data to track emerging trends in the types of injuries and illnesses sustained by workers so that appropriate measures, such as providing specific safety training and information on hazards, could be taken to address emerging safety issues and prevent or reduce injuries and illnesses. Although OSHA was unable to use injury and illness data to track emerging trends, it did identify some injuries and illnesses that occurred during the response through the information it obtained from other federal agencies at the Interagency Safety Committee meetings held at the Joint Field Office in each state. Because OSHA could not provide data on injuries and illnesses, we asked the 10 agencies that deployed workers to the Gulf Coast area for these data. However, although agency officials told us they collected information on the injuries and illnesses for their workers on the injury and illness logs required by OSHA, most of them could not separate out this information for workers sent to the Gulf Coast. Four of the 10 agencies—EPA, USACE, the Coast Guard, and the Department of the Interior—collected information on the injuries and illnesses their workers sustained in the Gulf Coast area using their own data systems. The four reported that their workers sustained over 3,000 injuries and illnesses from the end of August 2005 through June 2006 including minor injuries that would not have been recordable on the OSHA logs. The most frequently cited injuries were bites from insects such as mosquitoes and dogs; sunburn; exposure to floodwater; heat stress; and exposures to chemicals, infectious or biological agents, mold, and carbon monoxide. (See app. II for additional information on the injury and illness data provided by these four agencies.) The data were not comparable across the four agencies because each one collected different types of information and categorized it differently. For example, EPA used nonstandard, detailed descriptions of the illness or injury, such as “tripped on wire and bruised knee,” while the Coast Guard described the health effects of injuries or exposures using consistent and concise categories, such as “infected skin” and “skin laceration.” The Department of Labor’s Office of Workers’ Compensation Program, another source of data on injuries and illnesses, reported that federal workers filed 770 claims related to Hurricanes Katrina and Rita from August 2005 through June 2006. While data on the number of claims were reliable, the information on the nature and causes of the injuries and illnesses was not reliable. Therefore, we could not use it to identify the types of injuries and illnesses sustained by federal workers in the Gulf Coast area. OSHA and other agency officials identified 11 fatalities of workers involved in response and recovery work for Hurricane Katrina from September 2005 through June 2006, 9 of which occurred as a result of work-related accidents. No worker fatalities directly related to the response were reported in Alabama. In Louisiana and Mississippi, three federal agency contractor employees died in work-related accidents, including two employees of FEMA subcontractors and an employee of a USACE subcontractor. (See app. II for additional information.) Although FEMA did not issue a mission assignment to OSHA implementing the Annex until more than 3 weeks after Hurricane Katrina struck the Gulf Coast, OSHA was able to establish several of its operations within hours of the hurricane. FEMA officials told us that all of the NRP’s annexes take effect when the NRP is implemented, but OSHA officials said they must first receive a mission assignment from FEMA to receive funding and begin the work as described in the Annex. OSHA used its own staff and budget to establish operations and provide assistance to utility workers in the Gulf Coast before to receiving authorization from FEMA. OSHA staff developed health and safety plans, provided information on safety and health hazards to many workers, and intervened in thousands of potentially hazardous situations. OSHA staff also assessed air, water, soil, and noise hazards at many worksites. However, OSHA waited to provide assistance that involved substantial funding—such as deploying worker safety and health trainers and purchasing protective gear for other federal agencies—until FEMA formally authorized OSHA to receive reimbursement for these activities through mission assignments. Disagreements between OSHA and FEMA delayed issuance of the mission assignment that implemented the Annex, which delayed OSHA’s efforts to provide assistance to workers. In addition, lack of awareness by other agencies about OSHA’s role in a disaster further hindered its efforts. Because of these and other factors, the agency was unable to ensure that all workers’ needs for safety and health assistance were met, including obtaining needed training, protective gear, and mental health services, and OSHA had difficulty addressing the needs of nonfederal workers not covered under its mission assignments. OSHA effectively used its existing relationships with private companies and another federal agency to quickly establish its operations in the Gulf Coast area and provide safety and health assistance to workers. Through these relationships, OSHA quickly set up staging areas for its staff, obtained needed equipment, and provided safety and health information to workers early in the response. For example, when OSHA had difficulty finding housing for its staff in New Orleans, it contacted a chemical company that is part of one of OSHA’s cooperative programs, and the company gave OSHA space in its parking lot for recreational vehicles that OSHA used to house several of its field staff. OSHA also obtained support from the Mine Safety and Health Administration, another agency within the Department of Labor, for almost 3 months after the hurricane. The agency provided OSHA with two large trailers equipped with satellite communications that it uses for mine rescue operations. OSHA used the trailers as mobile command post centers to communicate with other agencies at a time when communication in the area was very difficult. The agency also gave OSHA generators to power electricity and plumbing. OSHA also capitalized on relationships with utility companies established during previous responses to hurricanes in the three affected states to target its safety and health assistance. Utility companies are among the first responders on the scene of hurricanes, restoring power and communications in the affected areas. OSHA accompanied the utility companies to staging areas each morning to brief workers on safety and distribute printed safety information. OSHA also advised utility workers on using the proper safety equipment. For example, although utility workers were trained on how to safely handle downed power lines, some were not aware that they needed to wear boots with steel shanks to prevent puncture wounds from debris containing nails and other sharp objects or that floodwater and drainage pipes could contain alligators, snakes, or other animals. Figure 2 shows some of the wildlife encountered by Hurricane Katrina response workers. OSHA developed a health and safety plan for the federal response to Hurricane Katrina that included all responders and hazards commonly encountered. The plan included information on how to monitor exposures; provide adequate supplies of protective gear that was appropriate for the hazard, fitted to the employee, and inspected, repaired or replaced as necessary; provide training on safety and health hazards that was conducted before deployment, applicable to general conditions, customized for different sites, and customized for specific tasks; develop decontamination procedures; and provide psychological first aid and other mental health services. OSHA also assisted other federal agencies in developing similar plans for their workers and ensured that all of the plans were coordinated and consistent across the response. OSHA also provided information about hazards on its Web site and directly to workers at public places such as hardware stores where they purchased materials. For example, OSHA developed 58 small, laminated “quick cards” and 1-page fact sheets in English and Spanish with information about hazards and how to address them, such as how to safely handle traffic in work zones, how to operate a chain saw safely, how to work safely with electricity, how to prevent falls, and how to use ladders safely. See figures 3 and 4 for selected quick cards and fact sheets distributed by OSHA. OSHA also provided pre-recorded public service announcements on its Web site with information on safe work practices that could be aired by local radio stations and stores. According to OSHA officials, one large national hardware chain played the public service announcements over its loudspeaker system in stores in the Gulf area as a safety and health reminder for its customers. From the beginning of the response in August 2005 through June 2006, OSHA’s field staff intervened in more than 15,000 potentially hazardous situations at work sites throughout the Gulf—6,800 in Louisiana and 8,320 in Alabama and Mississippi. OSHA targeted these visits based on information it received from other federal agencies and utility companies about work sites with large numbers of workers or potential hazards. As shown in figures 5, 6, and 7, OSHA staff intervened in many different types of hazardous situations, including work zones containing equipment not protected from traffic by safety cones and individuals working on water towers and roofs without proper fall protection such as safety harnesses and guard rails. OSHA staff offered advice on safety and health measures and followed up to make sure hazards were corrected. For example, an OSHA official in Louisiana stopped work at a site until unprotected workers in an aerial lift 50 feet above the ground received safety harnesses and orange cones were placed around the lift to protect against traffic. On the few occasions when an employer did not follow OSHA’s recommendations, or if there were repeat problems with an employer, OSHA would elevate its concerns to company management or to the federal agency that contracted with the company and this usually brought abut the needed changes, according to OSHA officials. For example, OSHA staff told a supervisor at one worksite that workers repairing a bridge needed safety harnesses to protect them from falls, but the workers did not have the equipment when OSHA visited the next day. OSHA staff then called the owner of the company, who promptly provided the safety equipment and made sure the workers used it. Other federal agencies asked OSHA to intervene in hazardous situations. For example, EPA asked OSHA to monitor the health of workers at the site of an oil spill where more than a million gallons of crude oil leaked from an above-ground storage tank. FEMA asked OSHA to provide a hazardous materials specialist to accompany its staff to jails and Department of Justice buildings in New Orleans and assess what protective gear was needed to enter and inspect buildings and to a local hospital to assess general safety and health hazards. FEMA also asked OSHA to conduct air- monitoring tests and assess hazards at local courts and other public buildings in the area, and OSHA staff advised FEMA on how to properly ventilate temporary housing trailers contaminated with formaldehyde gas emitted by construction materials such as plywood and rugs. Officials with OSHA and other federal agencies told us that the technical assistance OSHA provided during the response was well received and was more effective in protecting workers than if the agency had been operating in an enforcement mode. The officials noted that enforcement actions can take months to complete due to the legal requirements of an investigation, the amount of documentation required, and the due process provided to employers to appeal citations. By providing technical assistance and immediately addressing hazardous situations, OSHA officials said they were able to assist many more workers and correct more hazardous situations during the response than if they had been operating in an enforcement mode. OSHA typically conducts about 1,500 inspections each year in the three affected states—about 430 in Alabama, about 530 in Louisiana, and about 500 in Mississippi—but intervened in over 15,000 potentially hazardous situations during approximately 11 months of the response. In addition to providing safety and health technical assistance, OSHA also took more than 6,000 samples at work sites throughout the Gulf Coast area to assess air, water, soil, and noise hazards. As shown in figure 8, workers in the Gulf Coast area faced many airborne hazards. EPA was responsible for sampling the general environment—such as the air, water, and soil—in order to assess the dangers to the public, while OSHA was responsible for sampling worksites for hazardous substances harmful to workers. For example, OSHA field staff pinned small personal monitors on workers’ clothing to sample for potential exposure to hazardous chemicals and substances, and sampled water and soil at worksites (see fig. 9). OSHA field staff also monitored unoccupied buildings for carbon monoxide that may have accumulated from the use of generators before the building was vacated and to determine whether the siding and shingles contained asbestos. OSHA officials told us they posted the results of the samples taken on the agency’s Web site and said they are developing a data management system for future disasters that will provide faster access to sampling results. OSHA and FEMA disagreed about how and when to implement the Annex and about each agency’s responsibilities in the rescue and recovery effort. As a result, some of OSHA’s efforts to provide assistance were delayed. Additionally, before Hurricane Katrina, OSHA provided limited information to federal, state, and local agencies about the Annex, and many agencies did not understand the services OSHA can provide or that OSHA provides technical assistance, not enforcement, in a disaster. This may have contributed to agencies not inviting OSHA to participate in emergency preparedness exercises held prior to Hurricane Katrina or asking for OSHA’s help during the response and recovery efforts once the storm hit. FEMA did not issue a mission assignment to OSHA implementing the Annex until September 21, 2005—more than 3 weeks after the hurricane hit the Gulf Coast. Before Hurricane Katrina, FEMA and OSHA had not developed criteria or procedures for implementing the Annex in a disaster. FEMA officials told us that all of the NRP’s annexes take effect when the NRP is implemented; however, OSHA said it must first receive a mission assignment from FEMA to receive funding and begin its work as described in the Annex. OSHA used its own staff and budget to establish operations and provide assistance to workers in the Gulf before receiving authorization for reimbursement from FEMA. However, OSHA delayed activities that involved substantial funding, such as deploying worker safety and health trainers and purchasing protective gear for other federal agencies, until FEMA formally authorized funding through mission assignments, assuring that such activities would be reimbursed. However, although FEMA and OSHA were developing procedures for their operations in future disasters, as of December 2006, these procedures did not contain criteria that clearly defined when and how OSHA will carry out its responsibilities under the Annex or the type or magnitude of disasters in which OSHA will be involved. FEMA and OSHA also disagreed about which agency was in charge of worker safety and health for the response and recovery efforts and which workers should be covered. The agency in charge assumed the role of Safety Coordinator at the Joint Field Office in each state, where the federal agencies met to coordinate their response and recovery efforts. Because of their disagreement about leadership, FEMA and OSHA each fulfilled the role of Safety Coordinator for different periods of time in Louisiana, Alabama, and Mississippi, and other federal agencies did not know which agency was consistently and officially in charge. In addition, some FEMA officials viewed the role of the Safety Coordinator as providing support only to FEMA employees and personnel at FEMA- managed facilities. In contrast, OSHA officials saw the role of the Safety Coordinator as supporting all federal workers, including federal contractor employees involved in the response. For example, both FEMA and OSHA officials in Mississippi identified a need for driver training because of the large number of motor vehicle accidents. FEMA’s Safety Coordinator in Mississippi sought the driver training for FEMA staff only, while, under its mission assignment, OSHA had already worked with the National Institute of Environmental Health Sciences to develop a similar program that was available to all federal responders. In addition, under the Annex, OSHA is responsible for coordinating with the Department of Health and Human Services to monitor the medical conditions of responders and evaluate the need for long-term medical monitoring. However, FEMA did not direct OSHA to coordinate this activity in the mission assignments issued for Hurricane Katrina because, according to FEMA officials, they do not have the authority under the Stafford Act to pay for the collection and management of data for long- term studies or analysis. Although it is not clear whether there is a need for this type of monitoring for response and recovery workers involved in the response to Hurricane Katrina, the fact that some workers at the World Trade Center disaster did not exhibit symptoms of illnesses until months or years after they left the site, and others developed acute conditions at the site that later worsened or became chronic, highlights the importance of considering these issues for rescue and recovery workers who responded to Hurricane Katrina or for those involved in future disasters. FEMA and OSHA are in the process of developing new procedures for future disasters. However, the procedures do not specify the type or magnitude of disaster in which OSHA will be involved, and they include FEMA’s definition of the scope of the Safety Coordinator as providing safety and health support only to FEMA employees and personnel at FEMA-managed facilities, not OSHA’s definition that covers all responders, including federal contractor employees at all facilities. As a result, OSHA may have difficulty providing assistance to all workers involved in future response efforts. The new procedures also do not resolve the issue of how OSHA will be able to monitor the medical condition of responders or evaluate the need for long-term medical monitoring in future disasters as described in the Annex, given that FEMA does not believe it can authorize such activities or reimburse them under the Stafford Act. OSHA officials told us they did not have enough time to conduct extensive outreach to other federal agencies in the months between the issuance of the NRP in December 2004 and the end of August 2005 when Hurricane Katrina hit the Gulf Coast. They said they planned to inform other federal agencies about the Annex and OSHA’s new role in large disasters through a committee comprised of the key federal agencies that have a role in the Annex in responding to disasters. OSHA was in the process of developing this committee when Hurricane Katrina hit, but these efforts were suspended during the response. OSHA’s efforts to inform state and local agencies about its role under the Annex were limited to making presentations and staffing information booths at training sessions conducted by the Department of Homeland Security after the NRP and Annex became effective in April 2005. The sessions were offered in seven cities to state and local emergency and health officials from fire departments, police departments, and local hospitals. The Department of Homeland Security chose to visit cities it considered likely targets in future terrorist attacks: the District of Columbia, Chicago, New York, Los Angeles, Seattle, Miami, and Houston. According to OSHA and FEMA officials, the presentations were attended by individuals from federal, state, and local agencies; trade groups; and support personnel. OSHA officials also said they provided information about the Annex at meetings and conferences held by organizations such as the National Governors’ Association. These presentations, however, were not targeted to the key state and local agencies involved in disaster response efforts, such as state emergency management agencies. Officials from several federal, state, and local agencies told us that they did not understand OSHA’s role in a disaster response, including providing information on potential hazards, recommending proper protective gear, and testing for hazardous substances at work sites. They also did not know that, in a disaster, OSHA switches from enforcing regulations by conducting inspections of work sites to providing technical assistance. National Guard and EPA officials we interviewed told us they did not know OSHA’s role in disaster response. Representatives from state police and fire departments in Louisiana, the state highway patrol in Alabama, and the Federal Law Enforcement Officers Association—an organization that represents officers from more than 50 different federal law enforcement agencies—said they did not know that OSHA provides technical assistance in a disaster or that they could have asked for OSHA’s help. Because many federal, state, and local agency officials did not understand the assistance OSHA could provide in a disaster or its role under the Annex, OSHA was not invited to participate in many of the emergency preparedness exercises the agencies held prior to Hurricane Katrina. Moreover, in the few exercises to which OSHA was invited, the Annex was never implemented. For example, OSHA attended a national emergency preparedness exercise conducted by FEMA in June 2005 that simulated a response to a large, destructive hurricane, but the exercise did not include implementing the safety and health Annex. OSHA headquarters officials told us they thought the Annex was not implemented during these exercises because other agency officials did not fully understand the assistance OSHA can provide in a disaster or its new role under the Annex. OSHA’s participation in state and local emergency preparedness exercises held prior to Hurricane Katrina was also limited. Two of OSHA Area Office Directors in the affected states told us they had difficulty getting invited to participate in state and local emergency preparedness exercises, and often when they were invited, they did not play an active role in the exercise. For example, the Director of OSHA’s Mobile Area Office told us he attended regional training exercises on his own initiative. It took him a year to convince the sponsoring agencies that OSHA provides assistance in a disaster, at which point they incorporated OSHA into an exercise involving a chemical spill from a railroad car, but OSHA’s services were not used during the exercise. Since its response to Hurricane Katrina, OSHA officials say the agency has been invited to participate in more emergency response exercises where the Annex is implemented and the agency plays an active role. OSHA officials also told us they plan to participate in an exercise sponsored by EPA in 2007 that will simulate a large chemical spill. OSHA’s regional and area office directors told us they continue to look for opportunities to participate in regional, state, and local emergency preparedness exercises. Because OSHA and FEMA disagreed about the process for issuing the mission assignment authorizing OSHA to receive reimbursement for its safety and health training to workers, FEMA did not issue it until more than 3 weeks after the hurricane hit the Gulf Coast. As a result, OSHA and its cooperating agency, the National Institute of Environmental Health Sciences, reported that trainers who were ready to begin work in the aftermath of the storm were not deployed to Mississippi until October 2005 or to Louisiana until November 2005. In addition, some agencies did not ask OSHA to provide training because they did not realize that OSHA offered this type of training. For example, EPA regional officials told us that, although their response managers noted a need for driver safety training in October 2005 because of the large number of motor vehicle accidents that occurred in the Gulf Coast area during the initial response efforts, it was not provided until March 2006 because it took them several months to determine that OSHA could provide this training. Workers faced many hazardous driving conditions during the response to Hurricane Katrina, including missing road signs or signs pointing the wrong direction, debris-strewn streets, intersections without working traffic signals, and lack of street lights—which made nighttime driving especially hazardous. (See fig. 10.) FEMA authorized OSHA to receive reimbursement for establishing a personal protective equipment program as described in the Annex for other federal agencies that included the selection, ad hoc distribution, fit, use, and decontamination of equipment for the response to Hurricane Katrina. While OSHA field staff distributed ear plugs, eye goggles, respirators, and safety vests to workers throughout the Gulf from supplies they had on hand for the use of OSHA staff, the agency was unprepared to establish a program that included procuring and distributing needed equipment on an ad hoc basis to other agencies as required by its mission assignment from FEMA. In its lessons learned from the World Trade Center disaster, OSHA recognized the need to ensure an adequate supply of personal protective equipment before a future incident and to develop a program to ensure for the storage, transportation, and distribution of this equipment through FEMA and other federal agencies. However, OSHA did not have such a program in place prior to Katrina, and OSHA and FEMA disagreed on how to obtain personal protective equipment: OSHA ordered equipment from its Cincinnati Technology Center, while FEMA ordered equipment from its contractor. In addition, OSHA had not made prior arrangements for storing the equipment during the response. OSHA and FEMA resolved their disagreements about suppliers and OSHA arranged to store equipment in its area offices and FEMA-managed facilities near the Joint Field Offices in Louisiana and Mississippi, but these difficulties delayed the provision of some equipment to workers and highlighted the need to establish a personal protection equipment program in advance of a disaster. Some federal agency officials reported needing advice on proper protective gear, and other officials reported a shortage of equipment. For example, National Guard officials in Louisiana told us they would have liked information from OSHA on the hazards workers were facing, recommendations on how to protect workers, and assistance in obtaining protective equipment such as rubber boots needed to protect workers from contaminated floodwaters. USACE officials told us they had difficulty obtaining sufficient supplies of protective equipment such as gloves and reflective vests. OSHA officials told us the agency has not yet fully addressed what the personal protective equipment program, as defined in the Annex, should entail. Issues to be addressed include obtaining agreement with FEMA on how such equipment should be purchased and where it will be stored, how the equipment will be distributed at disasters, and which workers will be entitled to receive the equipment. FEMA tasked OSHA with coordinating with the Department of Health and Human Services to ensure that mental health assistance was provided to workers during the response to Hurricane Katrina. However, OSHA did not coordinate with them to ensure that all workers in the Gulf area who needed mental health services received them, and OSHA had difficulty obtaining these services. OSHA and FEMA officials told us it was difficult to get mental health counselors to go to the base camps where workers lived during the response and to get counselors to provide services during off-hours to workers who did not have standard work schedules. They also said it was difficult to obtain mental health services for non-FEMA employees because while FEMA believed its contract with a unit of the Department of Health and Human Services, Federal Occupational Health , to provide counseling would cover all federal workers responding to Hurricane Katrina, the contractor interpreted the contract to only cover FEMA workers. In addition, instead of sending counselors to work sites throughout the Gulf, the contractor provided a toll-free number for workers to call. This was not an effective way to provide services because phone service in the Gulf was widely disrupted, and OSHA and FEMA officials said they thought on-site counseling was a better way to help workers. Although the contractor eventually provided services to non- FEMA employees by sending counselors to work sites and base camps in the Gulf area and distributing literature about available services, these efforts did not begin until late December 2005—too late to address the needs of response workers who were most in need of these services and the needs of many recovery workers involved early in the response. According to a FEMA official, the agency recently began an effort to review its contracts to ensure that non-FEMA employees are explicitly covered in the event of a future disaster response. However, OSHA headquarters officials told us that, in their opinion, ensuring that mental health services are available to workers in a disaster response should not be part of OSHA’s responsibilities under the Annex because the agency does not have the resources needed; this responsibility should be placed with a federal agency that has subject matter expertise and access to appropriate mental health resources, such as the agencies within the Department of Health and Human Services. OSHA officials we interviewed said they are coordinating with FEMA and the Department of Health and Human Services to improve the delivery of psychological first aid and informational materials during future disasters. Such efforts include distributing pamphlets to workers and their families throughout the Gulf area; consulting with other agencies to learn what types of mental health assistance are most appropriate for workers who respond to disasters; developing pamphlets on mental health issues for employers, employees, and their families; and distributing these pamphlets to OSHA area offices and other federal agencies to use during future disaster responses. Although OSHA staff intervened to assist any worker when they observed unsafe work practices, some of the safety and health needs of nonfederal workers not covered by OSHA’s mission assignments for Hurricane Katrina—state and local government employees, immigrants, and volunteers—involved in the response were not met. OSHA officials in Alabama, Louisiana, and Mississippi said it was difficult to address the needs of these populations. The mission assignment FEMA issued to OSHA only covered federal workers and federal contractor employees. OSHA’s efforts, therefore, were focused on those workers, and no other federal agency had responsibility for meeting the safety and health needs of nonfederal workers. OSHA had limited access to state and local workers because the states did not request the agency’s assistance. OSHA also had difficulty addressing the needs of immigrant workers because of language barriers, low literacy levels among some immigrants, the transience of many employers that hire immigrant workers, and immigrants’ fear of deportation and the federal government. In addition, OSHA had no authority to compel volunteer workers in the Gulf to follow safe work practices. Some state and local agency officials reported that they could have benefited from additional assistance from OSHA, including information about potential hazards and protective equipment for their workers. For example, Louisiana state troopers involved in recovering bodies were provided with boots and gloves, but officials said they would have liked additional information on potential hazards and guidelines on appropriate protective gear such as waders and on proper decontamination procedures. Similarly, many state and local agencies reported that they did not have waders to protect workers from contaminated flood waters. An official with the New Orleans Police Department told us the only staff who had waders to use during rescue efforts were fishermen and hunters who owned their own waders. However, because the governors of the three states most affected by Hurricane Katrina did not request OSHA’s assistance, the mission assignments issued to OSHA by FEMA did not cover state or local workers, they only covered federal workers. As a result, OSHA’s efforts were focused on providing assistance to federal agencies and workers. Several advocacy groups have issued reports highlighting the worker safety and health issues among immigrant workers in the Gulf Coast area who lacked information on hazards, training, and protective equipment. For example, a study by the Advancement Project, the National Immigration Law Center, and the New Orleans Worker Justice Coalition concluded that, in their opinion, the level of health and safety training and equipment provided to many workers in the Gulf area, including immigrants, fell well below federal standards. OSHA trained its staff on the cultural aspects of working with immigrant populations, hired some bilingual field staff, and built relationships with immigrant advocacy groups. For example, OSHA’s Mississippi Area Office hired several Hispanic staff to provide training to immigrant workers and participated in several local cultural events and job fairs to improve workers’ awareness of OSHA’s role in protecting workers. In addition, OSHA officials in Alabama, Louisiana, and Mississippi developed worker safety literature in Spanish and Vietnamese, two languages frequently used by non-English speaking workers in the Gulf Coast area, and distributed the literature at cultural events sponsored by immigrant groups. The unit that conducted most of OSHA’s training in the Gulf area through an interagency agreement, the National Institute of Environmental Health Sciences, developed brochures in Spanish and Vietnamese. (See fig. 11.) OSHA officials told us they issued five public service announcements in Spanish and translated 26 safety and health technical assistance documents into Spanish and 3 into Vietnamese. They also said they worked closely with the Mexican Consulate offices in Houston, Texas and Atlanta, Georgia to address concerns about the safety of Hispanic workers involved in the response. For example, according to OSHA, the consulate in Houston arranged several events in New Orleans designed to give the Hispanic community a chance to raise concerns and meet with OSHA staff. In addition, OSHA officials said they worked with local Catholic churches to reach Hispanic workers in the New Orleans area. OSHA also raised concerns about the safety and health of volunteers who arrived in the Gulf Coast area to assist in the recovery efforts, including concerns about the lack of training and protective equipment among the volunteers. For example, OSHA staff encountered several volunteers working on roofs without the proper training or proper fall protection. OSHA staff intervened when they encountered such situations and, according to agency officials in the Gulf area, provided on-site training and protective equipment to volunteer workers when it was available. Although OSHA did not have a lot of time to prepare for its new role in a disaster between the time the NRP became effective and when Hurricane Katrina struck the Gulf Coast, the agency moved quickly to provide assistance to workers who were part of the early response effort and those involved in recovery work. In preparing for future disasters, however, it is important for OSHA to note the areas in which its efforts in responding to Hurricane Katrina could have been improved. Without the ability to collect data on injuries and illnesses sustained by workers involved in disaster recovery efforts, OSHA cannot fulfill its role as defined in the Annex to identify trends and use this information to prevent further injuries and illnesses by informing workers and their employers about potential safety and health hazards. Furthermore, unless OSHA and FEMA clearly define their roles, the type and magnitude of the disasters in which OSHA will be involved, and how and when the Annex will be implemented, there may continue to be delays in providing critical assistance and information needed to protect workers in future disasters. As a result, workers may sustain injuries and illnesses that could have been prevented. In addition, if OSHA and FEMA do not resolve the issue of who is responsible for assessing the need and paying for long-term medical monitoring of workers involved in a response effort, these needs may not be met in future disasters. Because OSHA has not taken a proactive role in educating many federal, state, and local agencies and their workers about the role the agency plays in large disasters, some of the agencies do not know about the assistance OSHA can provide or how to request it. Similarly, by not seeking opportunities to participate in emergency preparedness exercises held by federal, state, and local agencies, OSHA has not been able to demonstrate the assistance it can provide or how the agencies can obtain its services during a disaster. As a result, without knowledge of OSHA’s role, it is unlikely that state and local agencies will request OSHA’s assistance in future disasters, hampering the agency’s ability to meet the safety and health needs of nonfederal workers, many of whom are first responders. Further, because OSHA was not prepared to establish a program for providing information on what protective equipment is needed or how to use it during future disasters or for ensuring that agencies obtain adequate supplies of equipment, workers may not be properly protected from potential hazards. Finally, some workers’ needs for mental health services in future disasters may not be not met, and the full extent of workers’ unmet mental health needs will not be known because OSHA has not coordinated with the Department of Health and Human Services to determine how it will assess the need for mental health services or ensure that these services are provided to rescue and recovery workers. In order to improve the ability to meet workers’ safety and health needs in the event of a future disaster, the Secretaries of the Departments of Labor and Homeland Security should direct the Administrators of OSHA and FEMA to clearly define the criteria to be used in deciding when OSHA will be responsible for carrying out its duties under the Worker Safety and Health Support Annex to the National Response Plan, including the types and magnitude of disasters in which OSHA will be involved, and clearly define OSHA’s and FEMA’s roles under the Worker Safety and Health Support Annex, including resolving the issue of how the need for long-term medical monitoring of workers involved in the response to future disasters will be met; and proactively work to provide information to federal, state, and local agencies about OSHA’s role in a disaster and the assistance it can provide under the Worker Safety and Health Support Annex, including seeking opportunities for OSHA to participate in emergency preparedness exercises at federal, state, and local levels. In addition, the Secretary of the Department of Labor should direct OSHA to establish a process for collecting data on injuries and illnesses sustained by workers who respond to disasters as defined in the Worker Safety and Health Support Annex to the National Response Plan, such as requiring employers to record injuries and illnesses on logs maintained at each disaster work site and periodically submit them to OSHA during the response; use the information collected on injuries and illnesses to identify safety and health hazards and analyze injury and illness trends; and develop, implement, and monitor an incident personal protective equipment program as defined in the Worker Safety and Health Support Annex. In order to improve the ability to meet workers’ needs for mental health services in the event of a future disaster, the Secretaries of the Departments of Labor and Health and Human Services should develop a plan for coordinating and providing mental health services to response and recovery workers as described in the Worker Safety and Health Support Annex to the National Response Plan. We provided a draft of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, Homeland Security, the Interior, and Labor; EPA; the Coast Guard; DOD; the National Guard; and USACE for comment. We received written comments from the Departments of Health and Human Services and Labor, which are reproduced, along with our response in appendixes III and IV. Both agencies also provided technical comments, which we incorporated in the report as appropriate. The Department of Health and Human Services agreed with our recommendations. The Department of Labor agreed with our recommendation for OSHA to establish a process for collecting data on injuries and illnesses sustained by workers who respond to disasters as defined in the Annex, although it noted several challenges in doing so. Although the agency did not comment on the other recommendations, it disagreed with our findings in several areas and provided additional information on the actions it took to provide assistance to agencies and workers. Officials with the Department of Homeland Security stated in oral comments that they agreed with our findings and recommendations and provided written technical comments, which we incorporated as appropriate. The Department of the Interior, the Coast Guard, and the National Guard also provided technical comments, which we incorporated as appropriate. DOD did not respond to our request for comments. Officials with EPA, USACE, and the Department of Agriculture told us that they had no comments on the report. We will make copies of this report available upon request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about the report, please contact me at (202) 512-5988 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 the report are listed in appendix V. We met with OSHA national, regional, and area office officials to obtain a general understanding of their specific roles and responsibilities under the National Response Plan (NRP) and the Worker Safety and Health Support Annex (the Annex). We documented the steps OSHA took to ensure the safety and health of workers in the Gulf Coast area during the response to Hurricane Katrina; the extent of the agency’s coordination with other federal, state, and local government officials; and the lessons learned that included any new initiatives that had been implemented or were being considered. We also met with officials from federal agencies that, according to OSHA and FEMA officials, deployed federal workers and contractor employees to the Gulf Coast in response to Hurricane Katrina: OSHA; FEMA; EPA; the Coast Guard; DOD; the National Guard; USACE; and the Departments of Agriculture, Health and Human Services, and the Interior. As a part of our interviews, we asked about them the extent of their involvement with OSHA, lessons learned, and specific initiatives being implemented or planned to address the challenges faced by their workers during Hurricane Katrina. In addition, we interviewed representatives of several workers’ rights groups to obtain their perspectives on the role OSHA played in protecting the safety and health of workers involved in the response to Hurricane Katrina, including the safety and health of the immigrant population. These groups included Boat People SOS, the Mississippi Immigrants Rights Alliance, the Center to Protect Workers’ Rights, and the New York Committee for Occupational Safety and Health. We also reviewed several studies on emergency preparation, response, and recovery efforts conducted prior to and during Hurricane Katrina. We conducted our work from October 2005 to December 2006 in accordance with generally accepted auditing standards. We reviewed provisions of the NRP and the Annex to identify the specific roles and responsibilities of OSHA in an incident of national disaster or a catastrophic event. We also reviewed state emergency management plans in Alabama and Louisiana to determine whether these state plans had provisions for ensuring the safety and health of rescue and recovery workers. Mississippi did not have a current state emergency management plan. To provide some perspectives on the extent of OSHA effectiveness for ensuring safety and health of workers at the state and local levels, we conducted site visits in Alabama, Louisiana, and Mississippi, the states that suffered the most damage from Hurricane Katrina. We spoke with OSHA regional and area officials as well as federal officials from FEMA, EPA, and USACE. We also interviewed many state and local response and recovery workers, including state police in Louisiana and Mississippi; local law enforcement in New Orleans, Louisiana and Jackson, Mississippi; firefighters in New Orleans, Louisiana; the Louisiana Department of Wildlife and Fisheries; the Louisiana Department of Environmental Quality; and a county emergency management official in Mississippi. In addition, in March 2006, we attended a conference sponsored by the National Institute of Environmental Health Sciences that discussed the various lessons learned and challenges federal agencies encountered during the responses to Hurricanes Katrina and Rita. Because OSHA was unable to collect useable data on the number of injuries and illnesses sustained by federal workers in the Gulf Coast area, we asked the 10 agencies that sent rescue and recovery workers to the Gulf Coast to provide this information. Although agency officials told us that they tracked illnesses and injuries on the work site logs that OSHA requires them to maintain, they were not able to separate out this information for all workers deployed to the Gulf Coast because injuries and illnesses are recorded at the work sites where workers are permanently assigned, not the work sites to which they were temporarily assigned during the response. We asked these agencies whether they maintained their own data on workers who were injured or became ill as a result of their work in the Gulf area. Four of the 10 agencies—EPA, USACE, the Coast Guard, and the Department of the Interior—provided data on injuries and illnesses for workers deployed to the Gulf Coast that were sufficiently reliable for us to report. However, each of these agencies used different methods to report this information. In an effort to summarize the injury and illness data reported by the agencies, we developed a coding scheme for classifying and combining the data on injuries and illnesses provided by EPA and USACE into more consistent and concise categories. For example, we classified an injury described in USACE’s data as “contractor chain saw operator suffered laceration,” as a “laceration,” and an injury described in EPA’s data as “employee lost his footing and fell onto the deck landing,” as a “trip/fall.” We determined that the codes used by the Coast Guard were sufficiently reliable in coding scheme to use to report the number and types of injuries and illnesses sustained by their workers. We received the data from the Department of the Interior too late to include it in its entirety but provided a brief summary of the types of injuries and illnesses sustained by its workers in the Gulf Coast area (see app. II). In addition, to determine the number and types of injuries and illnesses sustained by their workers, we looked at the nature and causes of the injuries and illnesses reported by the four agencies and, where possible, the number of injuries and illnesses reported for each month. Because some incidents reported by EPA and USACE contained more than one injury or illness, we used more than one code to report on the type of injury or illness sustained. For example, we classified an injury reported by EPA where an employee had “pulled and strain neck and back from a motor vehicle accident,” as a “motor vehicle accident” and a “pain/strain.” As a result, the total number of injuries and illness reported by the agencies may differ from the numbers we reported. Because the data on injuries and illnesses provided by the federal agencies on their workers were limited, we obtained information on workers’ compensation claims filed by federal workers from the Department of Labor’s Office of Workers’ Compensation Programs in order to obtain more information about injuries and illnesses sustained by federal workers involved in the response. The Office of Workers’ Compensation Programs provided us with data on 770 claims related to Hurricanes Katrina and Rita filed from August 2005 through June 2006. However, we found that the data provided to us on claims filed by federal workers were not sufficiently reliable to use in reporting the types of injuries and illnesses sustained by federal workers involved in the response. Officials with OSHA and FEMA told us the following federal agencies sent workers to Alabama, Louisiana, and Mississippi—the three states that sustained the most damage from Hurricane Katrina—to perform rescues and conduct recovery work such as clearing debris: 1. the Department of Agriculture; 2. the Department of the Interior; 3. the Coast Guard; 6. the Department of Health and Human Services, including the Centers for Disease Control and Prevention, the National Institutes of Health, the Food and Drug Administration, the Office of Force Readiness and Deployment, and the Substance Abuse and Mental Health Services Administration; 9. DOD, including the Air Force, Army, Navy, and Marine Corps; and 10. the National Guard. In early May 2006, we asked these agencies to provide us with the number of employees and contract employees they employed in the three states to assist with rescue and recovery work related to Hurricane Katrina from the beginning of the response through April 1, 2006. Many agency officials told us that they could not provide the total number of workers for the entire period because they did not collect data in a way that would enable them to provide us with unduplicated counts of workers who rotated in and out of the Gulf Coast area. However, many said they could provide us with estimates of the total number of workers for specific points in time so we requested such data from all 10 agencies. We asked them to provide the total number of full-time equivalent workers they employed in Alabama, Louisiana, and Mississippi on the first day of each month from September 1, 2005, through April 1, 2006. We also asked them to exclude employees of other agencies that were temporarily assigned to them or volunteers who were not government employees or contractors. All of the agencies submitted estimates for their federal employees working in the Gulf area, although some agencies were not able to provide information on all personnel deployed to the Gulf Coast. Only 6 of the 10 agencies tracked information on the number of workers employed by their contractors in these three states to work on response and recovery work related to Hurricane Katrina: the Departments of Agriculture, the Interior, Health and Human Services, EPA, OSHA, and FEMA. Although officials with three of the other four agencies—the Department of Defense, USACE, and the Coast Guard—said they employed contractors in the Gulf, they did not track the number of workers employed by their contractors. Officials from the National Guard told us they did not employ contractors in the Gulf Coast area. We obtained data from OSHA and the other agencies on 11 response and recovery workers who died in the Gulf, 9 of whom were killed in work- related accidents. OSHA provided information on 10 fatalities, 9 of which were work-related, and USACE on 2 fatalities, one of which was work- related. All of the other agencies said that none of their workers was killed during the response to Hurricane Katrina. (See table 1 for additional information on these fatalities.) Because OSHA was unable to collect data on the number of injuries and illnesses sustained by federal workers in the Gulf Coast area, we asked the 10 agencies that sent workers to the Gulf Coast area to provide this information. Although agency officials told us that they tracked illnesses and injuries on the worksite logs that OSHA requires them to maintain, they were not able to separate out this information for all workers deployed to the Gulf Coast because injuries and illnesses are recorded at the worksites where workers are permanently assigned, not the worksites to which they were temporarily assigned during the response. We asked these agencies whether they maintained their own data on workers who were injured or became ill as a result of their work in the Gulf Coast area. Four of the 10 agencies—EPA, USACE, the Coast Guard, and the Department of the Interior—provided data on injuries and illnesses for workers in the Gulf area that were sufficiently reliable for us to report. However, each agency used different descriptions of the injuries and illnesses to report the information collected. In an effort to summarize the data reported by the agencies, we developed our own categories to use in classifying and collapsing the descriptions of injuries and illnesses provided by EPA and USACE into more consistent and easily understood categories. For example, for an injury described in USACE’s data as “contractor chain saw operator suffered laceration,” we reclassified it as a “laceration;” and for an injury described in EPA’s data as “employee lost his footing and fell onto the deck landing,” we reclassified it as a “trip/fall.” We determined that the descriptions and categories used by the Coast Guard were sufficiently clear to use in reporting the number and types of injuries and illnesses sustained by their workers. We received the data from the Department of the Interior too late to reclassify it and report it in its entirety, but we provided a brief summary of the types of injuries and illnesses sustained by its workers deployed to the Gulf Coast on page 58. To determine the number and types of injuries and illnesses sustained by their workers deployed to the Gulf Coast, we looked at the nature and causes of the injuries and illnesses reported by the agencies and, where possible, the number of injuries and illnesses reported for each month. Because some incidents reported by EPA and USACE contained more than one injury and/or illness, we used more than one code to report on the type of injury and illness sustained. For example, where EPA reported that an employee had pulled and strain neck and back from a motor vehicle accident, we classified it as “motor vehicle accident” and “pain/strain.” As a result, the total number of injuries and illness reported by these agencies may differ from the types of injuries and illnesses reported for that same time frame. EPA reported information on the number of injuries and illnesses sustained by their federal workers and contractor employees. (See table 2.) EPA also provided information on the types of injuries and illnesses these workers sustained. (See table 3.) USACE reported information on the number of injuries and illnesses sustained by their federal workers and contractor employees. (See table 4.) USACE also reported information on the types of injuries and illnesses sustained by these workers. (See table 5.) The Coast Guard provided information on injuries and illnesses sustained by their workers and contractor employees from November 2005 though March 2006 in several different categories. According to Coast Guard officials, about 5 percent of the data it received on illnesses and injuries that occurred during this period had not been entered into its injury and illness tracking system. It reported data on the number of types of exposures their federal workers and contractor employees experienced during the response. (See table 6.) The Coast Guard also reported the number of injuries sustained by their federal workers and contractor employees. (See table 7.) In addition, the Coast Guard provided data on the health effects of the injuries and illnesses sustained by their federal workers and contractor employees. (See table 8.) The Coast Guard noted which symptoms occurred during workers’ deployment and which occurred post-deployment. (See table 9.) Finally, the Department of the Interior reported that 90 workers sustained injuries or illnesses during the response to Hurricane Katrina from August 2005 through April 2006. They included injuries such as falls, slips and trips; strains from lifting; dermatitis from exposure to poison ivy; and reactions from exposures to toxins, dust, gas or chemicals. We took several steps to assess the reliability and reasonableness of the data the agencies provided. To assess the reliability of the agencies’ data, we talked with agency officials about their data quality control procedures and reviewed relevant documentation. For example, we asked about the types of procedures and systems they had in place to ensure that the data were collected and reported consistently. We found the data were sufficiently reliable for the purposes of this report. 1. We disagree that our report does not fairly and adequately capture the actions OSHA took to prevent occupational injuries and illnesses and work-related fatalities in the Hurricane Katrina response operations. The information on pages 15 through 27of the report details many of these activities, but the purpose of the report was to provide a broader picture of OSHA’s overall effectiveness. While the magnitude of the activities accomplished by OSHA’s field staff was noteworthy, the agency’s overall effectiveness was hampered by its lack of preparation for implementing its responsibilities under the Annex at the national level. This was also noted by the Department of Homeland Security’s National Preparedness Task Force, which stated in its technical comments that, “As a signatory agency, Department of Labor should have anticipated and put in place mechanisms to ensure the success of OSHA in meeting their Workforce Safety responsibilities.” In addition, our work focused on OSHA’s activities through December 2006, not December 2005. 2. Although OSHA provides more detailed information about its action during the response to Hurricane Katrina, our report mentions many of these same activities. For example, on page 33 of the report, we stated that OSHA distributed personal protective equipment to many agencies and workers; on pages 25 to 27, we noted that OSHA sampled many worksites for hazards; on pages 19 and 20, we provided examples of the quick cards and fact sheets OSHA developed and distributed throughout the Gulf; and on page 21, we discussed the thousands of interventions that the agency’s staff conducted. 3. We agree that OSHA, nor any other federal agency, was responsible for collecting information on the number of workers deployed to the Gulf area in response to Hurricane Katrina. In the absence of such information, we attempted to collect it ourselves but, as noted in the report, were not entirely successful because many of the agencies we contacted did not have systems in place for tracking the number of workers deployed. 4. We noted on page 9 of the report that the mission assignment FEMA issued to OSHA implementing the Annex for Hurricane Katrina included all of the activities listed in the Annex except long-term medical monitoring. We measured the effectiveness of OSHA’s performance only against those activities included in its mission assignment. 5. Despite OSHA’s efforts, as noted on page 32 of the report, other agency officials told us that there still were gaps in the training provided to workers involved in the response effort and additional information was needed about available training. 6. While we agree that establishing a personal protective equipment program for a disaster response is a difficult and complex task, we continue to believe that the underlying issue is the need for OSHA to define how it will implement and monitor such a program as specified in the Annex. The issues that OSHA raises need to be addressed in developing an incident personal protective equipment program for future disasters, including developing a process for deciding what providing equipment on an “ad-hoc” basis means, what types of equipment will be provided, who will provide it, which workers will receive it, and where will it be stored. 7. We disagree with OSHA’s comment that our statement about its lack of coordination with the Department of Health and Human Services is inaccurate. Our statement is based on OSHA’s lack of coordination before the disaster in order to ensure that the cooperating agencies were adequately prepared to meet the mental health needs of workers. Furthermore, in technical comments on the report, the Department of Homeland Security’s National Preparedness Task Force also noted this lack of coordination. It stated that OSHA did not seek assistance from cooperating agencies that have provided mental health services during major events in the past, such as the Department of Health and Human Services’ Substance Abuse and Mental Health Services Administration. 8. We disagree with OSHA’s assertion that the report does not accurately reflect the awareness of the Annex among federal agencies before Hurricane Katrina. As noted in the report, many of the agency officials we interviewed who were in charge of day-to-day operations in the Gulf area were not aware of OSHA’s role or the services it could provide. We continue to believe that OSHA needs to provide information to federal, state, and local agencies about its role in a disaster, including seeking opportunities to participate in emergency preparedness exercises at all levels of government. Because so many responders are associated with nonfederal agencies, it is particularly important for OSHA to reach out to state and local agencies to provide this information. 9. We used the word “suspend” to describe the fact that, in its press releases, OSHA noted that it had “exempted” large areas of the three affected states from its normal enforcement operations for specific periods and limited its inspections to cases involving fatalities, catastrophic accidents, or complaints, as noted on page 7 of the report. We changed the wording of the report in response to OSHA’s technical comments and no longer use the term “suspend.” However, we believe that this is an accurate reflection of the change in OSHA’s activities during a disaster. 10. The challenges OSHA recognizes in its comments regarding the use of its standard recordkeeping forms (OSHA forms 300 and 301) to collect data on injuries and illnesses sustained by workers during a disaster correctly identify some of the drawbacks involved in using the forms for this purpose. OSHA’s comments also emphasize the need for it to develop a process for collecting needed data that overcomes the challenges identified. We disagree, however, that the forms are a good platform on which to build such a process. They do not contain detailed information on injuries, and employers are not required to include many of the more minor injuries and illnesses sustained by workers, such as those requiring only first aid. In addition, the use of the logs could cause confusion among federal agencies about whether the standard rules for recording injuries and illnesses are to be applied. For example, federal agencies are not normally required to submit their injury and illness logs to OSHA, but OSHA will need to obtain this information on a timely basis during a disaster response in order to monitor injuries and illnesses and identify trends. Revae E. Moran, Assistant Director, and Karen A. Brown, Analyst in Charge, managed all aspects of the assignment. Amanda M. Mackison, Claudine L. Pauselli, and Linda W. Stokes made significant contributions to the report. In addition, James D. Ashley, Lise Levie, Sheila R. McCoy, Jean L. McSween, David Perkins, and Tovah Rom provided key technical and legal assistance. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Coast Guard: Observations on the Preparation, Response, and Recovery Missions Related to Hurricane Katrina. GAO-06-903. Washington, D.C.: July 31, 2006. Hurricane Katrina: Better Plans and Exercises Needed to Guide the Military’s Response to Catastrophic Natural Disasters.GAO-06-643. Washington, D.C.: May 15, 2006. Hurricane Katrina: Status of the Health Care System in New Orleans and Difficult Decisions Related to Efforts to Rebuild It Approximately 6 Months After Hurricane Katrina. GAO-06-576R. Washington, D.C.: March 28, 2006. GAO’s Preliminary Observations Regarding Preparedness and Response to Hurricane Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006. Hurricanes Katrina and Rita: Provision of Charitable Assistance. GAO-06-297T. Washington, D.C.: December 13, 2005. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. | Concerns about the safety and health of workers involved in the response to Hurricane Katrina included their exposure to contaminated floodwaters and injuries from working around debris. The Department of Labor's Occupational Safety and Health Administration (OSHA) is responsible for coordinating federal efforts to protect the safety and health of workers involved in the response to large national disasters. Under the Comptroller General's authority, GAO initiated a number of Katrina-related reviews. For this review, GAO examined (1) what is known about the number of response and recovery workers deployed to the Gulf Coast in response to Hurricane Katrina; (2) the extent to which OSHA tracked injuries and illnesses sustained by these workers; and (3) how well OSHA met the safety and health needs of workers. To address these issues, GAO reviewed reports; analyzed data; interviewed federal, state, and local officials; and conducted site visits. No one, including OSHA,was responsible for collecting information on the total number of response and recovery workers deployed to the Gulf Coast in response to Hurricane Katrina and no one collected it, but 10 federal agencies provided estimates showing that, on October 1, 2005, the agencies had about 49,000 federal workers in the Gulf Coast area. In addition, six of these agencies estimated that their contractors had about 5,100 workers in the area on December 1, 2005, but the other four either did not track the number of workers employed by their contractors or did not employ contractors. Although OSHA was responsible for tracking the injuries and illnesses that federal response and recovery workers sustained during the response to Hurricane Katrina, the agency's efforts to collect it were delayed and it was unable to collect usable information. According to OSHA, the Federal Emergency Management Agency (FEMA) must assign and fund specific responsibilities for each disaster. However, FEMA did not direct OSHA to collect injury and illness data until more than 3 weeks after the hurricane struck. OSHA attempted to collect the data, but the information federal agencies provided were incomplete and unreliable. OSHA and other agencies did track fatalities. They reported nine worker fatalities attributed to work-related accidents: three employees of federal contractors and six nonfederal workers or volunteers. OSHA provided assistance to many response and recovery workers who responded to Hurricane Katrina, but not all workers' safety and health needs were met. OSHA quickly established operations in the Gulf area; intervened in thousands of potentially hazardous situations; and assessed air, water, soil, and noise hazards at many work sites. However, disagreements between OSHA and FEMA about which agency was in charge of providing safety and health assistance to federal agencies and workers and how it would be provided delayed some of OSHA's efforts. Also, some agencies' lack of awareness about the role OSHA plays in a disaster further hindered its ability to provide assistance. As a result, OSHA did not fully meet workers' safety and health needs, particularly their need for training and protective equipment. OSHA also did not coordinate with the Department of Health and Human Services to ensure that workers had needed mental health services, and OSHA was not assigned responsibility for coordinating the needs of nonfederal workers, including state and local agency workers; many immigrants; and volunteers. |
While Congress originally envisioned Open World as a vehicle to bring Russia’s emerging political leaders to the United States, Open World has recently been authorized to expand the scope of its program. As shown in fig. 1, Open World has launched pilot programs in Lithuania, Ukraine, and Uzbekistan, with the first groups of about 50 participants from each country visiting the United States between December 2003 and February 2004. While Congress also made 11 other countries in the Newly Independent States and Baltic states eligible for funding, as of February 2004, there were no plans to extend the program to these countries. Open World is governed by a Board of Trustees and works with numerous partners to carry out the program. U.S. embassies play a key role by nominating individuals for the program, vetting applicants for final selection, and processing visas for participants. In addition, Open World has contracts with several organizations, such as the American Councils for International Education, which provides logistical support, and Project Harmony, which coordinates alumni activities, along with a network of 26 Open World alumni coordinators throughout Russia. Grants are awarded to U.S. national host organizations that, in conjunction with local partners, develop programs for participants and arrange home stays. (See app. II for a list of national host organizations in 2003.) The following chart illustrates Open World’s program operations and activities, as well as the entities involved in carrying out the program. Congress appropriates an annual amount for Open World, which has ranged from $8 million in fiscal year 2002 to $13.5 million in fiscal year 2004. In addition, Open World is authorized to seek and accept private donations and reports that it has received current gifts and pledges of about $2 million. Figure 3 shows the program’s total expenditures (unaudited) for fiscal years 1999-2003 and expenditures by major category during the same period. Based on data for the program’s expenditures and the number of participants for 2003 provided by Open World, we estimated the average cost per participant, including facilitators, to be about $6,200. When the program was established as an independent entity in December 2000, Congress provided the program with additional authority and support, including the authority to receive donations and appoint an executive director and to establish a trust fund in the Department of the Treasury to be credited with appropriations and donations approved by the program. In addition, Congress authorized the Library of Congress to provide the program with support services, including the ability to disburse appropriated funds; pay the program’s personnel; and provide administrative, legal, financial management, and other services. The Library was also authorized to collect the full costs of the services from the program’s trust fund. To formalize this arrangement, the Library and Open World entered into an interagency agreement. In addition to providing for support services, the agreement enables Open World to use Library personnel to conduct the program and the Library to recover the related salary and benefit costs of such personnel. According to Open World officials, the Library currently has 14 established positions assigned to assist the center in conducting its program. As provided for in the interagency agreement, the Library of Congress provides financial management services to the Open World Leadership Center. Open World officials review and approve financial management documents before submitting them to the Library of Congress for processing. Much of Open World’s in-house financial management activities are performed by a financial management consultant who makes recommendations to both the Executive Director and the Program Administrator regarding approval of program disbursements. In an effort to reach emerging leaders in various sectors, the program for Russia focuses on three types of exchanges—parliamentary, civic, and cultural. Parliamentary visits match members of Russia’s two houses of parliament—the Duma (the lower house) and the Federation Council (the upper house)—with host U.S. senators, representatives, and governors. The civic program in 2003 featured eight themes: economic development, education reform, environment, federalism, health, rule of law, women as leaders, and youth issues (see fig. 4). It targets, among others, government officials and civic leaders at all levels, with an emphasis on regional and local levels, and other community leaders. The new cultural program for Russia is designed specifically for cultural leaders, including museum professionals, visual and performing artists and administrators, and librarians. The typical exchange program runs for 10 days, including a 2-day orientation program upon arrival in the United States. Delegations usually consist of five people—four delegates and one paid facilitator who acts as a “bridge” between the Russian delegates and their American hosts. Most participants stay in private homes of American host volunteers for some or most of their local visit—a special feature of the program. In addition, unlike some other U.S. exchange programs, English is not a requirement for the Open World program. As a result, Open World has been able to send participants from each region of Russia to the United States—most for the first time. As of December 2003, Open World reported bringing 6,800 Russian delegates from seven geographic regions to visit over 1,200 communities in all U.S. states. The percentage of delegates from each region is roughly comparable to the proportion of the Russian population that each region represents. Figure 5 illustrates the representation of delegates, in terms of the number and percentage, from each region in Russia and the number of delegates that traveled to each state within the United States between 1999 and 2003. Fifty-eight percent of the delegates in 2003 were women. The average age of Open World delegates in 2003 was 39 years. As shown in figure 6, 77 percent of the delegates in 2003 were 45 years of age or younger. Delegates come from a wide variety of academic and professional backgrounds. Ninety-four percent of 2003 delegates reported having completed higher education, 12 percent had the equivalent of a master’s degree, and 1 percent had the equivalent of a doctorate. Their degrees span a wide spectrum, ranging from the fields of law and medicine to agriculture and journalism. Fifty-eight percent of the delegates reported that they had authored publications. Professions varied from Duma members and judges to leaders of nongovernmental organizations. Twenty percent of the delegates reported they were elected officials. Open World records as of February 2004 showed that 140 members of the Duma and 20 members of the Federation Council—representing about 31 percent and 11 percent of the current Duma and Federation Council, respectively—have traveled to the United States through Open World. Also, 577 Russian judges have participated in the program. In addition, Open World officials noted that Russia’s diverse ethnic groups were substantially represented among program participants. Based on our analysis of responses to participant surveys conducted by Open World, as well as our interviews with Open World alumni in Russia, delegates generally hold highly favorable views of their experience in the program. Almost all of the delegates reported that the program was useful and had partially or completely met their expectations. They also reported a greater willingness to cooperate with Americans as a result of the exchange. While overall comments were positive, some delegates cited not having enough time to establish business contacts. Our analysis of Open World questionnaires that surveyed delegates for their experiences in and immediate reactions to the program, and our own interviews of past delegates, showed that Open World program alumni hold highly favorable views of their exchange experience. Almost all of them reported the program was either probably or definitely useful to them. Many alumni with whom we met offered concrete examples of actions they had taken to implement what they learned from their U.S. visits in the context of the Russian environment. For example, several members of the Russian Ministry of Internal Affairs in Moscow used information they gained from their visits with State Department officials and nongovernmental organizations to draft legislation prohibiting the trafficking of women. The Chairman of the Judicial Council in Moscow and several judges at the Supreme Court in Petrozavodsk told us that they established court management structures modeled after U.S. courts and developed a judicial code of ethics in consultation with American judges. Librarians in Petrozavodsk told us that, after returning from the United States, they helped to establish a library association in the Republic of Karelia that is similar to the Russian Library Association, a counterpart to the American Library Association. Another alumnus joined the Rotary Club in Moscow after his Open World experience and was recently elected the president of his chapter. One woman said that upon learning about fund- raising efforts and philanthropy of private organizations in the United States, she began soliciting donations for her nongovernmental organization from private businesses in Russia. In addition, almost all alumni said that since the exchange, they had contacted other Open World alumni in other regions within Russia. Many of them had been invited to and had attended alumni conferences or other alumni events such as computer training seminars and professional development workshops. In addition, over half the alumni we interviewed had used the Internet to view Open World’s Web site or keep in touch with contacts made during their exchange experience. The American Corners facilities that we visited in Petrozavodsk and Samara, whose directors had participated in Open World, have become a hub for alumni who use the facilities’ computers for Internet access and other services. The majority of the alumni we interviewed said that their views of the United States changed in some way after the exchange. For example, one alumnus said she was unable to accurately visualize the United States before participating in the program and had developed the impression from Cold War propaganda that Americans had few opportunities and little hope for the future. Some alumni expected Americans to be hostile and were surprised by their friendliness. Open World surveys showed that, for the most part, delegates reported that the program improved their understanding of American institutions to some degree. For example, in 2003, a large amount of delegates (74 percent) believed that their visit improved their understanding of ethnic and cultural diversity in the United States, as well as their understanding of democracy (74 percent), role of Congress (68 percent), higher education system (70 percent), legal system (67 percent), freedom of speech (62 percent), market economy (50 percent), and role of religious organizations (52 percent). For example, among the past delegates we interviewed, one was impressed with the religious diversity in America when he observed Amish communities in Pennsylvania. Another delegate was impressed by the large Russian immigrant population in Brighton Beach, New York. Many delegates were surprised by how open and transparent American government institutions are to the citizenry, citing, for example, the openness of and public access to city council meetings, congressional sessions, courtrooms, and public hearings. According to Open World’s 2003 surveys, 89 percent of delegates reported they probably or definitely expect a positive long-term impact as a result of their visit to the United States. For example, 88 percent of delegates reported that, as a result of the exchange, their readiness to cooperate with American leaders had risen. Eighty-six percent also reported that their trip improved relations between Russian and U.S. citizens. Fifty-four percent indicated that they extended an invitation to their American counterparts to visit them in Russia during the next year. Seventy-six percent said they plan to stay in contact with persons they meet in the United States. While overall comments in Open World’s surveys were positive, some delegates cited areas that could be improved. For example, 34 percent of delegates in 2003 indicated they had not had sufficient time to establish individual business contacts with their professional counterparts. In addition, 34 percent indicated they had not had sufficient time for individual consultations on professional issues. Although the majority of the alumni we interviewed said they were satisfied with the contacts they made during the program, a few of them wished they had met with higher- level officials. For example, a deputy chief at the Moscow State Duma reported Open World does not facilitate enough contacts with high-level decision makers. Another said that because he did not meet with his American counterparts, he had the impression they did not have an interest in meeting Russians. Others said the program was simply too short to meet with everyone they had hoped. Nonetheless, Open World’s surveys indicated that 56 percent of alumni felt that a 2-week program would be optimal. Open World officials said they considered 10 days as a reasonable amount of time to expect participants to be away from their jobs. Ambassadors and embassy officials with whom we met noted that Open World complements U.S. mission activities and enhances outreach efforts—citing, in particular, the program’s alumni as a valuable resource. Although the U.S. mission offers several State Department-administered exchange programs, none of these individual programs brings Russians to the United States on the same scale as Open World, particularly from the remote regions of the country. (See app. III for a list of selected State exchange programs.) According to U.S. mission officials in Russia, including those at the consulate in St. Petersburg, it is at locations outside of the major cities that Open World has an advantage and can best target potential delegates for the program who have not yet traveled to the United States on other U.S. exchange programs. In fact, when visiting various regions within the country, embassy officials find it especially useful to meet with Open World alumni, many of whom are in leadership positions. For example, while visiting Volgograd, the U.S. ambassador met with Open World alumni who shared some examples of direct results of their exchange experiences. One alumnus started several youth programs in his district, while another started public information programs on healthy lifestyles directed at Volgograd youth. In addition to enhancing outreach efforts, State officials in Washington, D.C., and U.S. embassy officials with whom we spoke in Russia said Open World complements other U.S. mission activities. Similarly, Open World is able to build on relationships fostered by other U.S.-Russia assistance activities to further its own program. For example, the U.S. Agency for International Development (USAID) worked through Open World to send more Russian judges to the United States than it could have funded on its own, as part of the Vermont-Karelia Project. This project was initially established to bring representatives of the judiciary of Karelia, with which the judiciary of Vermont has a long-standing working relationship, to meet their counterparts and learn about the U.S. judicial system. The program has since grown to include an additional six Russian regions and six U.S. states and is now called the Russian-American Rule of Law Consortium, of which the Vermont-Karelia Project is a part. Also, the State Department targets Open World alumni for follow-up technical assistance and training upon their return to Russia. Thus, although Open World does not bring Americans to Russia, under State or USAID sponsorship, some American judges who had hosted Open World delegates later visited Russia to provide technical assistance and training. Embassy officials and State officials in Washington, D.C., noted that, although there are other independent entities within the executive branch that carry out international activities such as exchange programs, Open World is the only exchange program within the legislative branch. (For illustrative purposes, app. IV provides information on some independent entities funded through the executive branch.) The officials told us that the program’s independent status and current placement within the legislative branch offered some advantages, noting that congressional sponsorship of Open World lends a certain cachet to the program and allows it to attract emerging leaders who otherwise might not participate. The officials also said that congressional involvement was important to sustaining the support of Congress and other decision makers. Although Open World does deliberate and decide on programmatic themes and target audiences that it would like to emphasize each coming year, it does not have formalized strategic and performance plans that define success, what it will take to succeed, and how it should be measured. Without a framework that identifies long-term goals, explicitly links them to U.S. mission priorities and plans overseas, and systematically identifies the incremental outcomes expected at each step, along with measurable indicators of such progress, it is difficult to gauge whether Open World is targeting and reaching the right people, whether it is providing delegates with the right types of experiences, and whether these experiences are resulting in improved mutual understanding. This also makes it more difficult for Open World to adjust its course of action, when necessary, and to determine whether it is using its resources in the most efficient and effective manner. Also, although Open World surveys all delegates on their experiences in and immediate reactions to the exchange program, it does not systematically compare delegate attitudes and knowledge both before and after their participation in the program. Open World has also administered several different alumni surveys; however, these surveys are of limited value in gauging improvements in mutual understanding. Open World does provide nominating organizations with general criteria for determining a person’s eligibility for the program. To further screen nominees, the vetting committee considers such factors as a person’s active involvement in politics, the community, or teaching; the number of publications issued; the number of people the person supervises; whether the person is from outside the capital; and any prior visits to the United States to make subjective judgments about the applicant’s potential to influence change and apply the experience gained from participating in the program. Nevertheless, it is difficult to determine whether these are the optimal criteria for any given year, or whether they are being met, without explicit and measurable performance targets that are designed and sequenced to mesh with a larger strategy for achieving Open World’s long- term goals. Similarly, the lack of a strategy makes it difficult to assess whether delegates are gaining the desired experiences from their involvement in the program. We found varied responses among the past alumni we interviewed regarding what would constitute an optimal mix of experiences. Some favored a more focused approach involving training that is narrowly targeted toward specific professional needs. Others said that a broad exposure to the United States and its institutions is all that can be expected during a 10-day visit. One program nominator said that the program should consist of two separate trips: On the first, delegates would simply gain an insight into the American political and economic systems, while the second trip would be more focused on specific professional experiences. Without an explicit strategy that links particular target groups with specific program content, approaches, and timing, it is difficult to determine whether the experiences that delegates are gaining are optimal at any given time. Open World conducts surveys that attempt to capture delegates’ experiences in and immediate reactions to the exchange program, including their impressions about whether their attitudes had changed as a result of their participation in the program. However, it does not systematically compare delegate attitudes and knowledge both prior to and following their participation. Open World has also administered alumni surveys; however, these surveys were not designed to determine the long- term impact of the program, including whether improved mutual understanding has occurred. While measuring the impact of exchange programs is difficult because the full effects of such programs may not be known for years, Open World officials agree that such an evaluation is necessary and hope to conduct one in the near future. American Councils conducts three types of surveys for the Open World program—application, predeparture, and postprogram. The application survey primarily contains descriptive information regarding the applicant, such as place of residence and occupation. The predeparture survey, filled out just before the participant leaves for the United States, contains additional descriptive information, including the participant’s age, ethnicity, educational profile, employment, and views on democratic values. The postprogram survey, which is filled out immediately after the exchange program, contains information on delegates’ exchange experiences and their impressions of how the program affected them. These three surveys had very high response rates, all exceeding 90 percent. Overall, Open World surveys do an adequate job of measuring delegates’ experiences and immediate reactions to the exchange program. However, the surveys miss the opportunity to measure whether a delegate’s attitude toward the United States and its institutions changed as a direct result of participation in the program by not measuring pre- and postparticipation attitudes using parallel questions. The postprogram survey asks retrospective questions about whether delegates’ attitudes changed and whether their expectations were met. From a methodological standpoint, this approach is useful but not as rigorous as measuring attitudes and expectations before and after the program because it relies on the delegates’ accurately recalling how they felt before the exchange program. Open World staff told us they had not regularly analyzed responses to the surveys for evaluative or management purposes; however, they have recently embarked on an effort to redesign the surveys to use them for these purposes. Open World alumni have been surveyed, but these surveys were primarily designed to aid in program management, not to measure the long-term impact of the program. In 2000, American Councils conducted a survey to gain constructive feedback on what 1999 alumni found useful about the program and to obtain their opinions on what kinds of people should be considered as future program candidates. This survey was distributed through alumni networks and had a response rate of less than 30 percent— too low to be representative of total delegates. In 2002, American Councils in Moscow administered a survey to elicit ideas from alumni on how the program could be improved and to prepare them for upcoming alumni activities. However, Open World officials reported that the survey was not helpful because the answers were too general or vague and contained few suggestions for cost-effective improvement. Open World officials informed us they conducted an alumni questionnaire in December 2003 to assist Open World in planning future activities for alumni, but as of January 2004, the results had not been analyzed. Open World and American Councils staff acknowledged that a full program evaluation of alumni to determine the program’s progress over the long term was necessary and that they hope to conduct such an evaluation in the future. Open World does not have the formalized financial management and accountability mechanisms—formalized policies, audited financial statements, an audit or financial management advisory committee, or full program data—that would provide Congress and other decision makers with the timely, reliable cost and performance information that is especially important for a permanent, expanding program. Although Open World has established procedures for reviewing and approving transactions and analyzing financial reports, these procedures have not been formalized in written policies. For example, Open World has procedures for reviewing budget submissions that accompany grant applications, for awarding grants, and for reviewing grantee expenditures. It also has procedures for analyzing reports on program payroll and outstanding obligations. However, it has not evaluated whether these procedures provide adequate internal control or codified them into management-approved policies that Open World staff are required to follow. Documentation of policies and procedures covering an entity’s internal control structure and all significant transactions and events is fundamental to ensuring that all staff understand and consistently apply procedures, while management assessment of these procedures is an essential component of internal control. Management evaluation of controls, along with approval and documentation of procedures, is particularly important when financial management services are being performed by a contractor. According to federal government standards for internal control, written policies and related operating procedures should address key control activities such as approvals, verifications, reconciliations, and the creation and maintenance of related records that provide evidence and appropriate documentation of these activities. The lack of formal policies, particularly in the grants management area, may leave some critical elements of grantee accountability inadequately addressed. For example, as long as the total grant amount is not exceeded, Open World allows up to a 10 percent variance between the actual and budgeted amounts by budget category on an approved grant, but it does not require grantees to report such variances as part of their reporting of grant expenses; it also does not have follow-up procedures to deal with variances of more than 10 percent. Also, according to Open World officials, grantees are required to submit receipts or other evidence for all grant expenses unless Open World agrees, as part of the grant agreement, to permit a grantee to submit the results of its “single audit” conducted pursuant to OMB Circular A-133. However, the officials acknowledged that Open World does not have a formal policy that clearly defines the conditions under which it will accept the results of a single audit in lieu of a grantee’s submission of receipts or other evidence for all grant expenses. For example, in 2003, Open World began requiring, as a condition for accepting the results of a single audit, that an audit’s coverage include a “significant sample” of the costs incurred under the Open World grant. However, Open World has neither defined what audit coverage represents a “significant sample” nor implemented procedures to ensure that the requirement has been followed. According to program officials, Open World has permitted only a few grantees to submit single audit results in lieu of submitting receipts and other evidence of grant expenses. However, as the program expands, it may become difficult to manage the detailed review of supporting documentation for grantee expenditures; thus, Open World’s use of audit reports as an oversight mechanism could increase. Open World obtains detailed accounting reports for the program from the Library of Congress. In addition, Open World has prepared for the Board of Trustees various schedules that separately present the program’s planned budget and actual obligations. However, Open World does not currently prepare summary financial statements that are subjected to independent audit and used by the board in its oversight. Program officials plan to prepare financial statements for Open World and initiate an audit by the summer of 2004. As discussed in our executive guide on best practices in financial management, a solid foundation of control and accountability requires a system of checks and balances that provides reasonable assurance that the entity’s transactions are appropriately recorded and reported, its assets protected, its established policies followed, and its resources used economically and efficiently for the purposes intended. This foundation is built and maintained largely through the discipline of routinely preparing periodic financial statements and subjecting them annually to an independent audit. In fact, the April 2003 bylaws of the Open World Board of Trustees require an annual audited financial statement for the Open World Leadership Center Fund. This requirement further underscores the importance of Open World developing formal financial management policies. The auditor would use the financial management policies and any related operating procedures to gain an understanding of and evaluate Open World’s internal control environment. Open World’s governance structure does not include either an audit committee or financial management advisory committee to provide the Board of Trustees and management with independent advice on financial management, accountability, and internal control issues. Such a committee is a required element of the governance structure of publicly owned companies and a best practice for other types of organizations. The audit committee of a publicly owned company plays a particularly important role in assuring fair presentation and appropriate accountability in connection with financial reporting and related external audits and general oversight of an organization’s internal control. In the federal government, audit committees and advisory committees are intended to protect the public interest by promoting and facilitating effective accountability and financial management. This is accomplished by providing management with independent, objective, and experienced advice and counsel, including oversight of audit and internal control issues. In the case of Open World, use of an audit or financial management advisory committee could facilitate the process of formalizing financial management policies and procedures, including related internal controls, and preparing for the program’s first financial statement audit. Open World is not collecting data on the significant volume and value of contributed services from U.S. volunteers. According to Open World, 83 percent of program participants in 2003 stayed in the homes of American host volunteers, a contribution that considerably reduces program expenditures associated with housing participants during their stay. As a result, the amount expended by Open World does not reflect the full scope and cost of operating the program. The usefulness of information on the nature and extent of similar contributed services is recognized under generally accepted accounting principles, which encourage entities to disclose, if practicable, the fair value of contributed services received. Open World could obtain data, by geographic area, on the number of program participants that stay in the homes of American host volunteers and then apply standard per diem rates to estimate the value of meals and lodging provided by host volunteers. Collecting and disclosing this information would provide management, the Board of Trustees, and Congress with more complete information about the full scope of the program. Since its launch in 1999, Open World has organized large numbers of diverse delegations from every region in Russia and brought them to the United States. Most delegates viewed their program experiences very favorably, and many say they have taken concrete actions to adapt what they learned from their U.S. visits to the Russian environment. Also, U.S. ambassadors and embassy officials consider Open World a valuable tool to complement U.S. mission activities and outreach efforts and noted that congressional sponsorship of Open World lends a certain cachet to the program, allowing it to attract emerging leaders who otherwise might not participate. However, because the program does not have formalized strategic and performance plans with systematic performance measurement indicators, it is difficult to determine the extent to which Open World is targeting and reaching the right people and providing delegates with the right types of experiences, including those that result in improved mutual understanding. Also, Open World lacks the formalized financial management and accountability mechanisms that would help provide decision makers with useful, relevant, timely, and reliable information. Open World began as a pilot project and was not established as an independent entity until 2001. Now that Open World has permanent status and is expanding its scope, it is appropriate for the program to turn its attention to enhancing its strategic and performance planning and financial management and accountability mechanisms. Such mechanisms are particularly important to ensure that Open World’s efforts and the related activities of embassies, contractors, grantees, and nominating organizations are systematically integrated and managed to achieve measurable progress toward Open World’s fundamental goals. Strengthening these mechanisms will become even more important as the program further expands. To enhance Open World’s management, particularly in light of the program’s expansion, this report makes recommendations to the Chairman of the Board of Trustees of the Open World Leadership Center to (1) establish strategic and performance plans that articulate Open World’s direction and set measurable goals and indicators; (2) strengthen the program’s mechanisms for collecting data and reporting on program performance; (3) assess whether the current procedures provide adequate internal control over expenditures and grantee oversight; (4) develop and implement written, management-approved policies, procedures, and internal controls for Open World’s resources and expenditures; (5) develop and implement controls and requirements for grantees to provide accountability for grant expenditures to ensure that funds are spent for their intended purposes; (6) develop and implement plans for routinely preparing financial statements that are annually subject to an independent audit; (7) consider establishing an audit committee or financial management advisory committee to provide the Board of Trustees and management with independent advice on financial management, accountability, and internal control issues; and (8) estimate and disclose the value of contributed services from U.S. volunteers to better reflect the total scope of the program. Open World provided written comments on a draft of this report (see app. V). Open World generally concurred with the report’s observations, conclusions, and recommendations and acknowledged that the time has come for strategic planning and for considering options to strengthen the program’s administrative operations and financial reporting. Open World said that it is proceeding with measures to implement some of these recommendations. These measures include proceeding with plans to develop strategic and performance plans, review the program’s data collection efforts, and prepare financial statements and subject them to an independent audit. In response to other recommendations, Open World said it would ask the Board of Trustees to consider forming an audit committee for the board, evaluating the in-kind contributions of the program’s American volunteer hosts, and implementing a system for more regular summary financial statements for the board. However, Open World took issue with the report’s emphasis on measurable goals and indicators of success, noting that the results of its programs can only be validated in the medium or long term. Open World also said that improving mutual understanding is not a measurable, performance-based goal. We recognize the long-term commitment required to measure the ultimate success of exchange programs. However, measuring short-term incremental progress toward a program’s goals is also an important component of any serious effort to assess progress over the long term. It is fundamental to making necessary course corrections along the way—a capability that will become even more important as Open World further expands. While it is sometimes difficult to establish direct causal links between exchange programs and their ultimate impact, we believe that establishing convincing correlations is a reasonable expectation. With respect to mutual understanding, there are a number of internationally recognized social science research and statistically valid methodologies that can be used with questionnaires, interviews, and focus groups for gauging changes in attitudes, knowledge, and behavior among exchange program participants. The State Department also reviewed a draft of this report for technical accuracy. State’s comments have been incorporated into the report, as appropriate. We are sending copies of this report to other interested members of Congress, the Librarian of Congress and Chairman of the Open World Leadership Center Board of Trustees, and the Secretary of State. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Jess Ford at (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix VI. To review the Open World Leadership Center’s progress toward achieving its overall purpose, we reviewed Open World’s organizational structure, operational policies and procedures, program documentation, and legislative history, and we observed key program activities, including the vetting process and a predeparture orientation in Moscow, as well as program orientation and other selected events in Washington, D.C. This provided us with an understanding of the nature of Open World activities and how they are carried out—from the time delegates are selected in Moscow to their actual visit in the United States. We also analyzed the results of program surveys that delegates completed from 2000 to 2003. We reviewed the surveys, which were carried out by American Councils and translated into English for elements such as consistency, balance, tone, and adherence to common survey design standards. For example, we considered whether the response scales used (1) were balanced, (2) appeared to cover all possible response options, and (3) contained “double-barreled” options—that is, whether questions asked about more than one issue but allowed for only one response. We studied the survey results to see if there was anything unusual or unexpected that might indicate potential problems in the surveys’ design or structure. We met with knowledgeable Open World and American Councils staff, both in Washington, D.C., and in Moscow, to determine the completeness of the data set and the accuracy of required data elements. We also engaged a GAO native Russian speaker to review the translation of key questions from Russian to English. Based on these assessments, we determined that data produced by many of the survey items were sufficiently reliable and generally usable for the purposes of our study. These data included descriptive information on program delegates, such as education level; information on participants’ satisfaction with certain aspects of their exchange experience; and opinions on how the experience affected them. While we determined that most data elements were sufficiently reliable, we did not use a few data elements that we had questions about. We supplemented our analysis of the program surveys with interviews of 56 alumni during fieldwork in Moscow, St. Petersburg, Petrozavodsk, and Samara, Russia, in October and November 2003. We chose those four cities for our review because they represent not only three of the seven geographic regions in Russia where 60 percent of the Open World delegates have come from but also a mix of urban and rural areas, and a diverse group of alumni. Because our interviews were limited to a few locations in Russia (due to travel and time constraints), we did not generalize the results of our interviews to the universe of delegates. We recognize that the opinions and experience of the group of delegates with whom we met may not be representative of all program alumni; therefore, the results of our interviews should be used for illustrative purposes only. We conducted our interviews as follows: We developed a structured interview instrument for our meetings with program alumni with the assistance of GAO social science analysts and analysts fluent in Russian and in consultation with Open World. The interview instrument included questions regarding the contacts alumni made during their trips, changes in their attitudes toward the United States, and any actions they may have taken in Russia as a direct result of their participation in the exchange program. We conducted individual and group interviews with program alumni from various years of the exchange program, including some who were among the early delegates in 1999 and others who participated in the program as recently as 2003. Russian-English translators provided by the U.S. Embassy and the Open World Leadership Center facilitated the interviews. To review whether the program has appropriate financial management and accountability mechanisms in place, We discussed the nature and scope of existing mechanisms with Open World officials. We observed deliberations of an Open World panel that reviewed grant proposals from organizations interested in hosting Open World delegations. We performed a “walk-through” of supporting documentation for a grant and a contractor payment. We performed this work solely to gain an understanding of Open World’s existing financial management and accountability mechanisms, and as such, we did not conduct an audit of Open World’s financial reports or individual transactions. To provide information on the statutory authorities and governing structures of selected independent organizations funded through the executive branch, we conducted legislative research on the purpose, statutory authority, governance, and funding of four such organizations that carry out various international activities, including exchange programs: the African Development Foundation, The Asia Foundation, the Inter-American Foundation, and the National Endowment for Democracy. We conducted our work from July 2003 to January 2004 in accordance with generally accepted government auditing standards. The Open World Leadership Center awards grants to U.S.-based nonprofit and governmental organizations to host visiting delegations. Some organizations carry out Open World visits themselves or through their local affiliates, while others develop and oversee a network of local organizations to provide this hosting. These local organizations include civic associations, academic institutions, and nonprofit international training providers. Open World selects its host organizations annually through a competitive grants process. Figure 7 provides information on the 16 national host organizations selected in the 2003 grants cycle, from May 2003 to April 2004, and includes hosting activities. Russian American Rule of Law Consortium (including the Vermont-Karelia Rule of Law Project) An organization for partnerships matching the legal communities of seven Russian regions with seven U.S. states to develop the rule of law in both countries Supports women's progress in building democracies, strong economies, and peace Focuses on improving municipal services, economic development, health, social welfare, and quality of life in targeted communities CEC ARTSLINK was formerly known as CEC International Partners or Citizen Exchange Council. The State Department facilitates exchange programs—like Open World— with other parts of the U.S. government, the private sector, and foreign governments. State’s Bureau of Educational and Cultural Affairs is responsible for the management and oversight of U.S. international educational and cultural exchange activities, as authorized by the Mutual Educational and Cultural Exchange Act of 1961 (Fulbright-Hays Act). American embassies collaborate with the bureau in administering and supervising exchange activities. As shown in fig. 8, State offers a wide spectrum of academic, professional, and youth exchange programs in Russia and the Newly Independent States. The programs may run anywhere from 2 weeks to 2 or more years, according to State officials, and have varied in size from as few as 9 participants up to 675 participants. The State Department reported that the exchange programs operating in Russia, including those highlighted in this appendix and others, brought a combined total of more than 2,300 participants from Russia to the United States in fiscal year 2003. For illustrative purposes, figure 9 provides basic information, including statutory authority and governing structures, about selected grants-making organizations and entities that Congress supports. Like Open World, these programs are independent entities; however, unlike Open World, they are funded through the executive branch. In addition to the person named above, Natalya Bolshun, Lyric Clark, Janey Cohen, Martin De Alteriis, David Dornisch, Etana Finkler, Maxine Hattery, Catherine Hurley, Ed Kennedy, Lori Kmetz, Joy Labez, David Merrill, John Reilly Jr., Mark Speight, and Heather Von Behren 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. | Congress created the Russian Leadership Program in 1999 as a pilot project to promote mutual understanding by exposing emerging Russian leaders to the American economic system and democratic institutions. In 2003, Congress renamed the program the Open World Leadership Center, expanded its scope, and extended eligibility to a number of other countries. Because Open World had not been independently evaluated, GAO was asked to review (1) the program's progress toward achieving its overall purpose and (2) whether it has appropriate financial management and accountability mechanisms in place. Open World has exposed a large, broad, and diverse group of Russians to U.S. economic and political systems. As of December 2003, the program brought about 6,800 men and women from Russia's seven geographic regions to more than 1,200 U.S. communities. Our analysis found that most delegates generally hold highly favorable views of their experience in the program. Many found ways to adapt what they learned to the Russian environment. Also, embassy officials said Open World complemented U.S. mission activities. However, because the program does not have formalized strategic and performance plans with measurable indicators, it is difficult to determine the extent to which it is targeting and reaching the right people and giving them experiences that result in improved mutual understanding. While Open World does survey delegates about their experiences, it has not yet conducted a full program evaluation to determine progress toward its long-term goals. Open World officials agree that such an evaluation is necessary and hope to conduct one in the near future. Open World does not have the formalized financial management and accountability mechanisms that would provide Congress and other decision makers with timely and reliable information about its cost and performance. Now that Open World has permanent status and is expanding its scope, it is appropriate for the program to turn its attention to enhancing these mechanisms. Its procedures for reviewing program transactions and analyzing financial reports have neither been evaluated for their adequacy nor formalized in writing; and it does not prepare financial statements that can be subject to an independent audit. In addition, Open World does not have an audit or financial management advisory committee to advise the Board of Trustees on financial management, accountability, and internal control issues. Finally, Open World is not disclosing the value of services contributed by U.S. volunteers who support the program--information that generally accepted accounting principles encourage entities to disclose, if practicable. |
RECA establishes a procedure to make partial restitution to individuals who contracted serious diseases, such as certain types of cancers, presumably resulting from their exposure to radiation from aboveground nuclear tests or as a result of their employment in uranium mines. The law established three claimant categories—uranium mine employees (those who worked in underground uranium mines in certain specified states), downwinders (those who were downwind from aboveground nuclear weapons tests conducted at the Nevada test sites), and onsite participants (those who actually participated onsite in aboveground nuclear weapons tests). Table 1 summarizes the key provisions of RECA by type of claim, prior to the RECA 2000 Amendments. In addition to creating eligibility criteria for compensation, the law stipulates that appropriated funds be held in the Trust Fund to pay claims. By law, the Trust Fund is to be administered by the Secretary of the Treasury but maintained by the Attorney General. The Attorney General is also responsible for reviewing applications to determine whether applicants qualify for compensation and establishing procedures for paying claims. To discharge these two responsibilities, the Attorney General issued a final regulation implementing RECP on April 10, 1992. The regulation established RECP within Justice’s Civil Division and charged it with administering claims adjudication and compensation under the act. To file for compensation, applicants submit the appropriate claims forms along with corroborating documentation to RECP, whose claims examiners and legal staff review and adjudicate the claims. If the claim is approved, Justice authorizes the Treasury Department to make payment from the Trust Fund. If the victim is deceased, compensation may be awarded to the victim’s eligible survivors (e.g., the victim’s spouse or children). Figure 1 shows RECP’s claims adjudication process, including the procedures for refiling and administratively appealing denied claims. If RECP denies a claim, it notifies the claimant in writing of the basis for the denial and the claimant’s rights to refile or appeal the claim. Claimants may refile a claim with new information to RECP up to two times. If denied, claimants may file an administrative appeal to a Justice Appeals Officer, who can affirm or reverse the original decision or remand the claim back to RECP for further action. Applicants may also appeal denied claims in the U.S. district courts. RECP officials said that through July 3, 2001, claimants sought a judicial remedy only eight times. More recently, the Attorney General approved revisions to the regulations, effective April 21, 1999, to assist claimants in establishing entitlement to an award. The revised regulations modified eligibility restrictions regarding the claimants’ use of tobacco. Prior to the revision, RECP would apply stricter standards if the victim contracted certain qualifying diseases and was a “heavy smoker” or “heavy drinker.” The revised regulations, among other things, allow claimants to submit affidavits to establish smoking use histories and to submit pathology reports showing specified diseases. In addition, the changes permit applicants, whose claims were denied prior to the implementation of these regulations, to file another three times. The RECA Amendments of 2000, signed into law by the President on July 10, 2000, expanded the criteria for compensation, opening RECP to more people and establishing a prompt payment period. Some of the major changes include: permitting eligible aboveground uranium mine employees, uranium mill workers, and individuals, who transported uranium ore, to qualify for compensation; they are entitled to a payment of $100,000; increasing the geographic areas included for eligibility and extending the time period considered for radiation exposure for uranium mine employees; expanding the list of specified diseases that may qualify individuals for compensation to include other types of cancer and also noncancers (e.g., salivary gland, brain, and colon cancer); decreasing the level of radiation exposure that is necessary to qualify for compensation for uranium mine employees; making certain medical documentation requirements less stringent for eliminating distinctions between smokers and nonsmokers pertaining to diseases such as lung cancer and nonmalignant respiratory diseases; and requiring the Attorney General to ensure that a claim is paid within 6 weeks of approval. In addition to RECA, other programs provide compensation to persons who have presumably become ill as a result of working for the federal government in producing or testing nuclear weapons. For example, the Radiation-Exposed Veterans Compensation Act of 1988, in general, provides monthly compensation to veterans who were present at certain atomic bomb exercises, served at Hiroshima and Nagasaki during the post World War II occupation of Japan, or were prisoners of war in Japan. In addition, on October 30, 2000, the President signed into law The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001. Title XXXVI of this act establishes the “Energy Employees Occupational Illness Compensation Program” to, in general, compensate covered employees who contracted certain illnesses resulting from exposure to certain ultra- hazardous materials during employment in Department of Energy facilities that processed or produced radioactive materials used in the production of atomic weapons. Certain uranium employees who are eligible for compensation under RECA may also be eligible for additional compensation and medical benefits under title XXXVI. This would be RECP’s administrative responsibility. To determine the outcomes of the claims adjudication process, including the number of approved and denied claims, the timeliness of the claims adjudication process, the primary reasons for denials, and the amount of money awarded, we obtained and analyzed RECA-related case information from DOJ’s Civil Division’s case histories database. Our analysis was done on claims filed during fiscal years 1992 through 2000. Our analysis was done using the case histories database, as of February 26, 2001. We also analyzed claims payment information from the Civil Division’s Office of Planning, Budget and Evaluation (OPB&E). We discussed the basis for any major fluctuations with RECP officials. While we did not independently verify the accuracy of the RECA data extracted from the database, we did, however, ask the Civil Division’s Office of Management Information, the office that maintains the database, to complete a data reliability questionnaire about the design specifications and documentation for the database. The reliability questionnaire also posed questions about quality controls and procedures used to ensure data reliability. Our analysis of the questionnaire responses did not indicate any data reliability problems. To determine the cost of administering the RECP and the FTE program staff levels, we requested that OPB&E provide us with RECP administrative costs by budget object class for the end of fiscal years 1992 through 2000. The cost provided includes items such as personnel compensation and benefits, travel and transportation of persons, and printing and reproduction costs. To determine FTE staffing levels, the office provided us with FTE staff levels for RECP at the end of fiscal years 1992 through 2000. To determine the nature of expenditures from the Trust Fund, we evaluated annual Trust Fund activity (appropriations, interest earned on investments in government securities, and payments to awarded individuals) from fiscal years 1992 through 2000 provided by OPB&E. To verify that compensation awarded by RECP was paid as authorized, we randomly selected 30 individual payments from DOJ’s Civil Division’s case histories database of 1,592 RECA payments made from fiscal years1996 through 2000. We then obtained financial documentation for each payment from OPB&E, including (1) RECP’s payment authorization letter to OPB&E, (2) the fiscal payment request invoice approval sheet from OPB&E to the Justice Management Division’s (JMD) Financial Operations Service, and (3) the payment certification summary generated from a JMD financial database that shows that the Department of the Treasury made payments electronically or by check to the authorized individuals. We interviewed officials from RECP, OPB&E, and JMD to determine how they authorize, process, and certify payments from the Trust Fund. Finally, we interviewed officials from Treasury’s Financial Management Service to clarify Treasury’s role in disbursing the awarded RECA compensation. To determine the nature of RECP’s outreach activities, we interviewed RECP officials who described the elements of their outreach efforts and provided us with a list of the office’s outreach-related onsite visits that could be identified from existing records. To obtain insights on RECP’s outreach efforts, we conducted telephone interviews with a judgmental sample of 11 NGOs that (1) had members who could be eligible for compensation under RECA or (2) provided assistance and information about the program to potentially eligible candidates. We selected these organizations from a list provided by RECP, an Internet search, and a list of those who testified before the Congress in a RECA-related 1998 hearing. In addition, we asked officials from these organizations to suggest other related groups for us to contact, some of which we contacted. As agreed, we focused our review on Justice’s administration of RECA from its inception in fiscal year 1992 through the end of fiscal year 2000. We began our review in October 2000 and performed our audit work from January to August 2001 in Washington, D.C., in accordance with generally accepted government auditing standards. When RECP reviews and adjudicates a claim, the process ends in one of two possible outcomes—approval or denial of the claim. If approved, Justice electronically submits a request for payment to Treasury. If denied, applicants may refile their claims or pursue other avenues of appeal. Through the end of fiscal year 2000, RECP received 7,819 applications for compensation. During this period, RECP approved and denied roughly equal numbers of applications, awarding compensation to about 46 percent of the claimants, and denying compensation to about 46 percent. Moreover, approximately 8 percent of the applications were still pending at the time of our analysis. RECA claims are most frequently denied because the disease contracted by the victim is not specifically designated as eligible for compensation under the RECA program. Through the end of fiscal year 2000, $245.1 million was paid from the Trust Fund to 5,150 victims or their survivors, but some of the claims awarded by RECP were not paid because money in the Trust Fund was depleted. Although lack of funds may have prevented timely payment of compensation in some cases, RECP generally processed claims in a timely fashion. Our analysis of information from the case histories database showed that about 89 percent of claims were awarded or denied within the mandated 12-month time frame. The agency reported that the remaining claims were sometimes not processed within the 12-month period due to mitigating circumstances, such as claimants requesting extra time to find documentation to substantiate their claims. Our analysis of RECA-related claims information from the case histories database shows that from the April 1992 inception of the claims adjudication program through the end of fiscal year 2000, RECP had received 7,819 applications for compensation. As shown in table 2, there were 3,627 uranium mine employee-based applications (about 46 percent of the total); 3,140 downwinder-based applications (about 40 percent of the total); and 1,052 onsite participant-based applications (the remaining 14 percent of the total). Of the 7,819 claims filed, RECP approved 3,598 and denied 3,568. These amounts represent almost an even split between approvals and denials— about 46 percent for each. The remaining 8 percent of the claims were still pending at the time of our analysis. RECP approved about 47 percent of the uranium mine employee-based claims, about 53 percent of the downwinder-based claims, and about 21 percent of the onsite participant- based claims. Through the end of fiscal year 2000, applicants had filed claims amounting to almost $600 million, and RECP had awarded (or obligated) about $269 million to individuals on the basis of these claims. Of the amount awarded, only $245.1 million was paid through the end of fiscal year 2000 because the Trust Fund was depleted (see further discussion in the next section). RECP awarded $170 million to eligible individuals based on uranium mine employee applications (or about 63 percent of the total), $83 million based on downwinder applications (or about 31 percent of the total), and $16 million based on onsite participant applications (or about 6 percent of the total). Appendix I contains data on refiled and appealed applications. RECP denies claims when the applicants fail to meet eligibility requirements established by RECA and the Department of Justice’s implementation regulations. Our analysis of RECA-related information from the case histories database shows that through the end of fiscal year 2000, RECP denied claims for compensation for 13 different reasons. The most frequent reason for denial for all three types of RECA claims was that the disease contracted by the victim was not specifically designated as eligible for compensation under the RECA program (in about 46 percent of the cases). By type of claim, the primary reasons for denial were as follows: Uranium mine employee-based claims—The victim did not meet the minimum exposure to radiation requirements (in about 53 percent of the cases) or did not contract a disease that was eligible for compensation (in about 36 percent of the cases). Downwinder-based claims—The victim did not contract an eligible disease (in about 49 percent of the cases), was not physically present in the designated areas during the required time period (in about 21 percent of the cases), or was either under or over the required age when first exposed to radiation (in about 17 percent of the cases). Onsite participant-based claims—The victim did not contract a disease that was eligible for compensation under RECA (64 percent of the denied cases) or did not qualify as an onsite participant (in 17 percent of the cases). According to OPB&E, through the end of fiscal year 2000, Treasury paid about $245.1 million in awarded compensation to 5,150 individuals from the Trust Fund. The number of individuals who received compensation exceeds the number of claims awarded compensation. For example, in certain instances where the victim was deceased, compensation was awarded to the victim’s eligible children. On May 9, 2000, the amount of money awarded to claimants exceeded the amount of funds available in the Trust Fund. By the end of fiscal year 2000, 227 awards totaling $19.2 million had not been paid because money in the Trust Fund was depleted. As shown in table 3, the Congress initially appropriated $30 million to the Trust Fund in fiscal year 1992. Additional appropriations were made in fiscal years 1993, 1997, 1998, and 2000. Money remaining in the Trust Fund at the end of any given fiscal year is generally carried forward to the next fiscal year. According to Justice officials, money on deposit in the Trust Fund that is not needed in the short run for award payments may be invested in interest-bearing U. S. Treasury securities. The paid interest is then added to the account balance. According to OPB&E, Justice requested that $21.7 million be appropriated to the Trust Fund in fiscal year 2000; however, the Congress appropriated $3.2 million. Combined with funds carried over from fiscal year 1999, a total of $11.6 million was on deposit in the Trust Fund at the beginning of fiscal year 2000. These funds were fully committed by May 9, 2000, and payment of awards was deferred. RECP notified the eligible candidates by letter that although they qualified for compensation, their award could not be paid until additional funds became available. By the end of fiscal year 2000, payments for 227 approved claims amounting to about $19.2 million were delayed. Subsequently, on December 21, 2000, the President signed into law an appropriation of $10.8 million for the Trust Fund, with the stipulation that the money was only to be used to pay applicants who qualified under RECA as it existed on June 1, 2000, prior to the RECA 2000 Amendments. As of June 2001, according to RECP, 70 of the 227 delayed payments from fiscal year 2000 have been made—this amounted to about $5.2 million. On July 24, 2001, the President signed into law a supplemental appropriations act, which provided the Trust Fund with “. . . such funds as may be necessary. . . .” to pay approved claims through the end of fiscal year 2001. The RECA legislation requires that applications be processed within 1 year. As shown in table 4, about 89 percent of the applications were processed within 12 months. According to RECP officials, applicants may request additional time to submit more documentation to support their claims. We could not readily determine how many of the 692 applications that were not processed within 1 year were due to such requests. Processing times for claims differed among the three applicant types. Our analysis of information from the case histories database showed that for fiscal years 1992 through 2000 the average processing time from the date the application was filed until its disposition was 269 days for uranium miner employee-based claims, 190 days for downwinders-based claims, and 245 days for onsite participant-based claims. As shown in table 5, the average processing times for approved and denied applications varied by application type from fiscal year 1992 through fiscal year 2000. RECP attributed fluctuations in the time required to process claims to the unique characteristics associated with each claim and the different factors involved in the review and application of the law for the three claims categories. RECP told us that since the inception of the program, its policy has been to assist claimants in any way that it can. In addition, rather than denying a claim, RECP said that it allows the claimant additional time to provide corroborating documentation. RECP cited other reasons for delays in processing claims, including RECP’s need, in certain cases, to gather medical records to address the statutory restrictions on certain compensable diseases and in other cases to gather the documentation necessary to establish that the victim meets the radiation exposure eligibility requirements. RECP said that in these instances, staff would conduct additional research on behalf of the claimant or allow the claimant more time to provide the proof necessary to establish exposure. Justice processed and adjudicated 496 claims that were subsequently refiled. On average, these 496 claims were initially processed and adjudicated within 317 days. For those claims that were refiled for the first time, RECP took on average 258 days to process and adjudicate them. Furthermore, for those 21 claims refiled for a second time, RECP took on average 212 days to process and adjudicate them. When denied RECA claims were administratively appealed to Justice, Justice took on average 115 days to process and adjudicate appealed claims when it affirmed the denials and 262 days when it reversed the denials. As shown in table 6, RECP’s FTE staff levels and administrative costs have fluctuated from the first full year of the program in fiscal year 1993 through the end of fiscal year 2000. In fiscal year 2000, RECP employed a staff of 11.1 FTEs. Administrative costs were $2.1 million in fiscal year 1993, $1.1 million in fiscal year 1999, and $1.3 million for fiscal year 2000. Costs as measured by the average number of applications processed per FTE staff member and the average administrative cost for processing each application has shown substantial variation for fiscal years 1993 through 2000. The average number of applications processed per FTE ranged from 61 in fiscal year 1998 to 210 in fiscal year 1993. The average cost for processing applications per FTE ranged from $725 in fiscal year 1993 to $1,667 in fiscal year 1998. RECP officials said that the average cost for processing RECA applications fluctuated because many of the claims RECP received when the program began in 1992 were more complete than those received later. RECP officials told us that these later claims were typically far more complex than those initially processed, and RECP staff spent more time in assisting claimants with establishing eligibility. RECP officials told us that as a result of the RECA 2000 amendments, claims are being received at a record pace, far exceeding even the initial phase of operations in 1992. The officials said that RECP has also received an unprecedented number of telephone and written inquiries and requests for claim forms, program information, and information regarding the status of claims. According to RECP officials, staff responding to a significant number of inquiries regarding the status of funding to pay approved RECA claims has stretched RECP’s operational resources further. The officials told us that, to date, RECP has not received an increase in administrative funds to accommodate its increased workload. Justice has procedures in place to certify that funds are appropriately disbursed from the Trust Fund. Our review of the payment documentation for 30 randomly selected RECA cases, where compensation was awarded, indicated that all payments were made as authorized. According to the law, moneys on deposit in the Trust Fund are to be used solely to pay compensation to eligible RECA claimants. Treasury is to disburse payments from the Trust Fund on the basis of authorization and certification from Justice. Justice has established procedures for authorizing and certifying the payment of awarded claims from the Trust Fund. When a claim is approved, according to Justice officials, RECP authorizes payment to the eligible applicants. OPB&E obligates the funds, and JMD certifies the approved claim for payment on the basis of the supporting documents. JMD then electronically submits a request for payment to Treasury’s Disbursement Center. Treasury confirms to JMD on a daily basis that it has received the request and made payment as directed. A JMD official told us that payment is generally made within 24 hours of JMD’s electronic submission. At the end of each month, Treasury sends a list of disbursements made for that month back to JMD, which then reconciles the list with its own records. On the basis of our review of a random sample of 30 of the approximately 1,592 RECA payments made from fiscal years 1996 through 2000 where compensation was awarded by RECP (from the Trust Fund) to eligible individuals, we found that the payments were made as authorized to these individuals. We obtained and examined the financial authorization and certification documents for each of these 30 RECA payments from OPB&E. Using these documents, we traced RECA payments from authorization by RECP, through obligation by OPB&E, certification by JMD, and disbursement by Treasury. The monthly list of disbursements submitted by Treasury to JMD contains the schedule payment numbers for both electronic direct deposit and Treasury payments and also the Treasury check number. Financial summary information from this database allowed us to verify that all payments from our sample were made as authorized. As a result, at the 95-percent level of statistical confidence, we estimate that no more than 9 percent of the approximately 1,592 individual payments from which the sample was drawn could have resulted in unauthorized payments. To identify and inform people of their potential eligibility for compensation under the program and to help them apply for compensation, RECP engages in three primary outreach activities. We spoke with 11 organizations that assist potential RECA claimants. These groups had mixed comments about the extent of RECP’s outreach efforts. RECP has established an Internet website, conducts onsite visits, and operates a toll-free telephone number for program queries. Internet website—According to RECP officials, the Internet website was launched in November 1999 and is linked to Justice’s main website. Claimants can download background information about RECA and related programs, statistical information dealing with awards and payments, and application forms. Claimants can also e-mail questions and requests for information through the website. In calendar year 2000, there were 3,727 “hits” to the RECP website. Onsite visits—Based on a review of travel records, RECP officials have identified at least 36 outreach-related onsite visits that they have made from fiscal years 1992 through 2000. The officials told us that in many cases they did not maintain historical records of the specific organizations or groups they visited or the nature of their outreach activities during these visits. However, the summary information that RECP was able to provide shows that these onsite visits were primarily made to the five western states covered under the act—Arizona, Colorado, Nevada, New Mexico, and Utah. To inform potential applicants of planned onsite visits, officials told us that they place advertisements on local radio stations and in local newspapers. During these visits, the officials provide candidates with program regulations, instruction booklets, and applications. The officials told us that they explain the program, the application process, and assist the candidates with completing the forms. RECP does not produce any leaflets, flyers, or brochures that explain the RECA program for public distribution. Toll-free telephone Number—RECP maintains a toll-free number for queries about the program and assigns a staff member and two alternates to answer the telephone. RECP officials told us that contract personnel assist with answering the telephone and routing the calls to the appropriate staff members. According to RECP officials, the toll-free number is included on RECP correspondence, applications, instruction booklets, and the website, and it is also provided to potential applicants by health-related organizations that may come into contact with them. Over the life of the program, most of the queries have dealt with requests for claims forms and the status of claims in process. RECP officials told us that they initiated their outreach activities in 1991, when they announced through press releases that RECP would be conducting town hall meetings at various sites in Colorado, Nevada, Utah, and Wyoming. RECP said that these first outreach meetings were an attempt to reach wide audiences and inform them about RECA. Also, RECP told us that they compiled mailing lists from meeting attendance sheets, which were later used as the basis for mailing claims applications packages to the meeting participants. According to RECP officials, because a large percentage of the uranium mine employee population were members of the Navajo Nation and because of the language and cultural barriers, RECP began to focus its outreach efforts on the Navajo Nation. RECP told us that from mid-1992 through mid-1994, RECP staff went out to various chapter houses of the Navajo Nation in Arizona and New Mexico to conduct outreach meetings. The attendance at these meetings varied from as few as 20 people up to 100 people. The RECP officials informed us that in May 1994, RECP staff set up an office at the facilities of the Office of Navajo Uranium Mine Workers in Shiprock, New Mexico. They said that this outreach office was used by RECP until 1997. During this time, according to the officials, RECP outreach efforts were concentrated in Shiprock and at the various Navajo Nation fairs in Arizona and New Mexico. According to RECP officials, they have also contacted organizations such as the Health and Human Services’ National Institute of Occupational Safety and Health; St. Mary’s Hospital in Grand Junction, Colorado; the University of New Mexico Health Clinic in Albuquerque, New Mexico; and the Miners’ Colfax Medical Center in Raton, New Mexico, to help publicize the program. Program officials also reported that since RECP’s inception, they have publicized the program through press releases. We conducted structured telephone interviews with representatives from 11 NGOs that are involved with RECA-related activities in order to gather their views on RECP’s outreach efforts. The NGOs that we contacted included medical research institutes, Native American assistance groups, an atomic veteran’s association, a uranium workers council, a RECA reform coalition, an association of radiation survivors, and downwinders’ associations. Our interviews focused on the NGOs' experiences with respect to RECP’s outreach efforts to inform potential applicants about the program and how helpful RECP was in assisting claimants with the application process. The NGOs were generally mixed in their comments about RECP’s efforts to inform them about the compensation program. Five of the 11 NGOs told us that RECP had made an effort to inform them about potential eligibility for compensation under the program, but 8 of the 11 said that RECP had made no attempt to coordinate its outreach efforts with their organizations. Six of the groups said that RECP had succeeded in informing potential claimants about the program from some extent to a great extent. Five groups said that RECP was somewhat to very responsive to their written requests for information. Eight groups said that RECP was somewhat to very responsive to their telephone calls. Four groups told us that RECP was somewhat to very responsive to their e-mail queries. Eight organizations were familiar RECP’s website and had used the website to gather general program information and six used the website to obtain claims applications. The NGOs’ views of RECP’s efforts to assist potential claimants with the application process also varied. Six of the organizations believed that RECP was of little to no help in explaining the requirements for documentation to substantiate applicant claims, but five believed that RECP was generally to very helpful. However, six organizations claimed that RECP was somewhat to very helpful in explaining the eligibility criteria for RECA compensation, while four believed that RECP was not very helpful. Regarding our telephone interviews with the NGOs, RECP officials told us that they are looking into the concerns the NGOs raised and are actively exploring new techniques for meeting the needs of claimants and others interested in the program. We provided a draft of this report to the Attorney General for review and comment. On August 28, 2001, we met with a Department of Justice RECP official (an Assistant Director of the Civil Division’s Torts Branch), who provided us with consolidated comments from RECP. The Assistant Director said that RECP generally agreed with our draft report. In addition, the Assistant Director provided technical comments, which have been incorporated in this report where appropriate. Copies of this report are being sent to the Attorney General; the Director, Office of Management and Budget; and any other interested parties. We will also make copies available to others upon request. If you or your staffs have any questions about this report, please contact James M. Blume or me at (202) 512-8777 or at [email protected]. Key contributors to this report are acknowledged in appendix II. Applicants whose claims are denied may refile their applications with Justice’s Radiation Compensation Program (RECP), appeal the denial to a separate official within Justice’s Civil Division, or appeal the denial in U.S. district courts. Claimants who choose to refile must provide documentation to correct the deficiency previously noted by RECP. Also, according to RECP, claims may be refiled by providing documentation to establish eligibility (1) as a result of regulatory or legislative changes to eligibility requirements subsequent to the denied application (e.g., changes mandated by the Radiation Exposure Compensation Amendments of 2000 and/or those required by the July 1, 1999, Attorney General regulations), or (2) under a different claim category (e.g., filing a downwinder-based claim after being denied compensation on an onsite participant-based claim). Our analysis of the RECA case-related information from the case histories database showed that from April 1992 through the end of fiscal year 2000, a total of 496 applicants refiled claims—395 were uranium mine employee- based claims, 70 were downwinder-based claims, and 31 were onsite participant-based claims. Of these refiled claims, 250 were awarded compensation, 116 were denied compensation, and the remaining 130 were still pending resolution, at the time of our analysis. Of the 116 denied claims, 28 applicants refiled for a second time—all of these were uranium mine employee-based claims. Of the 28 denied claims, 21 were awarded compensation and the remaining 7 were still pending at the time of our review. Applicants may also administratively appeal denied claims to a separate official (an Appeals Officer) within the Department of Justice’s Civil Division. The applicants must do so within 60 days of the denial. Of the 3,568 claims denied by RECP, 710 (or about 20 percent) of the applicants administratively appealed the decision to Justice, as shown in table 7. In 553 of these cases (or 78 percent of the cases), the Appeals Officer affirmed the denials. Uranium miner claimants represented about 47 percent of the administratively appealed cases, downwinders about 31 percent, and onsite participants the remaining 22 percent. The denials were affirmed upon appeal for the vast majority of these cases. According to RECP, once claimants exhaust their administrative remedies within Justice, they may appeal their cases in U.S. district courts. RECP records showed that from program inception in 1992 through July 3, 2001, eight claims denied by RECP have been appealed to the district courts. Two of these appeals were consolidated into one court case. The courts affirmed RECP’s denials in three of the seven cases and remanded three of the cases back to RECP for readjudication. RECP again denied one of these three remanded cases, approved the claim in the second case, and the third case was still pending RECP review, as of July 3, 2001. In the seventh case, RECP reassessed and approved the claim. Michael G. Kassack, Bethany L. Letiecq, David P. Alexander, E. Anne Laffoon, Geoffrey R. Hamilton, Robert C. DeRoy, and Bassel Alloush made key contributions to this report. | From 1945 through 1962, the United States conducted a series of aboveground atomic weapons tests. Many people exposed to radiation from this nuclear weapons testing program later developed serious diseases, including cancer. To begin the process of making partial restitution to these victims, the President signed into law the Radiation Exposure Compensation Act (RECA) in 1990. RECA established the Radiation Exposure Compensation Trust Fund (Trust Fund), criteria for determining claimant eligibility for compensation, and a program (administered by the Attorney General) to process and adjudicate claims under the act. The Department of Justice (DOJ) established the Radiation Exposure Compensation Program (RECP) within its Civil Division to administer its responsibilities under the act. Through the end of fiscal year 2000, RECP received 7,819 applications for compensation. Roughly equal numbers of applications have been approved and denied, awarding compensation to about 46 percent of the claimants and denying compensation to about 46 percent. RECA claims are most often denied because the victim's disease is not eligible for compensation under the RECA program. The costs for administering RECP have fluctuated from the first full year of program implementation, fiscal year 1993, through fiscal year 2000. For example, administrative costs were $2.1 million in fiscal year 1993 and $1.3 million in fiscal year 2000. DOJ has procedures in place to certify that funds are appropriately disbursed from the Trust Fund. A review of the payment documentation for 30 randomly selected RECA cases in which compensation was awarded indicated that all payments were made as authorized. To identify and inform candidates of their potential eligibility for compensation under the program and to help them apply for funds, RECP engages in three primary outreach programs. The program has established an Internet website, conducts onsite visits to groups and organizations to promote the program, and operates a toll-free telephone line for program queries. |
U.S. troops were reportedly exposed before, during, and after the Gulf War to a variety of potentially hazardous substances. These substances include decontaminating and protective compounds used without proper safeguards (particularly decontaminating solution 2, or DS2, and chemical agent resistant coating); diesel fuel used as a sand suppressant in and around encampments, fuel oil used to burn human waste; fuel in shower water; and leaded vehicle exhaust used to dry sleeping bags. Other potential hazards included infectious diseases (most prominently leishmaniasis, a parasitic infection); pyridostigmine bromide and vaccines (to protect against chemical and biological weapons); depleted uranium (contained in certain ammunition and in residues from the use of this ammunition); pesticides and insect repellents, chemical and biological warfare agents; and compounds and particulate matter contained in the extensive smoke from the oil-well fires at the end of the war. Over 100,000 of the approximately 700,000 Gulf War veterans have participated in health examination programs that the Department of Defense (DOD) and the Department of Veterans Affairs (VA) established between 1992 and 1994. Of those veterans examined by DOD and VA, nearly 90 percent have reported a wide array of health complaints and disabling conditions, including fatigue, muscle and joint pain, gastrointestinal complaints, headaches, depression, neurologic and neurocognitive impairments, memory loss, shortness of breath, and sleep disturbances. Some of the veterans fear that they are suffering from chronic disabling conditions because of exposure during the war to substances with known or suspected health effects. The federal government, primarily through DOD and VA, has sponsored a variety of research on Gulf War veterans’ illnesses. DOD’s research is one component of a broader agenda coordinated under the aegis of the Persian Gulf Veterans’ Coordinating Board (PGVCB), which comprises the Secretaries of the Department of Health and Human Services, VA, and DOD. The details of this agenda are described in the PGVCB publication entitled A Working Plan for Research on Persian Gulf Veterans’ Illnesses. This agenda was developed in response to an Institute of Medicine conclusion that the DOD and VA should determine specific research questions that need to be answered and design epidemiologic research to these questions. Accordingly, most of the research sponsored under this agenda is characterized by PGVCB as epidemiological. The objectives of epidemiologic research are to determine the extent of diseases and illness in the population or subpopulations, the causes of disease and its modes of transmission, the natural history of disease, and the basis for developing preventive strategies or interventions. To conduct such research, investigators must follow a few basic generally accepted principles. First, they must specify diagnostic criteria to (1) reliably determine who has the disease or condition being studied and who does not and (2) select appropriate controls (people who do not have the disease or condition). Second, the investigators must have valid and reliable methods of collecting data on the past exposure(s) of those in the study and possible factors that may have caused the symptoms. The need for accurate, dose-specific exposure information is particularly critical when low-level or intermittent exposure to drugs, chemicals, or air pollutants is possible. It is important not only to assess the presence or absence of exposure but also to characterize the intensity and duration of exposure. To the extent that the actual exposure of individuals is misclassified, it is difficult to detect any effects of the exposure. Another means of linking environmental factors to disease is to determine whether or not evidence shows that as the exposure increases, the risk of disease also increases. However, this dose-response pattern can be detected only if the degree of exposure among different groups can be determined. Finally, in addition to specific case definition and dose-specific exposure information with known accuracy, it is important that a sufficient number of persons be studied to have a reasonable likelihood of detecting any relationship between exposures and disease. To the extent that this relationship is subtle or obscured in particular investigations by “loose” case definition (that is, a case definition that is too broad and encompasses different types of illnesses) or problems in measuring exposure, larger samples would be required. For example, the Institute of Medicine noted that “very large groups must be studied in order to identify the small risks associated with low levels of exposure, whereas a relatively small study may be able to detect the effect of heavy or sustained exposure to a toxic substance. In this way, a study’s precision or statistical power is also linked to the extent of the exposure and the accuracy of its measurement. Inaccurate assessment of exposure can obscure the existence of such a trend and thus make it less likely that a true risk will be identified.” Similarly, if an exposure had an effect only on a particular birth defect for example, this effect might be missed by studying all birth defects as a group. Although Gulf War veterans’ health problems began surfacing in the early 1990s, the vast majority of research was not initiated until 1994 or later. And much of that research responded to legislative requirements or external reviewers’ recommendations. As noted by external reviewers, since federal research goals and objectives were not identified until 1995, after most research activities had been initiated, the research reflects a rationalization of ongoing activity rather than a research management strategy. The government’s 3-year delay complicated the researchers’ tasks and limited the amount of completed research available. Of the 91 studies receiving federal funding, over 70 had not been completed at the time of our review. The results of some studies will not be available until after 2000. By the time research was accelerated and broadened, opportunities had been missed to collect critical data that researchers cannot accurately reconstruct. Even efforts to measure the chemical content of the oil-fire smoke, begun only 2 months after the fires began burning, were initiated after most troops had left the affected areas and the climatological dynamics were different. Consequently, researchers had to use statistical models of the behavior of smoke plumes in order to infer the ground-level exposures experienced by the large numbers of troops who had departed by the time they began collecting data. Even if such models could accurately explain the behavior of the smoke plumes, they had not been validated as measures of individual exposure, and their accuracy for this purpose could not be presumed. Similar and even more serious problems were caused in the measurement of other exposures by the failure to collect data promptly and maintain adequate records. The delay in starting research has also hindered accurate reporting of exposures by Gulf War veterans. At the time of our review, 6 years after the war ended, questionnaires were being distributed requesting information from veterans on their exposures to certain agents during the war. Early federal research appeared to emphasize risks associated with psychological factors such as stress. To support this emphasis, DOD pointed out that the psychological state of mind can influence physical well-being. DOD also pointed to a recent argument that from the American Civil War onward (and perhaps even earlier), a small number of veterans have reacted to the stress of war by suffering symptoms similar to those reported by some Gulf War veterans. Of the 19 studies initiated before 1994, roughly half focused on exposures to stress or the potential for posttraumatic stress disorder (PTSD) among returning troops. As late as December 1996, the Presidential Advisory Committee noted that “stress is the risk factor funded for the greatest fraction of total - 32 studies (30 percent).” While research on exposures to stress received early emphasis, other hypotheses have received scant support. In its Final Report, the Institute of Medicine discusses the evidence for a number of disease hypotheses, including multiple chemical sensitivity, fibromyalgia, and organophosphate-induced delayed neuropathy. However, the federal research program has supported only one study of the relationship between symptoms reported by veterans and fibromyalgia. In addition, prior to October 1996, only one of the studies initiated in response to Gulf War veterans’ illnesses focused on the health effects of potential exposures to chemical warfare agents. While multiple studies of the role of stress in the veterans’ illnesses have been supported with federal research dollars, other hypotheses have been pursued largely outside the federal research program. Although veterans raised concerns about potential chemical exposures soon after the war, the federal research plan was not modified to include an investigation of these concerns until 1996, when DOD acknowledged potential exposures to chemical agents at Khamisiyah, Iraq. The failure to fund such research cannot be traced to an absence of investigator-initiated submissions. According to DOD officials, three recently funded proposals on low-level chemical exposure had previously been rejected. A substantial body of research suggests that low-level exposures to chemical warfare agents or chemically related compounds, such as certain pesticides, are associated with delayed or long-term health effects. For example, abundant evidence from animal experiments, studies of accidental human exposures, and epidemiologic studies of humans shows that low-level exposures to certain organophosphorus compounds, including sarin nerve agents to which our troops may have been exposed, can cause delayed, chronic neurotoxic effects. This syndrome is characterized by clinical signs and symptoms manifested 4 to 21 days after exposure to organophosphate compounds. The symptoms of delayed neurotoxicity can take at least two forms: (1) a single large dose may cause nerve damage with paralysis and later spastic movement and (2) repetitive low doses may damage the brain, causing impaired concentration and memory, depression, fatigue, and irritability. These delayed symptoms may be permanent. As early as the 1950s, studies demonstrated that repeated oral and subcutaneous exposures to neurotoxic organophosphates produced delayed neurotoxic effects in rats and mice. In addition, German personnel who were exposed to nerve agents during World War II displayed signs and symptoms of neurological problems even 5 to 10 years after their last exposure. Long-term abnormal neurological and psychiatric symptoms as well as disturbed brain wave patterns have also been seen in workers exposed to sarin in sarin manufacturing plants. The same abnormal brain wave disturbances were produced experimentally in primates by exposing them to low doses of sarin. Delayed, chronic neurotoxic effects were also seen in animal experiments after the administration of organophosphates. These effects include difficulty in walking and paralysis. In recent experiments, animals given a low dosage of the nerve agent sarin for 10 days showed no signs of immediate illness but developed delayed chronic neurotoxicity after 2 weeks. It has been suggested that the ill-defined symptoms experienced by Gulf War veterans may be due in part to organophosphate-induced delayed neuropathy. This hypothesis was tested in a privately supported epidemiological study of Gulf War veterans. In addition to clarifying the patterns among veterans’ symptoms by use of statistical factor analysis, this study concluded that vague symptoms of the ill veterans are associated with objective brain and nerve damage compatible with the known chronic effects of exposures to low levels of organophosphates. It further linked the veterans’ illnesses to exposure to combinations of chemicals, including nerve agents, pesticides in flea collars; DEET and highly concentrated insect repellents; and pyridostigmine bromide tablets. Finally, research that we reviewed also indicates that agents like pyridostigmine bromide, which some Gulf War veterans took to protect themselves against the immediate, life-threatening effects of nerve agents, may alter the metabolism of organophosphates in ways that activate their delayed, chronic effects on the brain. Moreover, exposure to combinations of organophosphates and related chemicals like pyridostigmine or DEET has been shown in animal studies to be far more likely to cause morbidity and mortality than any of the chemicals acting alone. Despite the fact that in 1994, Congress directed DOD and VA to research treatments for ailing Gulf War veterans, such research has largely not taken place. While 61 of the 91 federally sponsored studies (67 percent) were classified as epidemiological by the PGVCB, only three of the studies had focused primarily on identification and improvement of treatments for these illnesses. Our review indicated that most of the epidemiological studies have been hampered by data problems and methodological limitations and consequently may not provide conclusive answers in response to their stated objectives, particularly in identifying risk factors or potential causes. The research program to answer basic questions about the illnesses that afflict Gulf War veterans has at least three major problems in linking exposures to observed illness or symptoms. First, it is extremely difficult to gather information about unplanned exposures (for example, oil-fire smoke and insects) that may have occurred in the Gulf. And DOD has acknowledged that records of planned or intentional exposures (for example, the use of vaccines and pyridostigmine bromide to protect against chemical/biological warfare agents) were inadequate. Second, the veterans were typically exposed to a wide array of agents with commonly accepted health effects, making it difficult to isolate and characterize the effects of individual factors or to study their combined effects. Third, the passage of time following these exposures has made it increasingly difficult to have confidence in any information gathered through retrospective questioning of veterans. In part, the latter difficulty was created by the delayed release of information about detection of chemical warfare agents during the war as well as the delayed collection of exposure data. Five years passed before DOD acknowledged that American soldiers may have been exposed to chemical warfare agents shortly after the war ended in 1991 (at the Khamisiyah site). Moreover, although chemical detections by Czech forces are regarded as valid by DOD, the origin of the detected chemical agents has not been identified by either DOD or the Central Intelligence Agency (CIA). In the face of denials by DOD officials, several researchers told us that they had considered it pointless to pursue hypotheses that the symptoms may have been associated with exposures to chemical weapons. When we asked investigators responsible for federally funded epidemiological research how they were collecting data on the various elements to which Gulf veterans may have been exposed, they indicated that they had no means other than self-reports for measuring most of these elements. This reliance on self-reports was not much less for elements such as vaccines, for which the opportunity for record keeping clearly existed. Two problems are associated with reliance on self-reports for exposure assessments. First, recalled information may be inaccurate or biased after such a long time period; that is, some veterans may not remember that they were exposed to particular factors, while others may not have been exposed but nonetheless inaccurately report that they were. Information also may be biased if, for example, veterans who became sick following the war recalled their exposures earlier, more often, or differently from veterans who had not become sick. Second, there is often no straightforward way to test the validity of self-reported exposure information, making it impossible to separate bias from actual differences in exposure frequency. Several investigators were also relying on a model developed by the U.S. Army Environmental Hygiene Agency for assessing exposures to components of oil-fire smoke through the combination of unit location data with information from models of the distribution of oil-fire smoke. However, this model requires the use of unit location as a proxy for exposure, and the validity of this approach is unknown. The Presidential Advisory Committee has noted, “DOD’s Persian Gulf Registry of Unit Locations lacks the precision and detail necessary to be an effective tool for the investigation of exposure incidents.” Another major hurdle to the development of a successful research agenda has been the difficulty in classifying symptoms into one or more distinct illnesses. Some veterans complain of gastrointestinal pain, others report musculoskeletal pain or weakness, and still others report emotional or neurological symptoms. As explained previously, development of one or more specific case definition is essential to conducting certain types of epidemiological studies. The VA collected some data on symptoms beginning in 1992 with the initiation of its registry. However, these efforts to collect information about symptoms and exposures from registry participants were limited and nonspecific. This constrained VA’s potential use of the information for improving understanding of the patterns of veterans’ complaints. These data limitations were unfortunate, as detailed information about symptoms and exposures might have yielded earlier, more reliable analyses of the nature and causes of veterans’ complaints and could have also assisted in developing working case definitions. We also found that both the federally supported projects and the federal registry programs have generally failed to study the conjunction of multiple symptoms in individual veterans. Articles and briefing documents that we obtained from DOD and VA reported findings that addressed only the incidence of single symptoms and diagnoses. There were two exceptions. First, for an Air National Guard unit in Pennsylvania, the Center for Disease Control and Prevention developed an operational case definition, which was quite similar to the case definition of chronic fatigue syndrome. Second, the studies conducted by Haley et al. also focused on identifying symptom clusters. For those ongoing, epidemiological studies that were built on case-control designs, we asked about how a case was defined. The specificity of this definition is important because a vague case definition can lead to considering multiple kinds of illnesses together. When this is done, it is not surprising to find no commonality of experience among the cases. Moreover, the use of specific case definition is particularly critical to achieving meaningful results within this type of research design. At the same time, for the case definition to be relevant, it must fit the symptoms described by an important portion of the group being studied. Most of the investigators we interviewed took steps to estimate the size of the sample they would require to have a reasonable expectation of detecting the effects of exposures to hazardous substances. However, many other variables were involved in such calculations, for example, the prevalence of exposures, some of which were unknown at the time the studies were planned. Thus, they had to make estimates within somewhat broad parameters. Although steps were clearly taken to plan for an adequate sample size, some investigators reported difficulty in locating subjects due to factors beyond their control, such as the rate of referrals from VA examination centers or the rate of identification of subjects that fit highly specific case definitions. Moreover, other studies, such as those on specific birth defects, required extremely large samples. The ongoing epidemiological research cannot provide precise, accurate, and conclusive answers regarding the causes of veterans’ illnesses because of researchers’ methodological problems as well as the following: Researchers have found it extremely difficult to gather information about many key exposures. For example, medical records of the use of pyridostigmine bromide tablets and vaccinations to protect against chemical/biological warfare exposures were inadequate. Gulf War veterans were typically exposed to a wide array of agents, making it difficult to isolate and characterize the effects of individual agents or to study their combined effects. Most of the epidemiological studies on Gulf War veterans’ illnesses have relied only on self-reports for measuring most of the agents to which veterans might have been exposed. The information gathered from Gulf War veterans years after the war may be inaccurate or biased. There is often no straightforward way to test the validity of self-reported exposure information, making it impossible to separate bias in recalled information from actual differences in the frequency of exposures. As a result, findings from these studies may be spurious or equivocal. Classifying Gulf War veterans’ symptoms and identifying their illnesses have been difficult. From the outset, the symptoms reported have been varied and difficult to classify into one or more distinct groups. Moreover, several different diagnoses might provide plausible explanations for some of the specific health complaints. It has thus been difficult to develop one or more working case definitions to describe veterans undiagnosed complaints. Because of the numbers of veterans who have experienced illnesses that might be related to their service during the Gulf War, we recommended in our report that the Secretary of Defense, with the Secretary of Veterans Affairs, give greater priority to research on effective treatment for ill veterans and on low-level exposures to chemicals and other agents as well as their interactive effects and less priority to further epidemiological studies. Mr. Chairman, that concludes my prepared remarks. I will be happy to answer any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its evaluation of the federal strategy to research Gulf War illnesses. GAO noted that: (1) the government was not proactive in researching Gulf War illnesses; (2) the government's early research emphasized stress as a cause for Gulf War veterans' illnesses and gave other hypotheses, such as multiple chemical sensitivity, little attention; (3) in contrast, the private sector pursued research on the health effects of low-level exposures to certain chemical warfare agents or industrial chemical compounds; (4) government research used an epidemiological approach, but little research on treatment was funded; and (5) most of the ongoing epidemiological research focusing on the prevalence or causes of Gulf War-related illnesses will not provide conclusive answers, particularly in identifying risk factors or potential causes due to formidable methodological and data problems. |
This section describes (1) the federal oil and gas fiscal system, (2) leasing processes, and (3) the history of oil and gas management challenges. Created by Congress in 1849, Interior oversees the nation’s publicly owned natural resources including parks, wildlife habitat, and crude oil and natural gas resources on millions of acres onshore and offshore in the waters of the outer continental shelf. With regard to oil and gas in particular, Interior leases federal lands and waters (also referred to as submerged lands), issues permits for oil and gas drilling, and is responsible for ensuring that the federal government receives payment from the private companies that extract oil and gas from federal leases. The oil and gas fiscal system defines the applicable payments to the government from companies that lease federal lands and waters for oil and gas development. These payments include royalties, rents, and other payments—items generally specified within the lease terms. The revenues collected by the federal government on oil and gas development are shared with states, as directed by statute, and the remaining funds are deposited in the U.S. Treasury. In addition to the collection of these payments by Interior, the federal government assesses taxes on the profits companies earn on the sale of oil and gas produced from federal leases. Under the oil and gas fiscal system, companies bid on leases that Interior makes available. Interior awards the lease to the highest bidder generally based on a lump-sum payment called a bonus bid that is due when the lease is issued. The lease is a contract and conveys the rights to explore for and produce the oil and gas in a specified area to a company that holds the lease. The company is then subject to the payment of rental rates until production begins and then to payment of royalties on any oil and gas that is eventually produced on the lease. The royalty rate is a percentage of the value of production, and the royalty owed is the volume of production times the unit value of production times the royalty rate. The federal government receives royalty payments once production starts. In fiscal year 2012, the $9.7 billion in oil and gas revenue collected included royalties (about $8.5 billion or 87 percent), bonus bids (about $947 million or 10 percent), and rental fees (about $272 million or 3 percent). Currently Interior has the authority to change certain lease terms—such as the duration of the lease, royalty rates, and rental fees—within the overall oil and gas fiscal system. For new offshore leases, Interior is allowed by statute to change the lease terms for the bonus bid structure, rent, and royalty rates. For new onshore leases, Interior is generally allowed by statute to change these same lease terms but with certain limits on flexibility. For onshore leases, Interior’s regulations—issued in the 1980s—currently establish a royalty rate of 12.5 percent. As such, changes to onshore royalty rates would require Interior to revise its regulations. With regard to taxes on corporate profits, only Congress may change the tax components of the oil and gas fiscal system as Interior does not have the authority to do so. For both offshore and onshore leases, ONRR collects revenue from companies for the royalties, rents, bonuses, and other revenues generated throughout the leasing process. In this regard, ONRR has the responsibility to ensure that these revenues are accurately reported and paid in compliance with laws, regulations, and lease terms. ONRR establishes the regulations for how oil and gas are valued for royalty purposes, which affects the royalties that companies pay. Interior’s processes for issuing federal leases vary depending on whether they are offshore or onshore. For offshore leases, management of oil and gas resources is primarily governed by the Outer Continental Shelf Lands Act, which sets forth procedures for leasing, exploration, and development and production of those resources. BOEM is the bureau within Interior responsible for implementing these requirements of the act related to preparing the leasing program. The act calls for the preparation of an oil and gas leasing program designed to best meet the nation’s energy needs while also taking into account a range of principles and considerations specified by the act. Specifically, the act provides that “anagement of the outer Continental Shelf shall be conducted in a manner which considers economic, social, and environmental values of the renewable and nonrenewable resources contained in the outer Continental Shelf, and the potential impact of oil and gas exploration on other resource values of the outer Continental Shelf and the marine, coastal, and human environments.” Furthermore, the act provides that the outer continental shelf is a “vital national resource reserve held by the federal government for the public, which should be made available for expeditious and orderly development, subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs.” The act grants the Secretary the authority to issue leases and states that “leasing activities shall be conducted to assure receipt of fair market value for the lands leased and the rights conveyed by the Federal Government.” The Outer Continental Shelf Lands Act requires the Secretary of the Interior to prepare an oil and gas leasing program that consists of a 5- year schedule of proposed lease sales that shows the size, timing, and location of leasing activity as precisely as possible. Every 5 years, Interior selects the areas it will offer for leasing and establishes a schedule for individual lease sales. These leases are offered for competitive bidding, and all eligible companies are invited to submit written sealed bids for the lease and rights to explore, develop, and produce oil and gas resources on these leases. These rights last for a set period of time, referred to as the initial period of the lease, which varies depending on the water depth. Interior estimates the fair market value of each lease, and the minimally acceptable bid is derived from this estimate. The bidder that submits the highest bonus bid that meets or exceeds Interior’s minimum bid is awarded the lease. If a high bid does not satisfy any of the required conditions, the bid is rejected. In the event that no bid is received or no bids equal or exceed the minimum bid, Interior may choose to withdraw the lease—possibly offering it again at a future date. For onshore leases, BLM’s current leasing process was established in the Mineral Leasing Act of 1920, as amended, and the Mineral Leasing Act for Acquired Lands of 1947, as amended. Interior relies on the competitive leasing process required by the Mineral Leasing Act to ensure fair market value for onshore oil and gas resources. In addition, the Federal Land Policy and Management Act, though not specific to federal oil and gas resources, calls for the management of public lands in a manner that protects historical and environmental resources, provides for recreational and other uses, and ensures “fair market value” is received for their use and resources. BLM offers parcels of land nominated by industry and the public, as well as some it identifies. As with offshore leases, Interior initially offers onshore leases through a competitive bidding process; however, bonus bids are received in an oral auction rather than in a sealed written form, and Interior does not evaluate bid adequacy on a parcel-by-parcel basis. Instead, by law, it requires a uniform national minimum acceptable bid of $2 per acre that the Secretary has the authority to raise. If Interior receives any bids on an offered lease, the lease is awarded to the highest bidder. All onshore leases that do not receive any bids in the initial offer must be offered noncompetitively the day after and remain available for noncompetitive leasing for a period of 2 years after the competitive lease sale. Any of these available leases may be acquired noncompetitively on a first-come, first-served basis for the minimum acceptable bid. About 40 percent of existing BLM oil and gas leases were issued as noncompetitive leases. For all competitively issued leases, the winning bidder must pay Interior the full amount of the bonus bid to become the lessee. The lessee then pays a fixed amount of rent each year until the lease begins producing or the lease terminates, expires, is cancelled, suspended, or relinquished. In the 1970s and early 1980s, Interior’s management of the oil and gas revenue collection system faced criticism by us and Interior’s Office of the Inspector General. Interior’s Inspector General issued five reports critical of the program between 1969 and 1977 and, in 1981, we reported that Interior was not collecting potentially hundreds of millions in royalties due from federal oil and gas leases. In response, in 1981, the Secretary of the Interior established the Commission on Fiscal Accountability of the Nation’s Energy Resources, better known as the Linowes Commission named for the chairman of the commission, to investigate allegations of irregularities in royalty payments, among other issues. The Linowes Commission raised a number of serious concerns and in its report stated that “management of royalties for the nation’s energy resources has been a failure for more than 20 years. Because the Federal government has not adequately managed this multibillion dollar enterprise, the oil and gas industry is not paying all the royalties it rightly owes.” The report cited a range of problems, including the failure to verify data reported by companies and late payments and underpayments, and concluded that, “n short, the industry is essentially on an honor system.” Among its 60 recommendations for improving the fiscal accountability of onshore and offshore resources, the commission called for raising onshore royalty rates to “appropriate levels.” Specifically, the commission recommended that the onshore royalty rate for oil and gas be raised from 12.5 percent to 16.67 percent generally for new and renegotiated leases consistent with offshore royalty rates of 16.67 percent in place at that time. Following the work of the commission, Interior and Congress took several actions aimed at improving management of revenue collection. In particular, the Secretary of the Interior, by secretarial order, reorganized the task of administering revenue collection under a new bureau; specifically, the Minerals Management Service (MMS) was created within Interior, in part, from the division of the U.S. Geological Survey—which was originally tasked with administering revenue collection, among other duties—to improve management of federal leasing revenues. In addition, Congress passed legislation aimed at improving the collection of revenue including the Federal Oil and Gas Royalty Management Act of 1982 and the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996. In 2007, Interior’s Subcommittee on Royalty Management—a subcommittee of the Royalty Policy Committee chartered to provide advice on royalty management issues and other mineral-related policies to the Secretary and other departmental officials responsible for managing mineral leasing activities—reported that a number of aspects of royalty management activities required prompt and, in some cases, significant management attention to ensure public confidence. In particular, the report included over 100 recommendations to improve Interior’s management of oil and gas resources, including those aimed at revising its valuation regulations and guidelines that govern the valuation of oil and gas resources for royalty purposes. According to Interior documentation, as of August 2012, 15 recommendations remain open. In our May 2007 report, we found that, based on results of a number of studies, the government receives one of the lowest government takes in the world. In September 2008, we found that the fiscal system needed comprehensive reassessment and that Interior did not routinely evaluate the federal oil and gas fiscal system. Interior disagreed with recommendations in the draft report that it perform a comprehensive review of the fiscal system using an independent panel and adopt policies and procedures to keep abreast of important changes in the oil and gas market and in other countries’ efforts to adjust their oil and gas management practices in light of these changes. Thus, in the final report, we suggested that Congress should consider directing the Secretary of the Interior to (1) convene an independent panel to perform a comprehensive review of the federal system for collecting oil and gas revenue and (2) establish procedures for periodically collecting data and information and conducting analyses to determine how the federal government take and the attractiveness for oil and gas investors in each federal oil and gas region compare to those of other resource owners and report this information to the Congress. Actions taken in response to this suggestion are discussed later in this report. In 2011, in part because of the challenges identified in our past work, we added Interior’s management of federal oil and gas resources to our list of programs at high risk of fraud, waste, abuse, and mismanagement. In the 2013 update of the high-risk list, we found that some progress had been made related to Interior’s management of federal oil and gas resources and narrowed the federal oil and gas high-risk area to focus, in part, on the remaining issues related to revenue collection and ensuring that the public is getting an appropriate share of oil and gas revenues. Interior has taken some steps to help ensure a fair return on federal oil and gas resources since our 2007 report, including: (1) changing offshore lease terms, while considering but not making changes to onshore lease terms; (2) contracting for studies of various aspects of the fiscal system; and (3) examining potential regulatory changes that could simplify royalty payments and collections. However, Interior does not have documented procedures in place for determining when to periodically conduct assessments of the fiscal system to ensure a fair return or for determining whether and how to make changes to lease terms for new offshore leases. Interior has taken some steps aimed at ensuring a fair return, including changing offshore lease terms—such as increasing royalty rates, minimum bids, and rental rates—but onshore lease terms have not changed in recent years though onshore and offshore leasing programs are subject to many of the same market conditions. For example, while onshore royalty rates have remained at 12.5 percent, certain offshore royalty rates began increasing in 2007 to the current offshore royalty rate of 18.75 percent. Figures 1 and 2 depict changes to offshore and onshore royalty rates along with oil and gas price fluctuations, respectively, from January 2000 through July 2013. In addition, Interior has contracted for studies of various aspects of its fiscal system, including an assessment of how the federal fiscal system compared with the systems of other oil and gas resource owners (including owners in other countries); an analysis of policies that affect the pace of leasing in the Gulf of Mexico; and an analysis of the benefits, costs, and economic impacts of raising onshore royalty rates. Interior is also examining potential regulatory changes that could simplify royalty payments and collections. In recent years, Interior changed some offshore lease terms in an effort to ensure a fair return on oil and gas resources. Since 2007, Interior increased offshore lease terms including royalty rates, rental rates, and the minimum bid for certain offshore leases as follows: Increased royalty rates. From 2007 through 2008, Interior increased royalty rates for new leases by 50 percent. In 2007, Interior increased the royalty rate for new Gulf of Mexico leases from 12.5 percent to 16.67 percent for new leases in water depths greater than 400 meters. In 2008, Interior increased the rate again for all Gulf of Mexico leases to 18.75 percent. As of August 2013, all Gulf of Mexico royalty rates for new leases are 18.75 percent. According to Interior officials and documents, incremental increases in royalty rates were instituted in response to a variety of factors including (1) increased oil and gas prices; (2) perceived improvements in exploration and production technologies, especially in deep water; and (3) the competitive market for offshore leases. Interior estimated that the royalty rate increase from 16.67 percent to 18.75 percent would result in a net increase in the total Gulf of Mexico federal revenues from bonuses, rents, and royalties from new leases of $4.3 billion, a 5 percent increase from $87.4 to $91.7 billion over 30 years. After this 2008 royalty rate increase, Interior documents stated that demand remained strong for newly offered leases in the Gulf of Mexico and that Interior observed strong bidding interest in the three subsequent lease sales. Escalating and increased rental rates. Interior established escalating rental rates—rates that increase over the duration of the lease—to encourage faster exploration and development of leases, or earlier relinquishment when exploration is unlikely to be undertaken by the lessee. Specifically, in 2007, Interior implemented escalating rental rates for leases offered in less than 400 meters of water—and in 2009, for leases offered in at least 400 meters of water. Also, in 2009, Interior increased rental rates for new Gulf of Mexico leases in all water depths. Interior estimated that the increased rental rates and escalating rent rates in water depths greater than 400 meters would result in five fewer lease tracts receiving bids but an increase in rental revenue of $57 million over the initial lease term for leases resulting from that sale. $27 million of this $57 million was attributed to the increase in base rental rates. In addition, the increased rental rates did not appear to reduce the number of lease blocks to be explored, according to Interior documents. Increased minimum bids. In 2011, Interior increased the minimum bid for leases offered in at least 400 meters of water in the Gulf of Mexico to $100 per acre, up from $37.50 per acre. According to Interior’s Proposed Final Outer Continental Shelf Oil & Gas Leasing Program 2012-2017, the minimum bid was raised, in part, to account for increases in oil prices and to encourage optimal timing of leasing. Interior officials told us that a review of the minimum bid was initiated because the minimum bid had not been changed in some time. In addition, Interior analysis showed that a minimum bid of $100 per acre would be generally equivalent to the cost of the minimum bid in the past, going back to 1999, adjusted for differences in prices, costs, and royalty rates. For details on the recent history of lease terms in the Gulf of Mexico, see table 1; changes in lease terms are highlighted in gray. Interior has also taken actions to encourage the development of oil and gas resources, which reduces the time from when federal leases are issued and the federal government receives its share of revenue from them, in response to our October 2008 recommendation that the Secretary of the Interior develop a strategy to evaluate options to encourage faster development of its oil and gas leases. Specifically, in 2010, Interior shortened lease terms by reducing the duration of the initial period for Gulf of Mexico leases in water depths of 400 to less than 800 meters from an 8-year initial period to a 5-year initial period. For water depths of 800 to less than 1,600 meters, it reduced leases from a 10-year initial period to a 7-year initial period. According to Interior documents, these lease terms can generally be extended if the lessee begins drilling a well during the initial period. For onshore resources, Interior has considered, but not made, changes to onshore lease terms in order to provide greater assurance that the public is getting a fair return on federal oil and gas resources. Interior acts on behalf of the American people to manage the federal oil and gas system to ensure a fair return to the public for the development of oil and gas resources. Interior officials told us that since 2009 the department has been considering increasing the onshore royalty rate—which is currently established in its regulations at 12.5 percent for both oil and gas. According to the officials, several factors prompted efforts to consider changing the royalty rates, including our September 2008 report, oil and gas prices, and Office of Management and Budget initiatives calling for increased revenue from onshore royalties. Although both onshore and offshore leasing programs are subject to many of the same market conditions, Interior officials are currently unable to make timely adjustments to onshore royalty rates because BLM’s regulations generally establish a set royalty rate of 12.5 percent. This limits the bureau’s flexibility because making adjustments to that rate require going through the rulemaking process, and the process can take several years according to Interior officials. Specifically, officials said that the public notice and comment period required as part of the rulemaking process could take 1 to 2 years, and proposed rules must also undergo review by the Office of Management and Budget. Interior officials told us that the department planned to publish a notice of proposed rulemaking in July 2012 to change BLM’s regulations to set an onshore royalty rate of 18.75 percent for oil production on new federal competitive leases but leave the royalty rate for gas production unchanged at 12.5 percent. The planned regulatory revisions would have allowed the Secretary to review and revise royalty rates for new competitive leases as appropriate—similar to the authority that the Secretary has for revising offshore royalty rates. Officials told us that including the requirement for periodic review and revision of royalty rates would have given the Secretary greater flexibility to go forward with such reviews and revisions in the future. Interior discontinued its efforts to pursue the revised regulations because, according to Interior officials, the department does not have enough information to determine how to adjust onshore royalty rates. Rather, Interior plans to ask the public to comment on whether and how royalty rates for new federal onshore competitive oil and gas leases should be revised to better ensure a fair return to the public. Specifically, Interior officials told us they plan to ask for comments on the types of royalty rate structures that should be considered, such as whether BLM should develop a uniform rate for all leases or different rates by region, state, geologic formation, or resource type. Furthermore, Interior officials told us they would also ask for comments on whether sliding scale royalty rates—or rates that vary with the price of the commodity—might be appropriate in specific circumstances. An Advance Notice Of Proposed Rulemaking is under development, but officials told us that higher priority rulemaking initiatives, such as regulations for hydraulic fracturing and revisions to its oil and gas measurement regulations, precede it and that limited resources constrain their ability to meet program demands. As a result of not successfully changing federal regulations to provide itself with the flexibility needed to make timely adjustments to onshore lease terms, Interior’s ability to ensure that the public is receiving a fair return is limited. Moreover, Interior continues to offer onshore leases with lease terms—terms lasting the life of the lease—that have not been adjusted in response to changing market conditions, potentially foregoing a considerable amount of revenue. For example, in 2011, Interior estimated that onshore royalty rate changes could increase revenue collections by about $1.25 billion over 10 years. Interior contracted for several studies—including a study of how the federal oil and gas fiscal system compared with fiscal systems of other resource owners—that reviewed various aspects of the federal oil and gas fiscal system since 2007. In our September 2008 report, we found that Interior collected a lower government take for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study, which included other countries as well as some states. We also found that Interior had not routinely evaluated the federal oil and gas fiscal system, monitored what other governments or resource owners were receiving for their resources, or evaluated and compared the attractiveness of federal lands and waters for investment with that of other regions. In response to our 2008 findings, Interior contracted for a study—the 2011 Comparative Assessment of the Federal Oil and Gas Fiscal System study—that compared the federal oil and gas fiscal systems of selected federal oil and gas regions to that of other resource owners. In addition, Interior contracted for two other studies on the effect of different leasing and royalty rate policies on revenue, exploration, and production. See table 2 for a description of these studies. According to Interior officials, the study conducted in response to our 2008 findings—the 2011 Comparative Assessment of the Federal Oil and Gas Fiscal System—provided some useful information about the fiscal system such as how fiscal terms in the United States compared with other resource owners, but it has not directly led to any changes to the fiscal system or lease terms for new federal oil and gas leases. Similarly, Interior officials told us that the other two studies have not yet led to revisions to the fiscal system or lease terms for new offshore or onshore leases. Rather, according to officials, additional internal analyses and modeling, as well as consultation with stakeholders—including oil and gas companies and the public—will continue to primarily inform future changes to the fiscal system. Moreover, Interior did not document any internal discussions or analysis of the three studies’ findings. As part of the 2011 Comparative Assessment of the Federal Oil and Gas Fiscal System study, officials said that they obtained a model that can be employed in the future to conduct comparative analyses but currently have no plans to update the model or the data inputs used by the model. Officials told us that the study’s findings reassured them that their own internal assessment related to the competitiveness of the offshore fiscal system was appropriate. In addition, officials said that the study provided additional information—mainly raising the issue of whether an appropriate return was being received for onshore resources—but that the study was not adequate to determine next steps for onshore lease terms. Interior is examining potential regulatory changes that could simplify royalty payments and collections. As we found in our past work, complex valuation regulations can result in inaccurate royalty payments made by industry, and this could increase ONRR’s costs to ensure accurate royalty payments because of the need for potentially detailed and time-consuming audits of records. In May 2011, Interior published an Advance Notice Of Proposed Rulemaking requesting comments to inform potential changes to regulations intended to simplify royalty payments and collections. In addition to our work, others have identified numerous shortcomings in ONRR’s royalty collection programs, in part because of its valuation regulations’ complex requirements for calculating the value of oil and gas and associated deductions and allowances for activities such as transportation. In December 2007, Interior’s Subcommittee on Royalty Management recommended that, by the end of fiscal year 2008, Interior publish proposed revisions to the gas valuation regulations to, among other goals, simplify the calculation of royalties and deductions for gas transportation and processing. Interior did not meet this time frame due to several factors including the complexity of oil and gas valuation, according to Interior officials. In May 2011, Interior published the Advance Notice Of Proposed Rulemaking in the Federal Register for the proposed rule, which according to Interior documents is intended, in part, to provide greater simplicity, certainty, clarity, and consistency in production valuation; decrease ONRR’s costs to ensure compliance; decrease industry’s compliance costs; and provide more certainty to ONRR and industry that companies pay every dollar due to the government. According to ONRR officials, the proposed regulations were undergoing internal review as of September 2013 and are expected to be published in the Federal Register in 2014. Interior does not have documented procedures in place for determining (1) when to conduct periodic assessments of the overall fiscal system or (2) whether and how to make changes to lease terms for new offshore leases. Interior does not have documented procedures in place for determining when to periodically conduct assessments of the overall fiscal system as a whole. Although Interior recently contracted for such an assessment, it was the first in well over 25 years. Without documented procedures, Interior cannot ensure that it will consistently conduct such assessments in the future, and without periodically conducting such assessments, Interior cannot know whether there is a proper balance between the attractiveness of federal leases for investment and appropriate returns for federal oil and gas resources, limiting Interior’s ability to ensure a fair return on federal oil and gas resources. Internal control standards in the federal government call for agencies to clearly document internal controls and the documentation is “to appear in management directives, administrative policies, or operating manuals.” Documented procedures of when Interior is to conduct such assessments—whether within specific time frames or the occurrence of certain market or industry changes— could help provide the department with reasonable assurance that its staff knows when to conduct assessments of the overall fiscal system to help ensure those reviews are conducted systematically and consistently. In our September 2008 report, we found that the last time Interior conducted a comprehensive assessment of the federal oil and gas fiscal system was over 25 years ago. Additionally, we reported that, without routinely evaluating the federal oil and gas system as a whole, including monitoring what other resource owners worldwide are receiving for their energy resources or evaluating and comparing the attractiveness of the United States for oil and gas investment with that of other oil and gas regions, Interior cannot provide reasonable assurance that the public is getting an appropriate share of revenues. As mentioned previously, in response to our 2008 findings, Interior contracted for a study that compared the federal oil and gas fiscal system to that of other resource owners. As part of this study, officials said that they obtained a model that can be employed in the future to conduct comparative analyses; however, there are currently no plans to update the model or the data inputs used by the model. Interior officials told us that this type of comprehensive assessment would only be undertaken if fundamental shifts in the market occurred. According to officials, however, Interior does not have procedures or criteria in place for determining when such an assessment of the fiscal system should take place or what changes in the market or industry would signal that such a study should be done. Without procedures for determining when to conduct periodic assessments of the fiscal system as a whole, Interior cannot be reasonably assured that it will consistently conduct such assessments in the future, limiting its ability to be confident that the system is ensuring a fair return on federal oil and gas resources. According to the Office of Management and Budget, rigorous program evaluations can help determine whether government programs are achieving their intended outcomes to the extent possible. Moreover, Interior’s oversight of federal land and waters is subject to the federal government’s multiple, diverse objectives—fair return, protection of historical and environmental resources, and expeditious and orderly development, among other goals. Thus, Interior is confronted with evaluating these objectives in light of a complex set of factors—including market prices and how development opportunities in the United States compare with those of other resource owners. By having documented procedures, the department could help ensure that its evaluations take all of these factors into consideration. Further, these factors may change over time as the market for oil and gas changes, the technologies used to explore and produce oil and gas change, or as the broader economic climate changes, making it even more important that Interior has documented procedures for conducting periodic assessments of the federal oil and gas fiscal system. In addition, Interior has conducted some analyses to support changes to offshore lease terms in advance of offshore lease sales, which typically occur a few times a year—but the analyses conducted to support these changes are not a substitute for periodically assessing the oil and gas fiscal system as a whole. Since 2007, Interior has conducted some analyses for offshore lease sales in support of changes to royalty rates, rental rates, and the minimum bid. Based on our review of Interior documents from several lease sales from 2007 to 2011, we found that the analyses the department conducted to support proposed changes to offshore lease terms generally involved estimating the impacts of a proposed change on revenue, bidding activity, and potential oil and gas production. In addition, Interior’s documentation shows that the department took into consideration technological and market conditions; policy goals, such as promoting development or enhancing revenues; and administrative benefits, such as making lease terms consistent across water depths. However, these analyses did not include an evaluation of what other resource owners worldwide are receiving for their energy resources or a comparison of the attractiveness of the United States for oil and gas investment with that of other oil and gas resource owners. In our September 2008 report, we suggested that Congress should consider directing the Secretary of the Interior to establish procedures for periodically collecting data and information and conducting analyses to determine how the federal government take and the attractiveness for oil and gas investors in each federal oil and gas region compare with those of other resource owners and report this information to Congress. Moreover, Interior has not conducted similar analysis for onshore lease sales. Interior officials explained that the mechanism for determining the value of onshore resources is directed by statute to be market-driven. Specifically, officials stated that fair market value for onshore lease sales is determined through the oral competitive bidding process required by the Mineral Leasing Act, rather than an evaluation of the geology and potential value of the oil and gas resource. Because the leasing process is established by statute, Interior officials told us that it has not recently examined whether alternative leasing systems might be more effective in ensuring fair market value. Interior does not have documented procedures for determining whether and how to make changes to new offshore lease terms—which are specified a few times per year ahead of each lease sale—consistent with federal standards for internal control. Without documented procedures for determining whether and how to make changes to new offshore lease terms, Interior is at risk of making inconsistent determinations about lease terms. Such inconsistent determinations would undermine its credibility and its ability to better ensure a fair return on oil and gas resources. Officials told us Interior does not have documented procedures or criteria for determining whether and how to make changes to offshore lease terms. Rather Interior officials said that they follow an informal process and establish offshore lease terms for each sale but that they do not have the time or resources to evaluate each lease term prior to each lease sale. However, based on our review of Interior documents, the analyses the department conducted to support proposed changes to offshore lease terms were inconsistent in the array of conditions and factors the department considered, and the level of analysis conducted in support of decisions to change lease terms varied and was not consistently or clearly documented. For example, as mentioned previously, escalating rental rates were implemented in two different sales—first, in 2007, in water depths less than 400 meters and then, in 2009, in water depths greater than 400 meters. The rationale provided for the first change was the policy goal to expedite drilling and compensate Interior, while the rationale in 2009 included specific estimates of the effects of an escalating rental rate on potential revenue and bidding, as well as consideration of market conditions. While both justifications may be warranted, because Interior does not have documented procedures specifying whether and how to support changes to its lease terms, Interior’s approach to revising its lease terms appears to be inconsistent. In addition, our review of documents supporting two separate royalty rate changes in 2007 and 2008—the first in 25 years—found that Interior did not consistently document the justifications and analysis supporting the increases. Specifically, Interior documents for the 2008 royalty rate increase cite reasons similar to the 2007 royalty rate increase—generally significant changes in market conditions—but because the second increase took place less than a year after the implementation of the first increase, it is unclear what significant changes in market conditions occurred to prompt the consideration of the second increase in royalty rates. Internal control standards in the federal government call for agencies to clearly document transactions and other significant events and that documentation should be readily available for examination. While both royalty rate increases may have been warranted, clear documentation of the justifications and analysis supporting royalty rate increases would make Interior’s decisions to change the royalty rates transparent and could inform future decision making related to changing rates. Such transparency can be particularly helpful in the event that key staff retire or leave federal service. Documentation of internal discussions that took place prior to the second royalty rate increase show that prior to being able to assess the impacts of increasing the royalty rate from 12.5 percent to 16.67 percent in 2007, Interior was considering an additional royalty rate increase. In addition, Interior documents show Interior program officials’ concerns about an additional increase in royalty rates; specifically, officials urged the need to analyze the impact of the first increase, and they also noted potential negative effects of an increase including delaying investment and production in certain areas of the Gulf of Mexico. By having documented procedures for determining whether and how to make future changes to offshore leasing terms, Interior could increase its consistency and thus enhance its credibility in the conditions and factors the department considered and the level of analysis conducted. Interior has taken several steps intended to help ensure that the public receives a fair return on oil and gas produced from federal leases. However, even with these recent steps, it is not clear that Interior’s efforts, by themselves, provide long-lasting assurance that federal resources will provide a fair return. This is especially true in light of the absence of documented procedures for Interior to determine when it will periodically conduct assessments of the overall federal oil and gas fiscal system and whether and how to make changes to new offshore lease terms, as well as Interior’s limited flexibility to make changes to new onshore lease terms. Ensuring that the federal government is obtaining fair return for the resources it manages on behalf of its citizens is especially important as the country faces ongoing fiscal challenges. Although leasing programs for both onshore and offshore areas are subject to many of the same market conditions, and Interior has increased offshore royalty rates, officials overseeing onshore leasing are currently unable to make timely adjustments to onshore royalty rates because, in general, BLM’s regulations fix the rate at 12.5 percent, potentially limiting Interior’s ability to ensure that the public is receiving a fair return and potentially resulting in foregone revenue. In particular, while Interior has changed offshore lease terms several times over the past few years in response to changes in market conditions—many of which also affect onshore areas—to better ensure a fair return, Interior has not successfully changed BLM’s regulations to provide itself with the flexibility needed to change onshore lease terms in a timely manner despite considering increasing the onshore royalty rate since 2009. As a result, Interior continues to offer onshore leases with lease terms—terms lasting the life of the lease—that have not been adjusted in response to changing market conditions, potentially foregoing a considerable amount of revenue. Key among Interior’s efforts to ensure a fair return, to address a GAO recommendation, Interior completed an assessment—the Comparative Assessment of the Federal Oil and Gas Fiscal System—which examined how the fiscal system of selected federal oil and gas regions compared with fiscal systems of other resources owners. Interior officials told us, however, that it has no plans to update the assessment, increasing the risk that this progress may be fleeting and that, as we found in 2008, it could be years before another assessment is completed during which time there could be significant changes in market conditions. Furthermore, without documented procedures in place for conducting periodic assessments of the fiscal system—such as when such an assessment of the fiscal system should take place or what changes in the market or industry would signal that such a study should be done, Interior cannot know whether there is a proper balance between the attractiveness of federal leases for investment and appropriate returns for federal oil and gas resources, limiting Interior’s ability to ensure a fair return. Finally, while Interior has made changes to its offshore lease terms, for example increasing royalty rates in some instances from 12.5 percent to 18.75 percent, Interior does not have documented procedures for determining whether and how to make changes to lease terms for new offshore leases. Without such documented procedures, Interior’s rationale is not transparent, and it is at risk of making inconsistent determinations about lease terms. Such inconsistency would undermine its credibility and ability to better ensure a fair return on oil and gas resources. Additionally, Interior has not clearly documented the justifications and analysis supporting changes to lease terms, including royalty rate increases. As a result, the department’s decisions to change lease terms are not transparent and, without documentation of these decisions, its future efforts to change rates may be impeded. To better ensure that the government receives a fair return on its oil and gas resources, we recommend that the Secretary of the Interior take the following three actions: Take steps, within existing authority, to revise BLM’s regulations to provide for flexibility to the bureau to make changes to onshore royalty rates, similar to that which is already available for offshore leases, to enhance Interior’s ability to make timely adjustments to the terms for federal onshore leases. Establish documented procedures for determining when to conduct periodic assessments of the overall fiscal system. Such procedures should identify generally when such an assessment should be done or what changes in the market or industry would signal that such an assessment should be done. Additionally, the assessment should include determining how the government’s share of revenue from the federal oil and gas fiscal system and the attractiveness for oil and gas investors in each federal oil and gas region compare with those of other resource owners. Establish documented procedures for determining whether and how to adjust lease terms for new offshore leases, including documenting the justification and analysis supporting any adjustments. We provided a draft of this report to Interior for review and comment. Interior generally agreed with our findings and concurred with our recommendations. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of the Interior, the 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 members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix II. In addition to the individual named above, Jon Ludwigson (Assistant Director), Janice Ceperich, Glenn Fischer, Cindy Gilbert, Michael Kendix, Alison O’Neill, Dan Royer, Kiki Theodoropoulos, and Barbara Timmerman made key contributions to this report. | In fiscal year 2012, companies received over $66 billion from the sale of oil and gas produced from federal lands and waters, and they paid $10 billion to the federal government for developing these resources according to the Department of the Interior. The federal government seeks a fair return on its share of revenue from leasing and production activities on federal lands and waters through the federal oil and gas fiscal system. Under the fiscal system, companies pay royalties, rents, and other payments--payments generally specified in lease terms-- and taxes on profits from the sale of oil and gas produced from federal leases. In May 2007, GAO found, based on several studies, that the government received one of the lowest percentages of value of oil and gas produced in the world. In September 2008, GAO found that Interior had not evaluated the federal oil and gas fiscal system for over 25 years and recommended that a periodic assessment was needed. GAO was asked to review Interior's collection of oil and gas revenues. This report examines steps Interior has taken to ensure the public receives a fair return on oil and gas resources since 2007. GAO reviewed applicable law and regulations; examined prior GAO studies, Interior policies and documents; and interviewed officials. Interior has taken some steps intended to help ensure a fair return on federal oil and gas resources but does not have documented procedures for periodically conducting assessments of the fiscal system. Specifically, Interior has taken the following steps: Changed offshore lease terms and considered but has not changed onshore lease terms . Interior changed certain offshore lease terms-- including raising royalty rates twice in response to changing market conditions. For onshore resources, which are subject to many of the same market conditions, Interior has considered but not made changes to royalty rates. Interior officials are currently unable to make timely adjustments to onshore royalty rates. Current regulations generally provide for a fixed onshore royalty rate that limits Interior's flexibility to make timely adjustments. Contracted for studies of various aspects of the fiscal system . Interior contracted for three studies examining its fiscal system including a study done in 2011, in response to GAO's September 2008 report that compared the U.S. government's oil and gas fiscal system to other resource owners. Interior officials said the reports provided some useful information such as how fiscal terms in the United States compared to other resource owners. Interior is examining potential regulatory changes that could simplify royalty payments . Interior is examining potential regulatory changes that could simplify royalty payments. GAO found in the past that complex valuation regulations can result in inaccurate royalty payments made by industry, and this could increase costs to ensure accurate royalty payments because of the need for potentially detailed and timeconsuming audits of records. In May 2011, Interior published the Advance Notice Of Proposed Rulemaking for a proposed rule currently undergoing internal review. According to officials, the proposed rule is expected to be published in 2014, and officials explained that it took several years due to factors including the complexity of oil and gas valuation. Interior does not have documented procedures in place for determining when to conduct periodic assessments of the fiscal system. Although Interior recently contracted for such an assessment, it was the first in well over 25 years. Without documented procedures, Interior will not have reasonable assurance that it will consistently conduct such assessments in the future and, without periodically conducting such assessments, Interior cannot know whether there is a proper balance between the attractiveness of federal leases for investment and appropriate returns for federal oil and gas resources, limiting Interior's ability to ensure a fair return. Further, Interior does not have documented procedures for determining whether and how to make changes to new offshore lease terms. Without documented procedures for determining whether and how to make changes to new offshore lease terms, Interior's rationale is not transparent and may result in inconsistent decisions. Such inconsistencies would undermine Interior's credibility and ability to better ensure a fair return on federal oil and gas resources. GAO recommendations include that Interior establish documented procedures for (1) periodically assessing the fiscal system and (2) determining whether and how to change new offshore lease terms. Interior concurred with GAO's recommendations. |
The Iraq Liberation Act of 1998 authorized U.S. assistance to support a transition to democracy in Iraq in key areas, including radio and television broadcasting. In 1999 President Clinton designated the Iraqi National Congress (INC) as eligible to receive assistance under the act. INC was formed in the early 1990s when the two main Kurdish militias—the Kurdistan Democratic Party and the Patriotic Union of Kurdistan— participated in a June 1992 meeting of dozens of opposition groups in Vienna. INC subsequently developed into a broad-based coalition of political organizations opposed to Saddam Hussein. In 1999, INCSF was established as a foundation to provide support to INC and to provide an organizational structure for State’s funding of INC. A seven-member board of directors (the INC Leadership Council) governed INCSF. INCSF was headquartered in London, England, until the end of the war, when its operations were relocated to Baghdad. During its cooperative agreements with State, INCSF also maintained field offices in Washington, D.C.; Damascus, Syria; and Tehran, Iran. In April and May 2003, INCSF began the process of relocating its offices to Baghdad. From the beginning of its relationship with State, INCSF’s plans for broadcasting into Iraq represented one of its major initiatives, along with plans for resuming publication of a newspaper INC had established in 1992, participating in Department of Defense training programs, and establishing humanitarian and information collection programs. INCSF envisioned radio as a key medium for the dissemination of information to the Iraqi people. It planned to reestablish Radio Hurriah and have a signal receivable in Iraq by early 2001. To expand the area of coverage, INCSF also planned to purchase a high-power transmitter in Iraq. Radio broadcasting was to focus on news, current affairs, and programs dedicated to democracy and human rights. Based on its prior television experience (from August 1993 to August 1996, INC operated a television production and transmission facility in Iraqi Kurdistan), INCSF’s plans for Liberty TV included setting up a studio in London and using satellite equipment to broadcast directly to Iraq. Planned programming included news, current affairs, and programs censored by the regime in Baghdad. Beginning in March 2000, State entered into a series of cooperative agreements with INCSF that included funding totaling nearly $33 million as of September 2003, but most of this funding came under agreements and amendments provided at irregular intervals, involved some retroactive funding, and were short-term and thus affected INCSF’s ability to broadcast. Table 1 describes State’s cooperative agreements with INCSF in further detail. Agreement 1 laid the groundwork for initial planning, and Agreement 2 described what INCSF hoped to achieve in the broadcasting area. These goals included (1) setting up a satellite television facility in London to broadcast directly into Iraq and (2) planning and preparing to resume broadcasting of Radio Hurriah from inside Iraq and via satellite and the Internet. From March 2000 through May 2002, State provided about $17 million to INCSF through the first two cooperative agreements and amendments and Agreement 3 (the 2-month “bridge grant” for April and May 2002). Of this $17 million, only limited funding was for Radio Hurriah, largely because an acceptable location for a transmitter could not be found. About $5 million was earmarked for Liberty TV broadcasting activities, which included hiring staff and establishing studio operations. Liberty TV broadcasting actually began in August 2001. However, upon becoming operational, Liberty TV encountered technical problems that forced it to broadcast from the United States based on a signal transfer from London. Liberty TV had goals of original broadcasting for 24 hours a day, but at the peak of its operations it only had original broadcasts of 4 hours. It went off the air on May 1, 2002, because of funding disputes between State and INCSF which, according to an INCSF representative, left the INCSF seriously short of funds to pay its bills. After the bridge grant expired on May 31, 2002, State and INCSF did not conclude a new agreement until November 2002. Funding in that new cooperative agreement (Agreement 4) and its amendments included about $4.67 million for (1) restarting Liberty TV and (2) “pre-award” costs incurred by INCSF for the period not under the agreement, including salaries for Liberty TV staff retained by INCSF. In the course of the relationship between the two parties, State several times offered INCSF longer-term agreements that INCSF would not accept. For example, for the period March 2000 through February 2001, State and INCSF had concluded the first two cooperative agreements totaling about $4.27 million. In April 2001, as an alternative to short-term amendments to Agreement 2, INCSF requested a new 5-month agreement totaling $29 million that included funding for 24-hours-a-day satellite television broadcasting, installation of a small transmitter in Iraq, and 24-hours-a-day radio broadcasting from inside Iraq. State rejected the proposal. Similarly, in September 2001, INCSF requested $23 million over 5 months. According to the proposal, Liberty TV operations would be expanded to 24 hours a day, and radio operations would be initiated via a transmitter inside Iraq. State rejected INCSF’s proposal but in late September 2001 made a counteroffer of $8 million for a 5-month cooperative agreement. State renewed the same offer in early November 2001. While emphasizing that it was not prepared to fund INCSF activities inside Iraq, State did offer to fund a series of activities, including publication of the newspaper, satellite TV broadcasting, information collection analysis, and startup of radio broadcasting using a transmitter based in Iran. INCSF declined State’s offer. Three main concerns affected State’s funding decisions for INCSF and thwarted the parties’ ability to negotiate and conclude long-term funding agreements: concerns over INCSF’s financial management and accountability based largely on the results of audits of INCSF; the desire of INCSF to operate inside Iraq, which was inconsistent with U.S. policy; and State’s increasing concerns about the appropriateness and merits of funding INCSF’s information collection program. State officials acknowledged that the use of frequent short-term amendments to the cooperative agreements, plus the substantial period of time that an agreement was not in force in 2002, significantly complicated management of the program and made it difficult for INCSF to accomplish its objectives. However, State officials said that these arrangements were necessary in view of the financial management, policy, and operational issues that arose during the program. INCSF repeatedly claimed that the short-term nature of State’s funding led to financial problems in the organization and disrupted Liberty TV’s ability to pay its bills. In the very early stages of State’s agreements with INCSF, State received strong indications that INCSF had inadequate controls over cash transfers. For example, in 2000, a CPA firm reviewed INCSF’s controls as part of Agreement 1. The review identified concerns about INCSF’s travel reimbursement procedures, use of non-U.S. flag-carriers, and its cash payment practices. Also that year, State notified INCSF that it needed to rectify certain compliance issues before it could draw down funds. These issues included INCSF’s lack of proper documentation to support expenditures and the questionable use of cash payments. In early 2001, another CPA audit examined INCSF’s operations as part of State’s agreements and identified significant noncompliance and control issues affecting implementation of Agreement 2. According to a State document, the auditor “appear to confirm what we suspected—that the INCSF is not complying with the myriad of regulations that grantees are required to comply with.” Concern grew in State that there were serious mishandling of money issues that needed to be examined in INCSF to avoid a potentially embarrassing situation for the administration and for State. In early 2001, some allegations about fraud within INCSF also circulated within State. State’s concerns about accountability and the potential for misuse of funds led to an audit of INCSF by State’s Office of the Inspector General (OIG) in mid- 2001. The OIG audit covered the initial $4.3 million in awards to INCSF under Agreements 1 and 2. The OIG found serious financial management and internal control weaknesses, particularly in the cash management aspects of INCSF’s information collection program. The OIG also found that INCSF had an inadequate accounting and financial management structure, insufficient accounting staff, and inadequate banking procedures and that State had not created a total budget for the second cooperative agreement incorporating the funding that had been awarded to the INCSF up to that point. The OIG questioned approximately $2.2 million in INCSF costs. As a result, the OIG recommended that State withhold, or at least restrict, future funding to INCSF until it implemented adequate and transparent financial controls. The OIG also recommended that INCSF acquire expert financial management assistance to set up a standardized accounting system, hire a financial officer, establish cash management procedures, develop written accounting policies and procedures, and incorporate into its agreements with State a budget that accurately reflected approved costs. Although several accounting and internal control weaknesses were identified, OIG officials said that they found no evidence concerning the prior accusations of fraud. An INCSF representative acknowledged that it had financial management and accountability weaknesses in the early stages of the agreements. However, the representative believed that INCSF made significant improvements in late 2001 and early 2002 to correct the weaknesses and to respond to the OIG audit. OIG officials said that their audits of INCSF were done in accordance with generally accepted government audit standards and that their work was similar to other grant and cooperative agreement audits they had conducted. From the beginning of its relationship with INCSF, State had policy concerns that ultimately affected funding decisions and plans for several programs, including Radio Hurriah and Liberty TV. At the beginning of the cooperative agreements with INCSF, State officials said that the U.S. government had adopted a general policy of prohibiting INCSF operations inside Iraq. State officials said that the presence of U.S.-funded INCSF staff within Iraq could open the door to potentially disastrous diplomatic situations if INCSF operatives were caught and/or killed by Iraqi troops. INCSF resisted this policy. From INCSF’s perspective, working inside Iraq was vital for the success of many of its programs. To begin radio broadcasting inside Iraq, INCSF wanted to purchase and install a suitable transmission tower within the country. The INCSF also wanted the existing information program to collect data on the Hussein government’s military, political, and economic activities for input into its newspaper, Al Mutamar, and for Liberty TV broadcasts. In addition, INCSF believed that elements of that data could be used in its diplomatic activities to reinforce views of the international community that the Hussein government represented a danger to its neighbors. Further, INCSF saw the program as an effort to gather information on the government’s alleged weapons of mass destruction programs and its ties with international terrorist groups. However, State maintained its position, refusing to fund radio activities inside Iraq and limiting its funding of information collection to areas outside and bordering Iraq. In commenting on a draft of this report, State noted that, as the grantor, it had entire discretion to determine whether a grant to the INCSF would further and be consistent with U.S. government policies, and to condition any such grant to ensure that it would. State further believed that as a grantee, INCSF was an instrument of U.S. government policy, and, as such, was not in a position to disagree with State on how State’s funds could be used. In addition to concerns about operating inside Iraq, State’s OIG had questioned the nature of INCSF’s information program and its lack of controls over cash transactions, particularly those that were used as part of activities in the field. In State’s view, the potential for fraud in an officially State-sponsored program posed a risk that State was not prepared to take. Finally, State officials doubted the value of the information obtained through the program, a claim that the INCSF vigorously disputed. As these financial management and policy issues were emerging, State and INCSF continued their efforts to conclude new long-term agreements, with little success. For example, in fall 2001, State offered INCSF an $8 million agreement for 5 months that would provide television and radio funding but did not fund operations in Iraq. INCSF did not accept State’s proposal, largely because it held firm to the position that not letting INCSF operate inside Iraq would result in the disintegration of the organization. In February 2002, INCSF proposed another long-term agreement totaling $37.5 million covering March through December 2002. As part of that proposal, INCSF believed that several elements of INCSF’s mission needed to be addressed by both parties, including the lack of a complete INCSF communications strategy without a radio program and the need for a higher-quality television operation. In addition, INCSF believed it was imperative that its information collection program be expanded to ensure timely and reliable intelligence on developments inside Iraq and provide critical information on Saddam’s alleged weapons of mass destruction program and involvement in international terrorism. State determined around mid-March that the proposal was incomplete and, because INCSF indicated that it needed funds quickly, recommended that the overall proposal be considered in stages, with the first priority to get current operations in order, including Liberty TV. In late March 2002, State said it stood ready again to discuss a cooperative agreement for 9 months (April through December 2002), with an initial period funded at $3.6 million for 3 months to provide funding continuity until full accord on the elements of the agreement could be achieved. Concerning INCSF’s continuing proposals for starting up radio operations, State said that INCSF’s proposals were no longer a priority because (1) the Kurdish Democratic Party and the Patriotic Union of Kurdistan opposed the plans and (2) both of those groups operated radio stations in Iraq, and the United States funded its own Radio Free Iraq. INCSF believed that State’s response to its proposal called into question State’s commitment to a new relationship and its general commitment to the INCSF. Of significant concern to INCSF were State’s demands for a short-term (3-month) funding period, as well as its continuing lack of support for a radio station. In lieu of a long-term agreement, State notified INCSF that it planned to award Agreement 3, referred to as the “bridge grant,” for 2 months (April through May 2002). State viewed its proposal as an austerity budget that would enable INCSF to get its house in order, including Liberty TV, and notified INCSF that what State considered as cost overruns under the prior grant would be handled with one or more “mop-up” amendments. As discussed below, INCSF regarded its unpaid bills as resulting from a failure on State’s part to meet its funding obligations. State’s initial proposal for the bridge grant caused great concern in INCSF for several reasons. First, it called for “heightened federal stewardship,” including on-site State participation in INCSF’s budget management and approval of all costs. INCSF believed that such conditions were unjustified and unacceptable, stating that it had already taken a number of steps to improve financial management consistent with the OIG recommendations. According to INCSF, it had hired internal accounting staff and a management consultant and implemented new and consolidated accounting systems. It also said that new procedures for documenting cash transactions were being installed. According to OIG officials, in a follow-up audit in mid-2002, OIG found that INCSF had taken several steps to implement recommendations for improved financial management and controls but had not fully implemented them. According to OIG officials, limited funding by State contributed to INCSF’s difficulties in improving its financial systems. INCSF said that such funding made it difficult for INCSF to pay for implementation of a new accounting system and contributed to delays in making reforms of the foundation’s accounting systems. Discussions between the two parties concerning the bridge grant further illuminated the financial issues faced in the program. Specifically, at the end of April 2002, INCSF complained to State that it had been operating for a month without a funding agreement and had incurred a $2 million shortfall. According to INCSF, that shortfall occurred because State had erroneously estimated INCSF’s monthly core operating costs at $850,000 to $900,000 during implementation of Agreement 2, whereas INCSF believed it was operating under a previously approved budget with estimated costs of $1.24 million. Implications for Liberty TV were particularly serious. Because of its financial shortcomings, INCSF had received notice that its service provider would terminate service for Liberty TV on April 30 because INCSF had not paid its bills. On May 1, 2002, Liberty TV stopped its broadcasting operations. State subsequently modified its proposal and signed the bridge grant agreement on May 17, awarding $2.4 million for the period April to May 2002 but deleting requirements for its on-site participation in budget management and approval of costs. Although the grant budget included funding for Liberty TV, broadcasting did not resume. INCSF operated without an agreement from June until November 2002, largely due to an impasse between the two parties over the information collection program. At a meeting of top INCSF and State officials in late May 2002, State officials said that the department would no longer fund the information collection program. However, State offered INCSF a new 7- month cooperative agreement totaling $8 million for the period June 10 through the end of 2002 that included about $4.2 million for Liberty TV and represented a substantial increase over the $400,000 per month funding levels previously supported. According to an INCSF representative, INCSF reacted negatively to the proposal for three reasons. First, INCSF negotiators received the proposal in the early morning of May 29, 2002, the day set for U.S./INCSF negotiations and 2 days before the bridge agreement was due to expire. Second, the proposal left INCSF with no funding for operations for the 10 days between the end of the bridge grant on May 31, 2002, and the effective date of the proposed new agreement on June 10, 2002. Third, and most important, INCSF was not willing to accept an agreement without funding for the information collection program. INCSF documents indicated that INCSF was in serious financial difficulty by October 2002, with staff being evicted and landlords threatening legal action. Several freelance employees of Liberty TV were released, but Liberty TV core staff were retained in the belief that State remained committed to Liberty TV broadcasting. In an attempt to successfully conclude a new agreement, INCSF sent a draft budget proposal to State that would cover costs from June through December 2002 and envisioned renewed Liberty TV broadcasting as soon as November 2002. State noted, however, that INCSF’s proposed budget differed in significant ways from State’s proposals and that modifications were needed for it to serve as a basis for a new agreement. State and INCSF were able to successfully conclude a new agreement in November 2002, in part because the Department of Defense agreed to take over funding of the information collection program. The new agreement included about $2 million in funding for Liberty TV costs incurred from June through the end of January 2003. However, Liberty TV did not become operational, primarily due to disagreements between State and INCSF over the amount of the funding provided and the time period of State’s commitment. Specifically: INCSF expressed concern that the new agreement did not include an additional $1 million it requested for long-term investment costs for television operations. State attributed this decision to its unwillingness to fund long-term capital costs and the uncertainty of congressional approval of additional funding for INCSF beyond January 2003. State indicated that one possible option for INCSF might include reducing costs of other budgeted items to cover television costs for one additional month but noted that option did not provide the type of commitment that INCSF was seeking. According to INCSF documents and an INCSF representative, the continued negotiations and lack of agreement over costs and commitment time periods for funding Liberty TV delayed resumption of broadcasting. INCSF told State in November 2002 that it was not prepared to begin Liberty TV broadcasts only to go off the air in 3 months. According to an INCSF representative, Liberty TV technically could have renewed limited broadcasting at this time because INCSF had retained many of the professional television staff on its payroll. However, INCSF’s representative said it was not willing to run an operation that, if taken off the air once again due to a shortage of funding, would further damage INCSF’s credibility. INCSF continued planning for options to restart Liberty TV. INCSF proposed that Liberty TV rent fully operational facilities on a short-term basis rather than invest in its own facilities. Quotes for rental facilities were obtained, and one organization was tentatively selected. In February 2003, State extended the agreement to July 2003, and $7 million was also added to INCSF’s funding, including about $2.67 million for television operations. INCSF notified State that it had signed two letters of intent with contractors that it hoped would get Liberty TV on the air: one for television and newspaper premises and another for television satellite capability. An INCSF official believed that Liberty TV could be operational 2 to 3 days after signing the satellite contract. According to an INCSF representative, these contracts were never signed because the drawdown of funds on the new February amendment was not received until March 12, just a few days before the war began. INCSF at this point developed yet another strategy: to open offices and install a television and radio station in northern Iraq for a 4-month period commencing upon the issuance of an Iraqi Sanctions Regulations License. According to an INCSF representative, this plan also fell through as the war began, and INCSF decided to move its operations to Baghdad. In early April 2003, State began working with INCSF to support its transition to Iraq, including the redirection of funding already committed to INCSF programs. According to State, those programs should include radio and television broadcasting at a time when it was critically important that Iraqis opposed to Saddam’s regime take control of the airwaves. State funding of INCSF continued through September 2003 and funds were available for television operations. According to an INCSF representative, INCSF decided in May 2003 that it did not have a dependable offer from the Department of State to resume Liberty TV broadcasts. Echoing a similar decision in November 2002, INCSF wanted to avoid a second shutdown of Liberty TV due to a gap in State funding. INCSF instead decided to concentrate its energies on establishing offices and hiring support personnel in Baghdad. The Department of State and INCSF provided written comments on a draft of this report (see apps. I and II). State said that our draft report provided a generally accurate account of the complex and difficult relationship that existed between the Department of State and INCSF. State said its actions with respect to INCSF were responsible and fully in accordance with U.S. law and administration policy. State also said it believed our observation that State and INCSF, through their inability to work together to restart Liberty TV, missed a chance to reach the Iraqi people at critical times prior to and during the war in Iraq lay outside the scope of our review. We disagree and believe that it is important to lay out the potential consequences of not successfully restarting Liberty TV, particularly in view of the significance that both State and INCSF attributed to television broadcasting into Iraq. State also provided some technical comments and suggested wording changes, which we have incorporated into the report as appropriate. INCSF agreed that due to the inability of State and INCSF to work together to restart Liberty TV, important opportunities to broadcast to the Iraqi people were lost. INCSF also provided technical comments on some of the points raised in our draft report concerning financial management, negotiation with State, and Liberty TV funding. We incorporated those comments into our report as appropriate. To document the history of State’s funding for INCSF programs and the issues affecting its funding decisions, we reviewed State’s cooperative agreement files. We also reviewed documentation gathered by the OIG as part of its audits. We also obtained files and other documentation from INCSF’s consultant. The documentation we reviewed included proposed and finalized cooperative agreements and amendments, letters of correspondence between State and INCSF, and e-mail traffic. We met with officials of State’s Bureau of Near Eastern Affairs and Bureau of Administration and also officials in State’s OIG who were responsible for audits of INCSF. In addition, we met with the consultant hired by INCSF to help improve the foundation’s accounting and financial management systems, and we obtained information from INCSF’s former controller and its manager of Liberty TV operations. The funding and related program data in this report were contained in State’s cooperative agreement files, OIG audit files, and documentation provided by INCSF’s consultant and its former controller and Liberty TV manager. Based on our examination of those data and discussions with State and INCSF’s consultant, we concluded that the documents we were able to obtain were sufficiently reliable for purposes of this engagement. We conducted our review from September 2003 to April 2004 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to the Secretary of State 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 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) 512-4128. Janey Cohen, Richard Boudreau, John Brummet, and Lynn Moore 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. | As part of the efforts by the United States to oust Saddam Hussein, a critical element of U.S. policy included funding the Iraqi National Congress as the lead Iraqi opposition coalition. In 1999, the Iraqi National Congress Support Foundation (INCSF) was established to provide an organizational structure for Department of State funding. From March 2000 until September 2003, the Department of State funded several INCSF programs, including television broadcasting. INCSF's broadcasting goals included broadcasts into Iraq focusing on providing the Iraqi people unbiased news and information and updating them on efforts to bring democracy to Iraq. GAO was asked to review (1) the history of the Department of State's funding of INCSF broadcasting activities and (2) the key issues affecting State's funding decisions. State's funding of INCSF programs totaled nearly $33 million for the period March 2000 through September 2003. This money was made available through 23 cooperative agreements and amendments that provided shortterm funding at irregular intervals. The funds were provided for several purposes, including establishing new satellite television capability (Liberty TV), newspaper publication, and information collection programs. About $10 million was earmarked for Liberty TV broadcasting activities, which included hiring staff, establishing studio operations, and actual broadcasting. There were several periods during which State did not have an agreement to fund INCSF's program, causing State to later fund INCSF activities retroactively. State's funding approach affected INCSF's ability to conduct television broadcast operations. Liberty TV broadcasted from August 2001 to May 2002, when funding shortages caused by funding and policy disputes between State and INCSF resulted in termination of broadcasting. Attempts to restart Liberty TV failed due to a combination of factors, including continued disagreements between INCSF and State over funding requirements for the broadcasts, the rapidly changing conditions associated with the war in Iraq, and INCSF's relocation of operations to Iraq in May 2003. INCSF repeatedly complained to State that the short-term nature of the funding agreements made it difficult to run an effective television broadcasting operation. State cited three reasons why it was unable to reach long-term funding agreements with INCSF: (1) State was concerned about INCSF's accountability for funds and operational costs, based largely on results of audits of INCSF, and remained concerned even after INCSF took steps to improve its accountability during late 2001 and 2002; (2) INCSF resisted U.S. government policy prohibiting INCSF operations inside Iraq; and (3) State questioned both the usefulness of INCSF's information collection program and whether it was appropriate for State to fund it. (In May 2002 State decided to drop its funding for the information collection program, effective August 2002.) Against this background and the sporadic funding arrangements that characterized the program, the process of proposal and counterproposal continued without producing agreements that could lead to restarting Liberty TV. Through their inability to work together to restart Liberty TV, State and INCSF missed a chance to reach the Iraqi people at critical times prior to and during the March 2003 war in Iraq. |
At retirement, participants in 401(k) plans enter the distribution—or “spend-down” —phase during which they typically use their savings to meet their retirement needs. Typically, participants can choose to take a payment of their entire account balance, referred to as a “lump sum” payment, or they can roll their account over to an Individual Retirement Account (IRA) to preserve tax advantages on their savings. In contrast, defined benefit plan (DB) participants must be offered an annuity, though a lump sum payment can also be offered. Participants who receive lump sums generally must decide on their own how best to make their money last throughout retirement. Some participants have access to products and services through their plan that can help them turn their savings into a retirement income stream. In 401(k) plans, these generally fall into two categories: Withdrawal options are a series of fixed or variable payments from a participant’s account. Participants may be able to set monthly payments as a fixed dollar amount, a percent of their account balance, or according to systematic withdrawal strategies designed— but not guaranteed—to stretch their savings over a set period of time or for life. Annuities are guaranteed payments, normally purchased through a contract with an insurance company for either a set period or for the participant’s life. Annuities come in a variety of forms. For example, deferred annuities enable the participant to delay the start date of payments until as late as age 85. Under the Internal Revenue Code (IRC), plan sponsors must comply with required minimum distribution (RMD) provisions under which participants age 70 ½ or older in 401(k) plans must receive minimum annual payments from their plan savings based on their account balance and remaining life expectancy. Plan sponsors may have their service provider, such as their record keeper or a third party administrator, administer RMDs by calculating and issuing payments to plan participants (see fig. 1). Typically, participants age 70 ½ or older who have not self- initiated withdrawals will automatically receive payments administered by their record keeper or third party administrator pursuant to RMD calculations. For participants who make insufficient withdrawals, the record keeper will typically issue payments for the amount of the difference to meet RMD requirements. Participants may face various risks as they enter retirement, some of which are new and different from those they may have become accustomed to as they accumulated savings. For example, as shown in figure 2, during both their working and retirement years participants may face the risk that poor investment returns will lead to lower than expected savings and the risk that inflation may erode the value of their savings as prices rise. Additionally, poor investment returns just prior to or just after retirement can substantially affect how long their savings will last. This is known as “sequence of returns” risk and it can have a serious effect on retired participants who have less ability to make up for lost of savings through increased contributions or longer employment. Participants who use a portion of their savings to purchase an annuity face the risk that low interest rates at the time of their purchase will negatively affect the amount of guaranteed income they can secure. Later in retirement, participants may also face cognitive decline that affects their ability to manage their savings. In retirement, participants also face “longevity” risk; that is, the risk that they will outlive their retirement savings. Longevity can be particularly challenging for participants because it poses the overarching risk that the longer a participant lives in retirement, the greater that participant is exposed to other retirement risks. For example, increased longevity can mean that there is a greater range of potential future investment outcomes and a longer period over which inflation may erode the purchasing power of available savings. Figure 3 may partially reflect the effects of longevity risk, as those over 75 are more likely to find themselves near or below the poverty line. Plan sponsors may hire companies to provide services and products that help participants use their savings to generate lifetime income and achieve other retirement goals. As shown in figure 4, service providers, such as legal counsel and investment advisers may help plan sponsors select appropriate lifetime income options for their participants. Record keepers play a particularly important role with respect to in-plan lifetime income options. They both administer withdrawal options for participants and build and maintain the record keeping platforms on which annuities are sometimes made available for plan sponsors to adopt for their participants. Plan sponsors may also contract with one service provider to provide multiple services to the plan. For example, a plan might contract with a record keeper that is also an insurance company providing both record keeping and annuities for participants, among other services. As of December 31, 2014, 401(k) plans represented more than $4 trillion in assets, nearly 500,000 plans, and more than 60 million participants. As shown in table 1, small defined contribution (DC) plans—those with less than $10 million in assets—represent about 95 percent of DC plans while large plans—those with assets greater than $200 million—make up a majority of assets and participants. We previously reported that other nations with account-based retirement systems have taken steps to help participants develop a lifetime income strategy. Five of the six countries we reviewed generally ensured that participants could choose among a lump sum, a withdrawal option, or an annuity. All six developed innovative approaches and strategies to help mitigate the financial risks participants face in securing adequate retirement income. EBSA is the primary agency responsible for protecting pension plan participants from misuse or theft of their pension assets as specified under Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Other statutory provisions applicable to 401(k) plans, such as minimum distribution requirements, are also set out in the Internal Revenue Code. ERISA is generally enforced by DOL’s EBSA, while Treasury’s IRS enforces applicable provisions of the Internal Revenue Code and is responsible for determining if plans qualify to receive preferential tax treatment. Treasury’s Office of Tax Policy develops and implements tax policies and programs and reviews regulations and rulings to administer the Internal Revenue Code. State insurance regulators are responsible for enforcing state insurance laws and regulations, which typically involves reviewing insurance products and their rates and examining insurers’ financial solvency and market conduct. To carry out its responsibilities, EBSA issues regulations and guidance; investigates complaints involving plan sponsors, fiduciaries, and service providers; seeks appropriate remedies to correct legal violations; and pursues litigation when it deems necessary. As part of its mission, DOL is also responsible for assisting and educating plan sponsors to help ensure the retirement security of workers and their families. Title I sets standards of conduct and requires accountability for the people who run or provide investment advice to plans, known as plan fiduciaries, and requires administrators to provide participants with certain disclosures, including periodic benefit statements as well as summary plan descriptions. In recent years, DOL and Treasury have taken a number of steps to protect beneficiaries by attempting to help plan sponsors and their providers offer lifetime income options. For example: In 2008, EBSA promulgated a “safe harbor” that describes actions plan fiduciaries can take to satisfy their fiduciary responsibilities when selecting an annuity provider. In 2010, Treasury and EBSA published a request for information (RFI) on expanding lifetime income options in 401(k) plans and received 793 submissions. In 2012, IRS explained how a plan sponsor with both a defined benefit plan and a defined contribution plan (such as a 401(k) plan) can allow participants to use their defined contribution account balance to increase their defined benefit plan life annuity payments. In 2013, EBSA published a notice that it was considering a proposal requiring participant benefit statements to include an illustration of 401(k) account balances as a stream of lifetime income payments. In 2014, IRS amended finalized a rule to allow for the use of qualifying longevity annuity contracts (QLAC) in 401(k) plans, and it amended its RMD regulations to provide for specified annuities beginning payments after the participant reaches age 70 ½ to not be included when calculating RMDs. That same year, EBSA and IRS also clarified how a deferred annuity—an annuity that makes payments that begin in the future rather than at the time of purchase—can be included in a target date fund (a common default investment used by 401(k) plans). DOL, Treasury, and the Administration have also taken steps that may help participants implement a retirement strategy. On April 8, 2016, DOL promulgated regulations that treat as a plan fiduciary anyone who furnishes investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner; establishes that such investment advice must be in the best interest of participants; and provides for participants to hold those who furnish them investment advice to account under ERISA. Furthermore, in an action that could have an impact on those participants who do not make decisions about their 401(k) account, in September, 2015, President Obama issued a Behavioral Science Insights Policy Directive to encourage the design of government policies that better serve the American people. The President noted that automatic enrollment and escalation in retirement savings plans have made it easier for Americans to accumulate retirement savings, and he called for federal agencies, applying behavioral science insights, to give particular consideration to the selection and setting of default options when individuals are presented with choices. Record keepers reported that most plans covered by the questionnaire did not offer withdrawal options, which unlike annuities, are 401(k) plan account distributions that may be designed, but are not guaranteed, to last for life. In addition to providing lump sums, record keepers reported that roughly a third of plans covered by our record keeper questionnaire adopted some form of a withdrawal option, including installment payments, systematic withdrawals, or managed payout funds. We sent a questionnaire to a non-generalizable sample of plan record keepers that represented about a quarter of the 401(k) plan market at the end of 2014. Plans generally do not have to provide participants with distribution options that will help them secure lifetime income in retirement. Plans can provide lump sum distributions of participants’ entire account balances and remove participants from the plan after participants reach the plan’s retirement age. However, when made available by plans, withdrawal options allow participants access to their 401(k) plan account throughout retirement. Withdrawal options can be structured in a variety of ways, some designed, but not guaranteed, to stretch a participant’s savings throughout retirement (see table 2). Record keepers reported that mid-size and large plans covered by our questionnaire had the highest adoption rates of withdrawal options and were also more likely to make sophisticated withdrawal options available to participants. As shown in figure 5, these mid-size and large plans had higher adoption rates of both installment payments and systematic withdrawals than small plans. One plan adviser we interviewed suggested this variation in adoption rates is due to small plans’ persistent view of 401(k) plans principally as an asset accumulation vehicle and a lack of focus on helping participants with their retirement income needs. Further, this plan advisor and other industry stakeholders noted that sponsors of larger plans are better positioned to negotiate reductions in, or waivers from, the fees record keepers charge for administering withdrawal options, which could affect their adoption. Similarly, figure 5 shows record keepers reported that mid-size and large plans covered by our questionnaire had at least twice the adoption rate of systematic withdrawal options as small plans. Industry stakeholders indicated that systematic withdrawal options are generally more prevalent among larger plans because they have more experience offering withdrawal options. These industry stakeholders explained that because of this greater level of experience with offering withdrawal options, larger plans may also be more comfortable offering more sophisticated options like systematic withdrawals. Record keepers reported that a few plans covered by our questionnaire adopted managed payout funds, but unlike other withdrawal options, such as installment payments and systematic withdrawals, that are available among all the record keepers who responded to our questionnaire, industry stakeholders told us managed payout funds are not readily available as an in-plan option. In addition, industry stakeholders told us that managed payout funds are found primarily outside of 401(k) plans in the retail market. Although RMDs have not been identified by EBSA or IRS as a default systematic withdrawal option, RMDs can serve that purpose for retirees who remain in the plan beyond age 70 ½ if they are calculated to provide minimum amounts based on a retiree’s life expectancy and account balance. Plans may and do also adopt other methods that satisfy the RMD provisions. Withdrawals can satisfy those provisions as long as the distributions from those options are as much or more than the applicable RMDs, such as when plans only offer lump sum withdrawals of the entire account balance. Therefore, the RMD provisions can be met without providing participants with payments based on life expectancy. In fact, industry research has shown that many plans do not allow retired participants to take partial withdrawals; instead, retirees must either withdraw their entire account balance or forgo withdrawing any funds. Further, according to a record keeper, some plans may require participants to take lump sum distributions of their entire account balance before reaching age 70 ½ to avoid having to administer RMDs. Similarly, a lump sum distribution for a participant age 70 ½ or older would also allow a plan sponsor to meet RMD requirements. However, none of these practices help to provide participants with lifetime retirement income. Record keepers reported that about three-quarters of plans covered by our questionnaire did not offer an income annuity. Among the options offered by roughly a quarter of plans in our record keeper questionnaire were fixed immediate annuities, guaranteed minimum withdrawal benefits (GMWB), and deferred annuities (see table 3 for a description of each option). Plans adopt annuity options to allow participants to secure guaranteed income for retirement from their 401(k) plan savings. Annuity options are structured in a variety of ways, such as the timing of its purchase or the beginning of payments, to meet different guaranteed retirement income needs of participants. Record keepers reported that plans covered by our questionnaire most frequently adopted a fixed immediate annuity, a simple and traditional form of annuity benefit found in 401(k) plans that offered annuities. As shown in figure 6, small and mid-sized plans in our review had slightly higher adoption rates than large plans. Some industry stakeholders told us that smaller plans generally have higher adoption rates of in-plan annuity options because they are more likely to use record keepers that are insurers and participate in group annuity contracts. What Are 401(k) Plan Group Annuity Contracts? Record keepers reported that most small plans covered by our questionnaire are funded through the use of group annuity contracts, as shown in Figure 7. Group annuity contracts place a “wrapper” of benefits, namely an annuity or a minimum death benefit, around a bundle of investments that are similar to mutual funds. See Appendix III for an illustration of how group annuity contracts are used as a plan funding mechanism. We previously reported that some plan sponsors may be unaware that their plan is funded through a group annuity contract or may not know to consider the terms of the option. Industry stakeholders explained that even though group annuity contracts have provisions—including terms and rates—for participants to purchase or receive an annuity at retirement, they are principally used as a funding mechanism for insurers to administer plan assets and are therefore rarely used to provide lifetime income. One insurer said that the cost to administer a plan through a group annuity contract is competitive with those administered directly with investment funds. However, we previously reported that fees associated with group annuities can add significant costs to a plan (see GAO-12-325). Industry stakeholders also told us that a fixed immediate annuity is the most straightforward and simple annuity that plans can offer participants because they are typically purchased in one transaction at retirement and provide a specified benefit. Further, one stakeholder noted that fixed immediate annuities are relatively standardized and that their simplicity facilitates comparisons of providers’ products. Several record keepers noted that products that are easier for participants to understand and for record keepers to implement, such as fixed immediate annuities, are more likely to be adopted by plans. Small and mid-sized plans also represented nearly all of the plans from our record keeper questionnaire that adopted GMWBs, a more complicated product introduced in recent years to the in-plan market. Similar to fixed immediate annuities, some stakeholders told us that GMWBs may be more prevalent among smaller plans because insurers, many of whom offer their own GMWB product, often perform recordkeeping and administrative functions for smaller plans and make their own product readily available. Industry stakeholders told us that because GMWBs are a hybrid investment and insurance product, they can provide unique benefits, but can also be difficult to understand. Some stakeholders told us that GMWBs can be beneficial for plans that focus on helping participants accumulate their savings because the product allows participants to remain invested in the stock and bond markets and benefit from potential returns while guaranteeing income against market downturns. Because GMWBs allow participants to benefit from potential returns, the levels of guaranteed minimum withdrawal payments may also increase. In contrast, some other stakeholders indicated that the features of GMWBs that make it a flexible annuity option result in higher costs as compared with other types of annuities. See Appendix II for an illustration of the ownership phases of a typical GMWB. Despite recent agency actions to help facilitate the use of some types of deferred annuities, plan adoption of this form of annuity is limited. Record keepers reported that less than 1 percent of plans covered by our record keeper questionnaire had adopted any deferred annuity option. Treasury recently promulgated regulations on the use by plans of QLACs, a type of deferred annuity. Two insurers told us that they have begun to offer QLACs to plans, but the products are relatively new to the market. Accordingly, record keepers reported that that no plans covered under our questionnaire had adopted QLACs as an in-plan option. Similarly, DOL recently affirmed that a deferred annuity embedded in a target date fund (TDF) can be used as a qualified default investment alternative (QDIA), but industry stakeholders told us that few service providers have developed these products and, plan adoption has been very limited. Industry stakeholders also told us that they expect adoption of deferred annuities, such as QLACs and deferred annuities embedded in target date funds, to increase in the future as more providers introduce their products to the in-plan market and more plans adopt them as a default solution. Record keepers reported that less than 1 percent of plans covered by our questionnaire adopted an annuity shopping platform to help participants select and buy an annuity outside the plan using rollover funds. Annuity shopping platforms allow participants to compare and shop for annuities from competing insurers. They can be offered in-plan, but one provider told us that they generally are not because of sponsors’ concerns about the fiduciary responsibilities associated with insurer selection. The provider also suggested that the annuity shopping platform to select and buy an annuity outside the plan using rollover funds is the easiest option for plans to facilitate participant access to guaranteed lifetime income options because, among other reasons, sponsors do not have to assume the fiduciary responsibilities associated with insurer selection. Industry stakeholders and Treasury officials indicated that many plans lack partial annuitization options, which means many participants who have access to an annuity option through their plan must either annuitize their entire account balance or none of it. Agency officials and industry stakeholders have said that allowing participants to partially annuitize their account balance helps participants to combine multiple lifetime income options and purchase only the amount of annuity that they need. Partial annuitization also allows participants to purchase an amount of annuity that makes sense for their situation in consideration of not only their plan savings but also income sources outside the plan, such as from Social Security or the resources of a spouse. Research has also shown that when offered, partial annuitization increases both the percentage of people who annuitize and the average percentage of balances that are annuitized. An industry stakeholder noted the increase in the purchase of annuities through the Federal Thrift Savings Plan (TSP) after partial annuitization was introduced. When the TSP began in 1986, the annuity option was an “all or nothing” choice. In 2004, TSP amended the plan to include partial annuitization and saw an increased use of annuities. For example, although the take up of TSP annuities in general remains low, more participants annuitized after TSP introduced partial annuitization. According to the insurer that has been the exclusive annuity provider to the TSP since its inception, 784 annuities were purchased in 2003. From 2004 to 2008, after partial annuitization was implemented, the number of annuity purchases—including partial or full annuitization— increased to an average of 1,645 per year, a 110 percent increase in the number of participants annuitizing at least a portion of their account balances. In addition, the insurer noted that the average purchase amount of annuities increased 60 percent from $66,000 to $106,000. All-or-nothing decisions to annuitize can have adverse effects on participants. When annuity purchase decisions are framed as an “all-or- nothing” choice, most participants will bypass the annuity option and opt for a lump sum, which does not allow them to benefit from in-plan options that could help secure lifetime income. On the other hand, industry stakeholders noted that full annuitization using 100 percent of a plan account balance may not be suitable because it does not leave savings that may be necessary for emergencies, such as for healthcare expenses, or for other purposes, such as bequest motives. Similarly, they noted that full annuitization may also be inappropriate for most individuals because they may already have sufficient income through Social Security and other retirement benefits that provide an annuity benefit, such as a defined benefit plan. DOL is responsible for assisting and educating plan sponsors to help ensure the retirement security of plan participants. According to a Treasury fact sheet on retirement security, all-or-nothing choices may lead many participants to decline a plan’s annuity option, leading some plan sponsors to perceive participant demand to be low and the option to be unnecessary. Treasury noted one of its goals is to make it easier for plans to offer participants a combination of retirement income options that avoid an all-or-nothing choice. However, 401(k) plans are not required to offer partial annuitization and our interviews with industry stakeholders and agency officials indicate that plan sponsors are not incentivized to offer partial annuitization and may not be aware of the benefits to participants. Recent collaborations by Treasury and DOL have tried to encourage plans to allow participants the ability to combine multiple options to receive their retirement benefits. For example, the actions taken by Treasury approving the use of QLACs and by DOL facilitating the use of deferred annuity contracts embedded within a target date fund have made it easier for plans to offer partial annuitization options. However, partial annuitization is not encouraged broadly through general guidance applicable to all 401(k) plans, such as DOL’s Meeting Your Fiduciary Responsibilities publication. Agency officials have told us that many plans continue to frame annuity purchases as an “all-or-nothing” choice even though one Treasury official said that there is nothing prohibiting plans from offering partial annuitization. With DOL guidance encouraging plans to allow partial annuitization and enabling their participants to purchase the amount of annuity that they need, participants will be able to make annuity purchases that are most appropriate for their individual circumstances and support their lifetime income needs. Plan Sponsor Survey Respondent on Legal Risk “There is a not a single bit of upside to me as a plan sponsor in offering an option that participants don’t want, particularly when it is a complex offering with lots of room for 20/20 hindsight by plaintiff’s counsel, and one that tends to be more expensive. I care about our participants, but I have to balance that against my personal liability, as well as that of my employer.” Industry associations and other stakeholders told us that concerns about legal liability are the primary barrier deterring plan sponsors from offering annuities to participants. Of the 54 plan sponsors responding to our survey, 39 did not offer an annuity, and 26 of them said their decision was influenced by the resources required to obtain liability relief. In 2008, DOL promulgated a “safe harbor” rule that sets out procedures 401(k) plan sponsors can follow to satisfy their fiduciary duties when selecting an annuity provider. To obtain fiduciary relief under the safe harbor rule, for example, plan sponsors must perform an analytical search for annuity providers and consider the provider’s ability to pay claims in the future, in addition to the costs and benefits of the annuity. According to the rule, plan sponsors and other fiduciaries following the safe harbor when selecting an annuity provider fulfill their fiduciary duty and should, therefore, not be subject to corporate or personal liability for that selection. Stakeholders we interviewed indicated that the safe harbor for selecting an annuity provider is not helpful and the primary challenges stem from the requirements that plan sponsors appropriately: Consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract. Conclude that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract. Plan sponsors must also periodically review the appropriateness of the conclusion over time as the provider continues to issue annuity contracts. To facilitate the availability of annuity options in 401(k) plans, the 2005 ERISA Advisory Council Working Group on Retirement Distributions and Options recommended DOL change sponsor responsibilities for selecting an annuity provider. The Pension Protection Act of 2006 (PPA), required DOL to promulgate regulations clarifying the fiduciary standards applicable to the selection of an annuity contract as a form of distribution for a DC plan. In 2007, in the preamble to the proposed safe harbor rule, developed in response to the PPA requirement, DOL stated that plan sponsors had frequently cited their fiduciary liability as a reason for not offering an annuity spend down option. However, by DOL’s own estimates, the safe harbor was unlikely to make plan sponsors substantially more willing to offer annuities because it estimated when it proposed the rule that the safe harbor would increase the share of participants offered an annuity by only 1 percentage point. Assessing the future financial health of an insurer can be a difficult task for a plan sponsor, and many plan sponsors responding to our survey indicated they would be more likely to offer an annuity if the benefits of the safe harbor were more readily attainable. Members of Congress in both parties introduced legislation that would have, among other things, amended ERISA to permit plan sponsors and fiduciaries to rely more heavily on state regulators when selecting an annuity provider. Additionally, the Director of the Federal Insurance Office told us plan sponsors should not be expected to look at an insurer’s annual report to assess its financial liabilities or know more about an insurer than the research and metrics a rating agency or other entity might make publicly available. Officials we spoke with at the National Association of Insurance Commissioners (NAIC) also told us the safe harbor should have verifiable criteria. For example, the plan sponsors responding to our survey who did not offer annuities responded that any single criterion provided would make them more likely to offer them, as shown in table 4. DOL is responsible for educating and assisting plan sponsors to help ensure the retirement security of workers and their families. However, the annuity selection safe harbor can only translate into increased retirement security if it is used, and it does not provide sufficiently detailed criteria that plan sponsors feel they can use to obtain the liability protection it offers. The safe harbor requires plan sponsors to consider “sufficient” information to “appropriately” reach a conclusion about the annuity provider’s future solvency without defining the terms “sufficient” and “appropriate.” In 2010, a DOL official told us the agency was considering addressing industry concerns that plan sponsors have to second-guess state insurance regulators to assess insurers’ financial viability, and in 2014, DOL published information indicating that it would be developing proposed amendments to the safe harbor to provide plan fiduciaries with more certainty that they have discharged their obligations when contracting to provide an annuity option. DOL officials told us one advantage of revising the annuity selection safe harbor would be that it could provide greater clarity for plan sponsors and thus lead to more annuity options for participants. NAIC officials mentioned a standard proposed by an association of insurers, which would include, among other criteria, that the insurer be licensed in at least 26 states. RFI responses from two participant advocates suggested that annuity providers should also be licensed in states with strong regulatory protections. A DOL official told us that because the ERISA standard of prudence requires plan fiduciaries to exercise some degree of judgement in making the annuity provider selection, it precludes development of a simple and easily verifiable checklist. However, clarifying how to comply with the annuity selection safe harbor to the greatest extent possible may help encourage plan sponsors to offer plan participants an annuity option. According to researchers we spoke to, participants should have multiple lifetime income options because no one solution works for everyone. Treasury officials told us that participants can benefit by combining options to diversify their sources of lifetime income and help them manage multiple risks in retirement. For example, participants could use a portion of their savings to purchase an annuity and leave the balance invested in their plan for a withdrawal option. A variety of products and services could be offered in the plan environment to provide participants with a mix of annuity and withdrawal options. For example, managed payout funds provide for automated withdrawals, and annuity providers offer a wide variety of guaranteed income options. Furthermore, plans can also offer participants access to an online annuity shopping platform, and with it, comparable information on multiple products from multiple providers. See Appendix IV for further details. However, there is no agency guidance available to help plan sponsors minimize their legal risks when offering participants a mix of annuity and withdrawal options within a plan. The current safe harbor for the selection of an annuity provider is available to plan sponsors only offering an annuity product from a single annuity provider. Based on our analysis, a plan sponsor could increase its risk of legal liability for each option it offers. For example, a plan sponsor that offers an in-plan annuity increases its risk by adding withdrawal options. Of the 12 plan sponsors responding to our survey who did not offer withdrawal options, 8 responded that the fiduciary responsibilities for managing participant assets in the draw-down phase influenced their decision. The results of our record keeper questionnaire indicate that most plan sponsors are not offering a mix of lifetime income options. In contrast, plan sponsors are required to diversify the plan investments they offer. In addition, when 401(k) plans permit participants to exercise control over their investment choices and, among other things, offer participants a broad range of investment alternatives, plan sponsors or other fiduciaries are not liable for any losses that result solely from a participant’s exercise of that control. DOL has not provided an incentive for plan sponsors to provide participants a mix of lifetime income options and information about them. EBSA’s mission is to assure the security of the retirement, health, and other workplace-related benefits of America’s workers and their families, and without lifetime income options in workplace 401(k) plans, those benefits may not remain secure throughout retirement. Accordingly, DOL is engaged in an initiative with Treasury to encourage plan sponsors to offer prudent lifetime income options. Currently, each additional lifetime income option plan sponsors offer potentially exposes them to additional legal risk, unless that option is an annuity selected in a process pursuant to the safe harbor for annuity selection. DOL has not established a process plan sponsors can use to prudently select an appropriately diverse mix of annuity and withdrawal options offered to participants. Consequently, DOL has not determined the types of products—such as those on an online annuity shopping platform—that might appropriately be included in such a mix. DOL officials told us the decision to offer any lifetime income option is still a fiduciary one, and that even if they provided such relief, plan sponsors would still have some fiduciary responsibility associated with providing participants lifetime income. However, if plan sponsors and others are protected from liability when participants exercise control choosing among lifetime income options in a way comparable to how they are protected when participants exercise control in choosing investments to accumulate retirement savings, sponsors may be more likely to offer a mix of lifetime income options from which participants can choose in their plan. Another deterrent to plan sponsors offering annuities, according to representatives of annuity providers, is the possibility of plan participants having to lose lifetime income guarantees when the plan sponsor changes service providers. To serve the best interests of participants, plan sponsors may at times be required to change service providers, including annuity providers and record keepers. Plan sponsors have a legal obligation to establish and follow a formal review process at reasonable intervals to decide whether to continue to use a service provider or look for replacements. However, lifetime guarantees— insurance policies offering lifetime income—can be difficult to transfer. When participants contribute over time to a guaranteed lifetime income product such as a deferred income annuity or a GMWB, they are purchasing both an investment product and a guarantee of lifetime income. Purchasing an annuity in small amounts over time can have certain advantages, such as managing interest rate risk (see app V). When the plan sponsor changes record keepers or annuity providers, the investment will transfer, but the lifetime income guarantee may not. Some products might charge a guarantee fee of 1 percent or more every year and, as such, there is the potential for participants to have committed substantial resources to the guarantee before losing it due to a service provider change (see fig. 8). For example, a guarantee fee of 100 basis points (1 percent) for a GMWB may not be unrealistic. A representative of one plan sponsor told us that the plan’s Request for Proposals from 401(k) service providers for a GMWB did not return a single bid for less than 100 basis points per year. Representatives of one service provider told us that in general it is difficult to transfer annuities among annuity providers because it is difficult for providers to absorb the risk of another provider’s insurance products. For a product with a lifetime income guarantee to transfer from one record keeper to another, the new record keeper’s platform must either have the capacity to support the annuity product, or use third party software to allow a link to product information on the platform. Representatives of one annuity provider told us that given the complexities in effectively managing such a situation and the confusion about whether those efforts would be successful, many plan sponsors may be reluctant to offer annuities. According to examples provided by industry officials, options needed to protect participants already exist, whether by refunding, preserving, or transferring their lifetime income guarantees, and some annuity providers and record keepers have taken steps to preserve participant benefits when plans change record keepers or annuity providers. For example, an association of defined contribution plans’ record keepers has developed common data standards for tracking annuity products, which are intended to simplify the transfer of annuity data among record keepers. In another example, one annuity provider representative offers participants a refund of fees if they lose their lifetime income guarantee, returning to them some value that could replace the lost lifetime income. Further, another annuity provider representative told us his company paid the lifetime income guaranteed by another annuity provider’s product, effectively transferring the annuities from provider to provider. An additional approach to preserving such benefits would be to allow participants to roll over their 401(k) plan annuity into an IRA version of the annuity provider’s product in the retail market if it would otherwise be lost. However, such distributions would move some 401(k) plan benefits while leaving others, increasing the likelihood of participants having to manage benefits in multiple places, which we previously reported can be challenging for participants. Figure 9 shows how steps similar to those already taken by some providers could preserve participant benefits despite service provider changes. DOL is responsible for educating and assisting plan sponsors to help ensure the retirement security of workers and their families. Federal internal control standards also state that management should ensure there are adequate means of communicating with external stakeholders that may have a significant impact on an agency achieving its goals. Representatives of one annuity provider told us service provider changes have already caused some participants to lose lifetime guarantees. DOL officials told us on this subject that some plan fiduciaries may not examine insurance contract details as closely as the details of investment vehicles, and in such situations, they need to be more careful. However, DOL has not issued guidance encouraging plan sponsors to consider whether a service provider contract ensures future service provider changes do not cause participants to lose the value of lifetime income guarantees. While options to prevent lifetime income guarantee loses may exist, it is not clear how widespread they are in practice. However, by following such guidance from DOL, plan sponsors could make such options more widespread by requesting them, and they may be more willing to allow participants to accumulate in plan annuities in the future, if they are confident that a service provider change will not amount to a benefit reduction for participants. Industry stakeholders we interviewed told us that plan sponsor access to annuity options is often dependent on the options their record keeper makes available. Plan sponsors make annuity options available in their plans similar to the way they make investment options available. For example, plan sponsors who want to offer an annuity option may work with a number of service providers to determine the appropriate annuity options to offer their participants. However, several industry stakeholders, including some record keepers, told us that sponsors’ choices of annuity options may be limited because of cost considerations and business affiliations. Cost. Industry stakeholders told us that, among other things, it is costly to integrate plan record keeper systems with those of an insurer, especially for complex and non-standardized annuity products like GMWBs, which require daily transmittal of information between systems. In contrast, stakeholders indicated that fixed immediate annuities may be the least costly annuity option that plan sponsors can adopt because they are simple and straightforward for record keepers to implement. Stakeholders also told us that some record keepers may offer an open record keeping platform that either already supports competing annuity products or can be customized at the sponsor’s request to do so. However, a number of record keepers told us that even for providers that offer an open platform, the process of integrating the systems for annuity products like GMWBs can be costly absent strong demand for them from plan sponsors. Business affiliation. Industry stakeholders told us that many record keepers are affiliated with specific insurers, financial service providers, and investment managers. In such instances, the services or products offered by their respective affiliates may influence the annuity products that the record keeper platform supports. Some stakeholders also told us that financial services companies that are focused on the retail annuity and investment markets may not want their affiliated record keeper to make in-plan annuity options available because their business is either based on or is comprised significantly of participants rolling over their savings into a retail IRA. Similarly, some stakeholders indicated that record keepers may not offer annuities because some record keepers are also investment managers who may be compensated based on assets managed, which decrease with annuity purchases. Some stakeholders also said that insurers that have proprietary annuity products, especially GMWBs, have an interest in only offering their own products on their affiliated record keeping platform. As a result, plan sponsors that want to offer an annuity option generally must choose their record keeper’s product or forego the option altogether. In general, plans’ ability to persuade their record keepers to make annuity options available can be limited, similar to investment management services as we previously reported. Industry stakeholders have indicated that larger sponsors are generally more likely to have the leverage or resources to persuade their record keeper to support competing products and services from multiple providers on their recordkeeping platform. Smaller sponsors may not be able to affect this change and may need to select a different record keeper to implement their desired annuity option or forego adopting an annuity option altogether. While our record keeper questionnaire suggests that small plans are more likely to offer some form of lifetime income option, this data may be a reflection of a greater likelihood that smaller plans are administered by an insurance company that offers annuities. Nearly all the plans covered by our record keeper questionnaire that offered GMWBs were either small or mid-size. Stakeholders told us that because GMWBs have more features than other types of annuities, they are generally more expensive. Due to the complexity of the product, participants who do not fully understand GMWBs risk making withdrawal decisions that could decrease benefits. One of DOL’s roles is to enforce Title I of ERISA by educating fiduciaries on how to carry out their responsibilities, which include selecting service providers. DOL’s guidance in its Meeting Your Fiduciary Responsibilities publication recommends that, to ensure a meaningful selection, plan fiduciaries should survey a number of potential service providers before hiring one, but the guidance does not specifically include or discuss consideration or adoption of annuities or lifetime income options. The guidance specifies that diversifying plan investments—which can include annuities—and paying only reasonable plan expenses for service providers and plan investments are among a sponsor’s fiduciary responsibilities. DOL also underscores the importance of plan fiduciaries’ responsibility to compare potential providers’ services to appropriately assess their reasonableness. However, DOL’s guidance does not encourage plan fiduciaries to use a record keeper that supports products from competing providers. While factors like cost and business affiliation may prevent some record keepers from supporting a variety of products, DOL officials told us participants would benefit from their plans having the ability to access non-proprietary products along with proprietary products. We previously recommended that DOL provide guidance to plan sponsors that addresses, among other things, the importance of considering multiple providers when choosing a managed account provider, and the importance of requesting from record keepers a choice of more than one provider. By considering similar guidance encouraging plan sponsors to use a record keeper that supports competing annuity product providers on its platform, plan sponsors could be more likely to find options that serve their participants and adopt them. Lifetime income illustrations show participants a projection of the monthly or annual income their 401(k) savings may generate for retirement, but industry research indicates most plan sponsors do not use them. According to representatives of one service provider, showing participants a projection of their account balance as monthly income helps them determine how much they need to save to cover anticipated expenses in retirement. Similarly, representatives of another service provider said showing participants a projection of their account balance as annual income helps them determine how much they need to save to replace their current annual salary. In contrast, showing an account balance as a lump sum payment does not give participants a way to compare their savings to their monthly expenses or annual salary. Service providers can give plan sponsors the ability to present lifetime income illustrations in ways that can help participants think about how to use their 401(k) savings in conjunction with other sources of retirement income. For example, figure 10 shows how one record keeper can incorporate into a 401(k) plan’s benefit statements an estimate of a participant’s Social Security benefit, as well as information about a defined benefit plan if the participant has one. Industry stakeholders also said it is beneficial for participants to see information that helps them set lifetime income goals and address shortfalls through a “gap” analysis that compares their goal against the anticipated results of their current savings behavior. As shown in figure 11, service providers can use such an analysis to help participants think of their account in terms of either monthly or annual retirement income. Representatives of four service providers told us they have the capacity to generate a lifetime income goal for their participants using recordkeeping data. Participants we surveyed in coordination with a research firm reported that two important things to know for retirement planning are how much money they will need in retirement and how much lifetime income they can expect their savings to generate—information that lifetime income goals and a gap analysis are designed to communicate. One service provider told us their historical testing indicates that one out of five participants who used their tool for developing lifetime income goals subsequently increased their contributions by an average of 5 percent to address savings shortfalls. Despite its benefits, industry research indicates that only a limited number of plans communicate these types of information to participants. For example, according to one industry survey, at most about 48 percent of plan sponsors make a gap analysis available to their participants. Recognizing the value of providing 401(k) participants with income projections, DOL issued an Advance Notice of Proposed Rulemaking in 2013 to address the low adoption of lifetime income illustrations by plan sponsors. The rule being considered would require plan sponsors to include lifetime income illustrations alongside the account balance in participant benefit statements. DOL officials told us they were considering this requirement based on the experience of the Thrift Savings Plan, the defined contribution plan for federal employees that is similar to 401(k) plans. According to DOL officials, contributions to the Thrift Savings Plan increased substantially once participants saw how much lifetime income they could expect in retirement based on their current savings behavior. Research has shown similar increases in participant contributions in other circumstances in response to the introduction of lifetime income illustrations. We previously reported on research suggesting that participants in Chile’s defined contribution retirement system made additional contributions to improve their retirement prospects after Chile required that plans include projections of retirement income in participants’ annual statements starting in 2005. Researchers reported that these projections helped individuals better align their savings behavior with lifetime income goals. In a separate study, researchers found that participants in defined contribution plans similar to 401(k) plans who received lifetime income illustrations increased contributions by more than those who did not. The materials plan sponsors provide participants to educate them about lifetime income options may in many cases not be adequate to help them learn to make informed use of their plans’ withdrawal options and annuities. Although participants we surveyed in coordination with a research organization cited separation packets some plan sponsors send to participants in or near retirement as a key source of education about lifetime income options, we reviewed 16 plans’ separation packets and found they were missing most of the elements we identified as critical in helping participants learn about their options at retirement (see fig. 12). For example, we identified education on the possible advantages and disadvantages of each available lifetime income option as important because it helps participants weigh the pros and cons of different options. Although a majority of the packets we reviewed provided descriptions of available options at retirement, few included discussions of the advantages and disadvantages of these options. We also found that most packets were not written in a way that participants can easily and clearly understand. DOL has acknowledged the importance of educating participants on, among other things, how to estimate their future retirement income needs and make informed selections from among plan offerings. According to DOL, this kind of education is particularly important because more participants are in defined contribution plans that require them to make decisions about what to do with their savings. Additionally, DOL officials told us education on lifetime income options needs to be in place before more plans begin offering these options. Participants we surveyed in coordination with a research organization cited obtaining advice as a key step in selecting lifetime income options offered by a 401(k) plan. We asked participants to check all the steps they would take to assess what lifetime income options are right for them, and almost 50 percent of respondents reported they would seek advice. Our surveys also found that participants preferred to obtain financial advice through their plans as opposed to other sources. We asked participants to select from a list the types of individuals they would consult in selecting among a plan’s lifetime income options. Fifty-nine percent of respondents selected a financial adviser provided by the plan. In comparison, fewer than 40 percent of respondents selected a tax professional or lawyer (39 percent) or a financial advisor outside of a plan (about 36 percent). Retirement planning decisions can create substantial challenges for participants who lack access to an adviser. One study of lifetime income options notes that participants must make decisions about how to deploy their savings in the context of other important retirement considerations such as when to claim Social Security; when to stop working; and home equity, taxes, and longevity. Additionally, providers of a managed account service told us participants need to consider not just how, but also when and where they deploy their savings. Specifically, the order in which participants draw on their various sources of income, as well as tax laws in the state where they live, can affect how much they pay in taxes during retirement. Determining how long their savings will last can also be challenging for participants. Research shows that without access to an adviser, participants tend to underestimate how long they may live and may spend down their savings too quickly. One researcher warned that participants tend to look to potentially misleading regulatory cues to inform retirement planning decisions. For example, they might interpret statutory provisions providing that the tax penalty on premature 401(k) distributions cease at age 59 ½ as a signal to start drawing down their savings at this age even if they would be better served by staying invested in their plan until a later date. Participants also tend to overestimate their ability to generate investment returns and underestimate the value of longevity protection. Our survey in coordination with a research firm also found that participants had competing priorities for their retirement savings, which can ultimately drive them towards complex products. As shown in figure 13, participants cited both securing easy access to savings and protecting from the risk of outliving their savings as top priorities. Service providers told us that options like GMWBs that embody both these characteristics are among the most complex and difficult for participants to understand. One insurance company told us they had to remove some features from their GMWB because it was too confusing for participants. A few possible consequences of not fully understanding such a product include losing longevity protection for failure to abide by withdrawal restrictions and paying fees for benefits not received. Despite broad recognition of the need for participants to consult an adviser on lifetime income options before they make any decisions, industry research indicates only a minority of plan sponsors make advisers available to plan participants. In a 2013 survey of more than 600 plan sponsors, less than one-third reported offering access to any kind of advice to participants. One industry stakeholder told us plan sponsors are reluctant to provide access to investment advice, in part because of concerns about the costs. One survey reported this is true even though participants can get advice on withdrawal options through their plan for less than half the cost they would pay on their own. In addition, legal liability may also be a concern for plan sponsors. Lawyers representing 401(k) plans told us they counsel their clients against providing access to advice because of legal liability. Industry research indicates that service providers already have some capacity to offer participants the opportunity to work with an investment adviser. According to one survey, over 35 percent of plans offered participants access to advice through a financial adviser affiliated with their plan provider, with the most widespread use among smaller plans. About twenty-six percent provided advice through a registered investment adviser (RIA). Further, a majority of sponsors who make advice available to participants choose to do so through one-on-one meetings in person with an adviser. One record keeper operates a call center participants can use to speak with an adviser and obtain advice about their plan’s withdrawal options and annuities, depending on their needs. A plan consultant we spoke with uses a network of financial advisers who will spend a week at their client’s business meeting with participants. Participants opting for a managed account can also get advice through that service. DOL is responsible for educating and assisting plan sponsors to help ensure the retirement security of workers and their families. DOL officials told us it was a good idea to encourage sponsors to offer participants access to investment advisers in-plan, though sponsors should diligently vet prospective advisers before they are allowed to make open presentations to participants. However, in DOL’s publication Meeting Your Fiduciary Responsibilities, plan fiduciaries are not encouraged to provide access to an investment adviser knowledgeable about lifetime income strategies. Despite the absence of such guidance, some plan sponsors have already ensured that their participants have the chance to speak with an investment adviser about their plans’ annuities and withdrawal options, enabling participants to talk to professionals before they leave their plan or make a decision that can jeopardize their retirement security. Without guidance about the importance of providing their participants access to an adviser at the point of retirement to discuss in-plan lifetime income options, plan sponsors may continue to not offer such a service. Even with better information and an opportunity to receive advice, there are some participants for whom lifetime income decisions can be overwhelming or of no interest. As a result, they may disengage from making decisions regarding their income stream in retirement. We previously reported that about 17 percent of employees who lack a retirement plan have access to one but do not enroll. Sponsors have used automatic enrollment as a way to help ensure adequate retirement savings for employees, sometimes because other efforts, such as e-mails and educational materials, were not effective. Some participants did not enroll thinking they were ineligible, but researchers have noted many fail to enroll because of a behavioral tendency to follow the path that does not require an active decision. In six automatic enrollment studies we reviewed in 2009, automatic enrollment in a plan increased participation by at least 18 percent. The results of our record keeper questionnaire suggest relying on participants to make proactive decisions to ensure lifetime income has resulted in few participants selecting such options. Less than 1 percent of participants in plans covered by our record keeper questionnaire chose annuities, and less than 1 percent of participants chose systematic withdrawals. We previously reported that because people are prone to inertia and procrastination, a default option often becomes the most common choice when making financial decisions. Although default contributions for participants who do not make such decisions during the accumulation phase are allowed, provided certain requirements are met, little has been done to facilitate lifetime income defaults. Several industry representatives we spoke to, and others who reported to DOL and Treasury in 2010, indicated that defaults can lead participants to use lifetime income options. Over 70 percent of participants we surveyed in coordination with a research organization for this report indicated that if their employer automatically invested a small percentage of their future contributions in a competitively priced guaranteed retirement income product, they would stay invested in the product. Figure 14 illustrates deferred annuity payments (deferred annuities begin payments later than the time of purchase), showing how such a default can hypothetically guarantee some income and longevity protection while leaving most of the account available for other purposes. DOL has previously acted to encourage defaults that provide retirement income. DOL clarified in a 2014 letter to Treasury that a deferred annuity embedded in a target date fund qualifies as a qualified default investment alternative (QDIA). Accumulating an annuity over time in such a way has certain advantages, as detailed in Appendix V. The DOL letter describes a circumstance where each fund available to participants age 55 or older holds deferred annuity contracts and funds available to participants under age 55 do not. As participants age, a larger portion of their assets are devoted to annuities, and at the target date, fund members receive an annuity that provides lifetime income payments. On September 15, 2015, President Obama directed executive branch agencies to give particular consideration to selecting and setting default options. One option already in place that can provide a default for participants in 401(k) plans is the provision of required minimum distributions (RMD). A plan can be disqualified under the Internal Revenue Code if they do not follow the RMD provisions. Under these provisions, participants are required to begin receiving at least minimum payments starting after the participant retires and reaches the age of 70 ½. RMD calculations based on life expectancy provide lifetime income by design. Some plan sponsors are willing to administer RMDs as lifetime income by providing the minimum distribution to the participant in the plan rather than requiring participants to take a lump sum. As a result, participants who do not proactively commit to a lifetime income strategy may still get lifetime income through a plan that complies with RMD provisions by making distributions on the regulated minimum schedule. Default income based on RMD provisions can also begin when a participant retires and is in need of income, even though a distribution is generally not required until after the participant turns 70 1/2. For example, the Thrift Savings Plan for federal employees offers a series of monthly payments computed by the TSP based on IRS life expectancy tables. President Obama’s executive order directs agencies to specifically consider using default options, and RMDs can function as such for lifetime income. However, DOL does not communicate that the RMD methodology can be used this way in its Meeting Your Fiduciary Responsibilities publication. Currently, the only default option for lifetime income that DOL has formally supported is a deferred annuity, which was offered by less than 1 percent of the plans represented by record keepers who responded to our questionnaire. In contrast, many record keepers already know how to administer RMDs, so DOL could leverage that experience by providing guidance on how to use the methodology to produce lifetime income for participants. DOL officials told us they had not considered this approach and would need time to do so. However, without leveraging a default that is widely available in plans, few participants are likely to be impacted, and RMDs are essentially the only type of distributions that all 401(k) plans are required to make. Unless DOL begins encouraging plan sponsors to consider providing RMD-based default income, many retirees who do not select a lifetime income option may continue to receive a single lump sum payout that may not be used for lifetime income. Since the enactment of section 401(k) of the Internal Revenue Code in 1978, 401(k) plans have become the most common retirement savings vehicle in the United States. As a growing number of 401(k) participants retire, agencies have begun to realize the importance of helping those retirees create lifetime income from their 401(k) plan savings. DOL can take action to address fiduciary barriers that deter plan sponsors from offering lifetime income options to participants. First, most plan sponsors are unlikely to be equipped to judge the long-term viability of an insurer, yet they currently must do so under the existing safe harbor. Providing clearer criteria for making this determination likely would encourage more sponsors to seek fiduciary relief for offering annuities. Second, DOL offers fiduciary relief when savings are accumulated in an appropriate mix of investments, but it offers no such relief for plans offering a mix of lifetime income options. Extending this relief to plan sponsors could encourage more plans to make a mix of options available and, therefore, allow participants to create a better retirement strategy by selecting and combining annuity and withdrawal options. DOL can also provide additional guidance, in its Meeting Your Fiduciary Responsibilities publication or elsewhere, for fiduciaries as they consider how their participants’ account balance will translate into retirement income. DOL guidance can encourage plan sponsors to use a record keeper that includes annuities from other providers on its record keeping platform and increase the likelihood the plan sponsor will have access to annuities that the plan sponsor considers to be in the best interest of the plan participants. DOL guidance can encourage fiduciaries to offer participants the option to partially annuitize their account balance, allowing participants to purchase the amount of guaranteed lifetime income most appropriate for them. DOL guidance can also help plan sponsors plan for future service provider changes when offering an annuity. The fear of causing participants to lose annuity guarantees due to a service provider switch may cause plan sponsors to stay in a less than ideal service provider relationship or not offer an annuity. Guidance can encourage plan fiduciaries to consider whether a lifetime income contract could cause participants to lose lifetime income guarantees under such a circumstance before entering into the contract. DOL guidance can also encourage plan sponsors to provide an expert in retirement income strategies for participants to talk to about the plan’s distribution options. Enabling participants to receive advice about in-plan lifetime income options given their individual circumstances will better ensure they make retirement income decisions that can be directly applied to their specific circumstances. Lastly, DOL can encourage participants who have not chosen a lifetime income option at retirement toward income security with defaults. These participants may be less likely to take advantage of advice when offered. RMD-based default income can stretch out the account balances of these participants throughout retirement if sponsors and participants understand how they can be administered and used. Unless DOL encourages plan sponsors to consider providing RMD-based default income, many retirees who do not select a lifetime income option may continue to receive a single lump sum payout that may not be used for lifetime income. We are making seven recommendations to the Secretary of Labor. We recommend the Secretary of the Department of Labor (DOL) help encourage plan sponsors to offer lifetime income options by: 1. Clarifying the safe harbor from liability for selecting an annuity provider by providing sufficiently detailed criteria to better enable plan sponsors to comply with the safe harbor requirements related to assessing a provider’s long-term solvency. 2. Considering providing legal relief for plan fiduciaries offering an appropriate mix of annuity and withdrawal options, upon adequately informing participants about the options, before participants choose to direct their investments into them. To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to: 3. Use a record keeper that includes annuities from multiple providers on their record keeping platform. 4. Offer participants the option to partially annuitize their account balance by allowing them the ability to purchase the amount of guaranteed lifetime income most appropriate for them. 5. Consider whether a contract with a service provider ensures future service provider changes do not cause participants to lose the value of their lifetime income guarantees. 6. Include participant access to advice on the plan’s lifetime income options from an expert in retirement income strategies. 7. Consider providing RMD-based default income–plan distributions as a default stream of lifetime income based on the RMD methodology– beginning, unless they opt-out, when retirement-age participants separate from employment, rather than after age 70 ½. We provided a draft of this report to the Department of Labor and the Department of the Treasury. The agencies provided technical comments, which we have incorporated where appropriate. DOL also provided written comments, which are reproduced in Appendix VI. In its written comments, DOL agreed that today workers face greater responsibility for managing their assets for retirement, both while employed and during their retirement years. As we note in our report and DOL stated in its comments, DOL is committed to continuing to explore steps to advance lifetime income options in individual account retirement plans, such as 401(k) plans. DOL expressed reservations about GAO’s recommendations but described actions consistent with their intent, as discussed below. Regarding the recommendation to clarify the steps a plan sponsor must take to assess the long term solvency of an annuity provider when selecting one in accordance with DOL’s safe harbor, DOL stated that a clarification might erode consumer protections by degrading the oversight of fiduciaries making such selections. We commend DOL for placing a high value on consumer protections and wanting to uphold the requirements placed on fiduciaries. However, our report notes on page 26 the relatively challenging process for plan sponsors prudently offering an in-plan annuity. DOL’s suggested alternative is that the plan fiduciaries outsource these decisions to a financial institution as an investment manager under Section 3(38) of ERISA. We agree with DOL that it has identified a promising strategy, and commend DOL for doing so transparently. However, this strategy relies on a plan having access to something rather specific, which is a deferred annuity embedded in a target date fund. While they may be used more often in the future, as our report notes on page 52, less than 1 percent of plans covered by our record keeper survey offered deferred annuities. At this time, we are not confident that relying on a strategy available to so few plans will effectively resolve the challenges posed by the current version of the annuity provider selection safe harbor. While we agree that outsourcing can bring helpful expertise to the complex fiduciary task of selecting an insurer, it is not clear whether such a service would be available and affordable to the bulk of 401(k) plan sponsors. For example, we report on page 27 that a large consulting firm told us they do not select annuity providers for plan sponsors because the costs and liability risks of doing so are prohibitive. Regarding the recommendation to consider providing fiduciary relief to plan fiduciaries offering an appropriate mix of annuity and withdrawal options, DOL expressed concern that it could shift the responsibility for annuity selection from the fiduciary to the participant. However, we believe that a concern is unwarranted, and the change would not adversely affect participants. DOL already offers certain fiduciary relief under section 404(c) related to the investments offered under a plan. Once plans have performed their fiduciary duty in selecting a broad range of at least three investment alternatives with differing characteristics and provided participants with educational information on them, the participant bears the risk of selecting from among them. Analogously, we believe it would be appropriate for DOL to provide, once plans have exercised their fiduciary duty to select an appropriate mix of annuity and withdrawal options, for participants to bear the risk of selecting from among them. While it raised these concerns, DOL stated in its letter that it is open to considering alternative regulatory approaches. DOL also noted that it has an active regulatory agenda but will include the recommendations as part of its ongoing development and prioritization of its agenda. Finally, with respect to the recommendations to provide guidance to fiduciaries on how the account balances of their participants will translate into financial security in retirement, DOL stated that it will review its publications along the lines of the recommendations to explore ways in which to encourage use of products and arrangements designed to provide participants and beneficiaries a lifetime income stream after retirement, and take steps to better educate participants and plan sponsors about the need to think about retirement savings as lifetime income. DOL also noted that the Meeting Your Fiduciary Responsibilities publication may not be the appropriate vehicle for addressing some of the subject matter in the recommendations. However, the recommendation also states that DOL could alternatively issue new guidance. We specifically cited the Meeting Your Fiduciary Responsibilities publication because it covers a wide range of topics and may reach a wider audience than other forms of guidance. Further, as stated in the publication, while some decisions are plan design decisions and not fiduciary decisions, there may still be fiduciary responsibilities involved in carrying them out. 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 Labor, Secretary of the Treasury, 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) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix VII. Our objectives were to examine 1) the adoption of lifetime income options in 401(k) plans; 2) the barriers, if any, that deter plan sponsors from offering lifetime income options; 3) the challenges participants face, if any, in learning to make informed decisions about lifetime income options; and 4) the defaults that exist for participants who do not choose an option. To address these objectives, we reviewed relevant research, responses to the Request for Information (RFI) by the Department of Labor (DOL) and the Department of the Treasury (Treasury) in 2010, federal laws, regulations, and guidance on lifetime income options. We identified relevant research to review with the help of a GAO librarian, through stakeholder interviews, by reviewing the sources cited in documents we obtained, and through limited internet searches driven by stakeholder and documentary evidence. We shared key studies with a GAO actuary for review. We reviewed the 2010 RFI responses, when available, of stakeholders we interviewed or were considering interviewing. We interviewed a non-generalizable sample of 29 service providers to 401(k) plans including record keepers, insurance companies, asset managers, managed account service providers, lawyers and advisers to plan sponsors. We also interviewed representatives of industry advocacy groups, researchers, and officials from DOL’s Employee Benefits Security Administration (EBSA) and Treasury’s Office of Tax Policy, Federal Insurance Office, and Internal Revenue Service (IRS) as well as representatives of the National Association of Insurance Commissioners (NAIC). We worked with a GAO methodologist to select stakeholders to interview. We selected industry stakeholders to interview who could provide information on a large number of participants or assets, who offered unique products and services facilitating 401(k) plan lifetime income, or were in roles working closely and directly with plan sponsors or participants. We selected researchers and participant advocates to interview with published work on retirement income. We included questions in a generalizable survey of defined contribution plan participants conducted by an independent research firm. We also conducted a non-generalizable online survey of 54 plan sponsors. We collected and analyzed data on plan sponsor adoption and participant use of lifetime income options from 11 record keepers to 401(k) plans. We assessed a non-generalizable sample of 16 separation packets that some plan sponsors make available to participants at or near retirement. We obtained and reviewed examples of information, such as lifetime income illustrations, that some service providers make available for plan sponsors to include in participant benefit statements or on plan websites to help participants plan for retirement. Lastly, we developed two interactive retirement models to illustrate the factors, such as inflation, that can affect the amount of retirement income a participant’s savings may generate and depict ways in which participants can use their 401(k) savings in coordination with other sources of retirement income, such as Social Security. We conducted this performance audit from July 2014 to August 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Boston Research Technologies agreed to include questions we wrote to collect data for this report in a survey of plan participants conducted in April 2015. We are reporting survey results from that survey as well as a second survey of participants conducted by Boston Research Technologies at the same time. We reviewed the methodologies of these surveys and concluded they were suitable for our purposes. The first survey included questions we provided about participants’ experiences with lifetime income options offered through their plan and had 5,804 completed responses. The target population of this survey was full-time workers who participate in a defined contribution plan. The second survey, with 3,594 completed responses, included questions about managing retirement savings in multiple accounts. The target population of this survey was full-time, part-time, and contract workers whose current employer offers a defined contribution plan. Since both surveys represent only a sample of the potential population, they are subject to sampling error. For the first survey, we estimate that the sampling error is approximately 1.7 percent at the 95 percent confidence interval. We estimate that the sampling error for the second survey is 1.5 percent at the 95 percent confidence interval. While Boston Research Technologies took great efforts to ensure the sample population correctly represented the true population, we do not have an exact response rate and therefore cannot directly calculate non-sampling error, which could occur if survey responses differed in some systematic way from the true population. Additionally, each survey included a few respondents who reported participating in other types of defined contribution plans such as 457 plans, which are for state and local governments and tax-exempt organizations. Participants in these types of plans may exhibit different behavior with respect to lifetime income options than that of 401(k) participants. For these reasons, to determine whether we considered the survey population, sample and question results reflective of the larger population, we compared sample demographic characteristics and selected survey responses against data from other large samples of 401(k) participants and found the population broadly similar in characteristics such as participant age and job tenure. As a result, we generalize the survey responses as the views of the broader population of 401(k) participants. We created a web-based survey of plan sponsors on 401(k) lifetime income and conducted it between May 18th and July 24th, 2015. We received 54 completed responses. We publicized the survey to the membership of industry organizations such as PLANSPONSOR, the Plan Sponsor Council of America, the National Association of Plan Administrators, BenefitsLink, and Pensions and Investments. These organizations distributed the survey to their members, but they did not collect survey responses, which were sent directly to GAO. To develop the questions and answer sets, we analyzed information gathered through stakeholder interviews and our review of relevant regulations and legislation. We pre-tested questions with stakeholders external to GAO with the assistance of GAO methodologists. We provided text fields to allow respondents to elaborate qualitatively or provide additional insights. Data collected through the survey are not generalizable and reflect the views and experiences of the respondents and not the entire population of 401(k) plan sponsors. Responses may be more indicative of the practices of larger plans. Of the plans represented in the survey, 16 plans had fewer than 100 participants, and 32 had 500 participants or more. Also, 401(k) plans voluntarily participating may be more proactively managed than others. We collected data on plan adoption and participant use of lifetime income options in 401(k) plans from 11 record keepers who together represent about 42 percent of the 401(k) market as measured by assets, 46 percent as measured by participants, and 26 percent as measured by plans. To ensure our analysis reflected the broadest possible range of participants in differing circumstances, we obtained data from a variety of different types of record keepers serving different portions of the 401(k) market. For example, we obtained data from record keeping platforms operated by both insurance companies and mutual fund companies. We also obtained data from record keepers that focus on serving smaller plans as well as those that principally serve large plans. We collected data on the number of plans that offered different withdrawal options and annuities, though some record keeper respondents did not provide data for some products and services. We aggregated and analyzed the responses we received to determine plan adoption of each individual withdrawal or annuity option. Plans that made multiple withdrawal or annuity options available would be included in the totals for more than one option. We did not independently verify the systems used to produce record keepers’ data. However, we met with representatives from 10 of the 11 record keepers to discuss the lifetime income options they currently make available to plans and determined the data the record keepers provided accorded with these discussions. We concluded that record keeper data were reliable for our purposes and provide a reasonably accurate depiction of a non-generalizable sample of plans in the 401(k) market. We assessed a non-generalizable sample of 16 separation packets that some 401(k) plan sponsors provide to participants near or in retirement. We obtained separation packets from participants and industry stakeholders we interviewed, as well as from publicly available sources such as plan websites. In some instances, we obtained separation packets for specific plans while in other instances we received templates that service providers make available to their plan sponsor clients. As shown in table 5, the separation packets we reviewed represented a broad range of plans as measured by characteristics like plan assets and average account balance. We cannot determine the extent to which the separation packets we assessed are reflective of all separation packets that some plan sponsors make available to their participants. However, given the variety of plans represented in our sample, our assessment can provide valuable insights on the extent to which separation packets include factors we identified that can help participants make informed choices among lifetime income options. To assess the separation packets, we identified five factors that can help participants make informed decisions about the use of lifetime income options and determined the extent to which the packets address them. We developed these factors from our past work and our review of relevant literature. We obtained a review of the factors from a GAO research methodologist and incorporated feedback on them from three external parties: a researcher who studies the use of lifetime income options in 401(k) plans and representatives of two firms that help employers provide their employees with independent financial guidance and education. To ensure that we applied our factors appropriately to the 16 separation packets, two reviewers independently evaluated the separation packets against criteria we identified in conjunction with a GAO methodologist as subjective, and a third analyst arbitrated any discrepancies between the two reviewers. See table 6 for a more complete description of the five factors and the results of our assessment. We developed two interactive retirement models to provide contextual information on lifetime income options: The first interactive retirement model we developed is based on a similar retirement model we developed for a prior report. The new version of this interactive retirement model allows users to view expected retirement income generated by two types of payment options under a range of circumstances: (1) systematic withdrawal strategies with payments that are (a) a fixed dollar amount, unadjusted for inflation; (b) a percentage of the account balance at retirement, increased annually for inflation; and (c) based on life expectancy at each age of withdrawal, using factors published by the IRS for purposes of complying with required minimum distributions (RMD) and determining substantially equal periodic payments, and (2) an immediate annuity that makes level payments based on the lifetime of an individual retiree. We developed, in consultation with GAO’s actuaries and an external actuary who has expertise in annuity pricing, a formula that was calibrated to approximate annuity prices similar to those found in U.S. retail annuity markets in July 2013. Because we simulated retail annuity prices, the annuity payment differs by gender. Annuities offered inside a 401(k) plan would not differentiate pricing by gender and may be rated differently than retail annuities. All income streams illustrated by the model are presented in real dollars, which reflects an assumed annual inflation rate of 2.25 percent throughout the projection period. The interest rates and investment return assumption ranges were based on analysis of current and historical capital market data and consideration of professional forecasts of key economic indicators. We also consulted with GAO’s actuaries and two GAO economists in setting these ranges. 401(k) account balance options are for illustrative purposes only, and are not intended to be representative of actual account balances held by 401(k) plan participants as of publication. As such, the amount of income illustrated by the model also should not be considered representative of what actual 401(k) participants could generate with their savings as of publication. The second interactive retirement model illustrates potential lifetime income strategies that combine different options for generating retirement income, including several Social Security claiming options, systematic withdrawals from a 401(k) account, and partial annuitization of a 401(k) account balance. The systematic withdrawal strategy is structured to provide a level amount of total inflation- adjusted income when combined with Social Security and annuity income that is purchased with plan savings. The model and the systematic withdrawal strategy assume that retirees live to age 100, unused account balances earn 3 percent real return, and inflation grows at 2.25 percent per year. The model does not reflect the effect that actual lifespan, investment returns, and inflation could have on the illustrated retirement strategy. The model allows users to include or exclude a fixed immediate annuity based on the age of the illustrated retiree and purchased from the 401(k) account balance in the illustration. We obtained annuity prices from an annuity shopping platform provider who provided averaged quotes across multiple annuity providers as of January 2016. As such, modeled annuity prices reflect the pricing available through a platform provider and differ by gender. Annuities offered inside a 401(k) plan would not differentiate pricing by gender and may be rated differently than other market segments. The model includes Social Security retirement benefits, and allows users to defer the age at which benefits are first claimed if retirement occurs before age 70. Social Security benefit amounts were obtained from the Social Security Administration’s Social Security Quick Calculator, using data for the illustrated retiree as inputs. The model assumes retirement occurs at the end of 2015, regardless of the retirement age selected. 401(k) account balance options are for illustrative purposes only and are not intended to be representative of actual account balances held by 401(k) plan participants as of publication. As such, the amount of income illustrated by the model also should not be considered representative of what 401(k) participants could generate with their savings as of publication. We also consulted two external stakeholders with expertise on lifetime income options regarding our model. The ranges, calibration of the annuity rates, and estimated Social Security benefits provide illustrative context for the report but are not material to the findings, conclusions, or recommendations. However, the assumptions and methodology used to develop the models, as well as numerous test cases, were reviewed by a GAO actuary. The retirement income depicted in the interactive retirement models does not reflect federal or state taxes. Dollar amounts in the interactive retirement models are for illustrative purposes only, and should not be considered representative of individual circumstances or the pricing of annuities available in the market. The model is provided for illustrative purposes only and modeled results should not be construed or used as financial advice. The contract terms for guaranteed minimum withdrawal benefits (GMWB) vary across providers but generally consist of an accumulation, withdrawal, and insured phase (see fig. 15). Accumulation: The accumulation phase begins when a participant purchases a GMWB contract, which establishes the benefit base from which lifetime withdrawals are made. This benefit base is the amount to which lifetime withdrawal percentages will be applied to determine minimum insured lifetime income. The investment account value represents the total value of the participant’s investments. During this phase the participant decides how to allocate investment assets among various options made available. The insurer monitors the participant’s account value and automatically adjusts or steps-up the benefit base periodically should additional contributions or investment gains increase the value of the account. Once a benefit base is stepped up, it typically does not later decline because of investment losses that may reduce the participant’s investment account value. However, the benefit base is separate from the account value, cannot be withdrawn as a lump sum or annuitized, and is not payable as a death benefit. Withdrawal: The withdrawal phase starts when a participant begins taking withdrawals. The maximum withdrawal amount that a participant can take in a year (without incurring a reduction in their benefit base) is generally calculated as a percentage of the participant’s benefit base at the time of the first withdrawal. As in the accumulation phase, the insurance company will typically increase the benefit base if a participant’s account value, net of withdrawals and fees, increases above the existing benefit base, which may in turn increase the minimum insured lifetime income and the maximum withdrawal that the participant may take without reducing the benefit base. Insured: A participant enters the insured phase if their investment account value has been reduced to zero as a result of withdrawals, investment losses, or any expenses, fees, or other charges. In such cases, the participant’s benefit base (the amount to which the withdrawal percentage is applied) remains unchanged, but the participant’s investment account value is zero. The funds needed to continue paying benefits to the participant would then come from the insurance company’s assets, and participants would receive payments from the insurance company equal to the minimum insured lifetime income, generally a percentage of the benefit base determined at the time of the first withdrawal amount. Once the insurance company begins paying the agreed-upon insured payment, the fees that the participant had been paying for that protection would cease, as would any investment management and other fees paid for other benefits. Once the insured phase begins, all rights and benefits under a GMWB product terminate except those related to continuing benefits, and all lifetime withdrawal benefits will continue to be paid to the participant on the established schedule and generally cannot be changed. Annuity shopping platform technology offers certain benefits to 401(k) participants. Such technology can offer multiple, competing products on a single interface where participants can comparison shop by price. Participants may be able to input information about what they are looking for, allowing them to customize the annuity to fit their financial plan. Participants may be able to choose how much of their account to devote to the annuity, their income starting date, and select or unselect features like death benefits to view the resulting price change. For example, a participant might choose to set aside an amount as small as $10,000 to manage longevity and cognitive risk without losing access to the rest of their savings. An official of one platform compared their platform to the way technology now allows shoppers in other markets to compare prices on airplane flights and hotels. An official at another platform told us it sells annuities for a 1 percent commission as opposed to the 6 or 7 percent commission stakeholders told us was typical of the retail market. According to that official, the annuity shopping platform also offers its own education and advice services apart from those offered by the plan. Figure 17 shows products available on one platform. Based on our record keeper questionnaire, less than 1 percent of plans adopted an annuity shopping platform. According to a representative of one annuity shopping platform provider, plan sponsors were not using it as an in-plan option because of concerns about legal risks associated with selecting annuity providers. The other two annuity shopping platforms we found to be in operation also appeared to cater exclusively to the retail market rather than to participants in employer-sponsored plans. One online annuity shopping platform offers a means for plan sponsors to make the platform available to participants in a way that the provider believes makes it an out-of-plan option. According to a representative of the platform, at retirement the shopping platform can appear on the participant’s distribution form as part of a lump sum option labeled “IRA/Annuity Platform”. When selected, a participant’s funds are rolled into an IRA and the participant is provided the opportunity to make an annuity purchase from among choices provided through the platform. In 2010, this annuity shopping platform was available to over a thousand plans and millions of participants, but 98 percent of plans adopting it were doing so through this type of arrangement involving an IRA. According to this provider, because it is an out-of-plan option, employers often require participants to acknowledge a disclaimer stating that the employer does not endorse the platform or its choices, which according to the provider contributes to more than 50 percent of participants exiting the platform without obtaining an annuity. The provider’s IRA rollover solution was intended to resolve plan sponsors fiduciary liability concerns in 2005, but according to that provider, those concerns remain today. Experts have identified the workplace as potentially being a particularly effective venue for providing financial education and helping individuals improve their financial decision making. Employers have the potential to reach large numbers of adults in a cost-effective manner at a place where they make important financial decisions regarding retirement. Financial literacy—the ability to use knowledge and skills to manage financial resources effectively—is becoming increasingly important. Participants make decisions about lifetime income options in the same plan environment in which they have become accustomed to making decisions to accumulate savings, (e.g., on the plan website or by submitting a form). The authors of a report on lifetime income options noted that by simplifying the steps needed to select and combine lifetime income options, plan sponsors can help participants overcome inertia to make complex retirement planning decisions about their retirement income strategies. One way to do this is to integrate the selection of lifetime income options into the routine tasks participants may perform. For example, each time participants change their investment allocation using a plan website designed by one record keeper we interviewed, they are also given the option to invest some of their savings in a fund that will gradually and automatically turn into a guaranteed minimum withdrawal benefit (GMWB) as the participant nears retirement. In a second example, a managed account service provider told us participants can typically implement their recommendations on a plan’s lifetime income options at the click of a button. In-plan annuities can be offered as an investment option purchased in smaller amounts over time as the participant nears retirement. For example, more than 44 percent of the mid-size 401(k) plans represented in our record keeper questionnaire that adopted GMWBs allow participants to purchase those benefits over time through periodic contributions. Figure 18 shows how purchasing annuities in this way can help participants address, for example, the risk of purchasing a single, large annuity when interest rates might be unfavorably low (“interest rate risk”). Breaking up annuity purchases into smaller amounts can also help participants address the hesitation associated with a single, large purchase. For example, one independent financial adviser told us splitting up annuity purchases helps build her clients’ comfort with the idea of annuitizing a modest portion of their retirement savings. It also gives them time to react to changes in their health or financial status that could change their need for annuitization. Most plan sponsors we surveyed cited the potential regulatory protections provided through ERISA as an additional advantage of in-plan lifetime income options. We have reported on these protections, including the requirement that plan fiduciaries act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing plan benefits and defraying the expense of plan administration. Other protections, as shown in table 7, include the selection and monitoring of appropriate investment options and holding down and clearly disclosing fees. Plan sponsors can typically obtain lower fees for lifetime income options. We have reported that participants generally pay lower fees through their plan than they would on their own because plan sponsors can use participants’ combined savings to negotiate with service providers. An industry report noted this may benefit participants with smaller balances because in a 401(k) plan, all participants typically pay the same relative costs, such as the same annual fee as a percentage of their investment in a lifetime income option. According to a study of lifetime income options, under certain conditions participants who remain invested in their plan can increase retirement income from certain withdrawal options by more than 20 percent after 20 years. Industry stakeholders also reported that in-plan annuities are generally less expensive than their retail-market counterparts in part because plan sponsors can reduce or eliminate the commissions paid to make annuities available for sale on an individual basis. Representatives of one 401(k) plan told us that in-plan, they could access an annuity product for their participants at less than half the cost of comparable retail options. According to one association of insurance and financial services companies, assets covered by an in-plan guarantee totaled $3.6 billion in 2014, while retail annuity sales that same year totaled more than $235 billion. Several industry stakeholders reported that retail annuity markets offer a wider variety of options than are available for use in 401(k) plans. Additionally, retail versions of annuities may have more sophisticated features than those available as in-plan options. One insurance company explained how the retail version of a GMWB they offer allows individuals to “lock in” positive investment returns on a daily basis. However, this feature was too complicated for the in-plan version, which instead only allows participants to lock in investment gains once a year. Similarly, one researcher told us the withdrawal options currently available to participants may not be sophisticated enough to adapt to fluctuating investment returns and other changes in a participant’s circumstances. One managed account service provider we interviewed told us the service can help participants develop more responsive withdrawal strategies that change from year to year depending on participants’ circumstances. However, as we reported in 2015, managed account services still represent a small, if growing, portion of the 401(k) market. We have also reported that annuity pricing in 401(k) plans may create instances where male participants are better off purchasing an annuity in retail markets rather than through their plan. Retail annuities typically vary based on gender. As a result, men, who tend not to live as long as women, can generally secure higher monthly payments from an annuity than women with otherwise similar characteristics. In contrast, annuities offered in 401(k) plans must be priced on a gender-neutral basis. This requirement stems from a Supreme Court decision ruling that employers sponsoring plans offering annuities that make smaller monthly payments to women than to men violate a ban on gender-based employment discrimination. According to Treasury officials and researchers, the effects of gender on in-plan annuity prices may be offset by other factors such as the plan sponsor’s ability to negotiate lower fees. One researcher added that the potential effects of an annuitant’s gender on the pricing of in-plan annuities is also limited because prices for opposite sex joint and survivor annuities take into account both male and female longevity and so are priced more similarly in institutional and retail markets. Participants may also have trouble consolidating multiple 401(k) accounts to manage their retirement savings from a single account. As evidenced by our survey of defined contribution plan participants in coordination with a research firm, a vast majority of participants are likely to accumulate more than one account over their career. The majority of participants we surveyed reported they would likely pay for a service that consolidates their accounts into their current plan if their plan sponsor offered one. Almost all participants we surveyed would view such a service as a valuable benefit if their plan sponsor made it available, as compared with other workplace benefits they might receive (see fig. 19). Charles Jeszeck, (202) 512-7215 or [email protected]. In addition to the contact named above, Tamara Cross (Assistant Director), Tom Moscovitch and Ted Leslie (Analysts-in-Charge), and David Lin made key contributions to this report. Also contributing to this report were James Bennett, Ted Burik, Diantha Garms, Gene Kuehneman, Sheila McCoy, Meredith Moore, Ernest Powell, Joseph Silvestri, Anne Stevens, Frank Todisco, Kathleen van Gelder, Walter Vance, and Craig Winslow. GAO, 401(k) Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants, GAO-15-578 (Washington, D.C.: Aug. 25, 2015). GAO, Retirement Security: Most Households Approaching Retirement Have Low Savings, GAO-15-419 (Washington, D.C.: May 12, 2015). GAO, 401(k) Plans: Improvements Can Be Made to Better Protect Participants in Managed Accounts, GAO-14-310 (Washington, D.C.: June 25, 2014). GAO, 401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants, GAO-13-30 (Washington, D.C.: Mar. 7, 2013). GAO, Retirement Security: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States, GAO-13-75 (Washington, D.C.: Dec. 10, 2012). GAO, Thrift Savings Plan: Adding a Socially Responsible Index Fund Presents Challenges, GAO-12-664 (Washington, D.C.: June 26, 2012). GAO, 401(k) Plans: Increased Educational Outreach and Broader Oversight May Help to Reduce Plan Fees, GAO-12-325 (Washington, D.C.: Apr. 24, 2012). GAO, 401(k) Plans: Other Countries’ Experiences Offer Lessons in Policies and Oversight of Spend-down Options, GAO-14-9 (Washington, D.C.: Nov. 20, 2013). GAO, Financial Literacy: A Federal Certification Process for Providers Would Pose Challenges, GAO-11-614 (Washington, D.C.: June 28, 2011). GAO, Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices, GAO-11-400 (Washington, D.C.: June 7, 2011). GAO, Defined Contribution Plans: Key Information on Target Date Funds as Default Investments Should be Provided to Plan Sponsors and Participants, GAO-11-118 (Washington, D.C.: Jan. 31, 2011). GAO, Retirement Savings: Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges, GAO-10-31 (Washington, D.C.: Oct. 23, 2009). | As 401(k) plan participants reach retirement they face the challenge of making their savings last for an unknown lifespan, and many 401(k) plan sponsors do not offer options to help participants with this complex task. GAO was asked to review any related challenges and potential changes to help plan sponsors and participants. This report examines, among other things, what is known about the adoption of lifetime income options in 401(k) plans, barriers that deter plan sponsors from offering such options, and the defaults that exist for participants who do not choose a lifetime income option. GAO administered a non-generalizable questionnaire to record keepers, conducted a non-generalizable survey of 54 plan sponsors, and interviewed a range of stakeholders. Workers relying in large part on their 401(k) plan in retirement may not always have a feasible way to make their savings last throughout retirement. Responses to GAO’s non-generalizable questionnaire from 11 401(k) plan record keepers—entities that manage participant account data and transactions for plans—showed that most plans covered by the questionnaire had not adopted products and services that could help participants turn their savings into a retirement income stream (referred to as lifetime income options in this report). Responses to the questionnaire represented more than 40 percent of all 401(k) assets and about a quarter of plans at the end of 2014. GAO found that of the plans covered by the questionnaire, about two-thirds did not offer a withdrawal option —payments from accounts, sometimes designed to last a lifetime—and about three-quarters did not offer an annuity—arrangements that can guarantee set payments for life. Concerns about legal risks and record keeper constraints may deter many plan sponsors—typically employers that provide 401(k) plans and establish investment and distribution options—from offering lifetime income options. The Department of Labor (DOL) issues regulations and guidance for plan sponsors and is responsible for educating and assisting them to help ensure the retirement security of workers. For example, DOL has prescribed steps plan sponsors can take to satisfy their fiduciary duties (i.e. act prudently and in the best interest of participants) when selecting an annuity provider for a 401(k) plan. However, according to industry stakeholders GAO interviewed, those steps are not often used because they include assessing “sufficient” information to “appropriately” conclude that the annuity provider will be financially able to pay future claims without definitions for those terms. Without clearer criteria to select an annuity provider, fear of liability may deter plan sponsors from offering annuities. Further, GAO found that a mix of lifetime income options to choose from is not usually available. DOL provides an incentive in the form of limited liability relief to plan sponsors who, among other things, provide participants at least three diversified investment options. However, no such incentive exists for plan sponsors offering a mix of lifetime income options. Without some degree of liability relief, plan sponsors may be reluctant to offer a diverse mix of lifetime income options to their participants. Lastly, stakeholders told GAO that record keepers may make only their own annuities available to the plans they service. DOL provides guidance on selecting service providers, but it does not encourage plan sponsors to seek choices from their service providers, which may prevent plans from having appropriate annuity options available to offer participants. Required minimum distributions (RMD) can offer a default for those who do not choose a lifetime income option by setting a minimum amount of taxable 401(k) income for those age 70 ½ or older, based on life expectancy. Some plan sponsors know how to administer RMDs, and some already choose to provide RMD payments calculated to last a lifetime. However, DOL’s guidance on default lifetime income is focused on a particular annuity type used only by a few plans. By issuing guidance encouraging plans to consider letting RMDs be the default distribution process for retiring participants, DOL may help create lifetime income for participants who do not choose an option. GAO makes seven recommendations to DOL, including that it clarify the criteria to be used by plan sponsors to select an annuity provider, consider providing limited liability relief for offering an appropriate mix of lifetime income options, issue guidance to encourage plan sponsors to select a record keeper that offers annuities from other providers, and consider providing RMD-based default lifetime income to retirees. DOL generally agreed, and described actions it would take to address the intent of the recommendations. |
The CSA places various plants, drugs, and chemicals such as narcotics, stimulants, depressants, hallucinogens, and anabolic steroids, into one of five schedules based on the substance’s medical use or lack thereof, potential for abuse, and safety or potential for dependence. The act requires persons who handle controlled substances and/or listed chemicals (such as manufacturers, wholesale distributors, physicians who dispense controlled substances, hospitals, pharmacies, importers/exporters, and scientific researchers) to register with the DEA. This agency, by delegation from the U.S. Attorney General, is responsible for administering and enforcing the CSA and its implementing regulations. Through its Office of Diversion Control, DEA administers the Diversion Control Program whose mission is to prevent, detect, and investigate the diversion of controlled pharmaceuticals and listed chemicals into the illicit market, while ensuring an adequate and uninterrupted supply for legitimate needs. In addition to conducting investigations, the office conducts a variety of activities such as the establishment of production quotas, drafting and promulgating regulations for handling controlled substances, regulating handlers of controlled substances, and monitoring and tracking the production and distribution of certain controlled substances, among other things. To carry out this mission, the Office of Diversion Control is authorized approximately 1,300 full-time equivalent positions and a budget of approximately $292 million. The program is funded through the Diversion Control Fee Account, which consists of registration fees paid by registrants. As required by the CSA, businesses, individuals, or entities that import, export, manufacture, distribute, dispense, conduct research with respect to controlled substances and/or listed chemicals must register with the DEA. DEA has more than 1.3 million individuals and companies that are registered to handle controlled substances or regulated chemicals. These registrants include manufacturers, distributors, and importers/exporters of controlled substances or medications; pharmacies, hospitals, narcotic treatment programs, and clinics that dispense controlled medications; practitioners who prescribe and administer or dispense controlled medications; and researchers who use controlled substances or medications in their research or analyses (see table 1.) In order to maintain their registration, DEA registrants must comply with a variety of regulatory requirements imposed by the CSA and its implementing regulations. Examples of these regulatory requirements include: Recordkeeping: A registrant must keep accurate records and maintain detailed inventories of controlled substances in compliance with applicable federal and state laws. For example, the registrant must maintain accurate records of each substance manufactured, received, sold, delivered, or otherwise disposed of by the registrant. Reporting: Manufacturers and distributors must report acquisition or distribution transactions of certain controlled substances, such as Schedule I and II drugs and Schedule III narcotics, to DEA through the Automated Reports and Consolidated Orders System (ARCOS). ARCOS is an automated reporting system to monitor the flow of controlled substances from their point of manufacture to the point of sale or distribution at the dispensing/retail level such as hospitals, retail pharmacies, practitioners, midlevel practitioners, and teaching institutions. Manufacturing transactions of Schedule I and II controlled substances, as well as Schedule III and IV narcotics, among others are also covered by the ARCOS reporting requirements. Dispensing of controlled substances: The CSA provides special requirements for licensed practitioners and pharmacists who dispense controlled substances in Schedules II-V to patients. For example, a prescription for a controlled substance must be “issued for a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice.” Accordingly, practitioners also have a responsibility to ensure that the controlled substance is properly prescribed and dispensed while a corresponding responsibility exists with the pharmacist filling the prescription. Security of controlled substances: For the purposes of ensuring the secure storage and distribution of controlled substances, all registrants must “provide effective controls and procedures to guard against theft and diversion of controlled substances.” Among other things, DEA regulations also detail specific security requirements for the different types of applicants and registrants. For example, nonpractitioners (i.e., manufacturers, distributors, and narcotic treatment programs) are required to store Schedule I and II substances in electronically monitored safes, steel cabinets, or vaults that meet or exceed certain specifications. Licensed practitioners must store controlled substances in a “securely locked, substantially constructed cabinet” and must notify DEA of the theft or significant loss of any controlled substances. Regulatory Investigations: DEA conducts scheduled investigations or inspections (depending on the registrants, the frequency of the scheduled investigations can range from every 3 years to every 5 years) of wholesale registrants who include manufacturers, distributors, importer/exporters, and narcotic treatment programs as well as other registrants such as researchers, analytical labs, and teaching institutions, among others. Retail level registrants such as pharmacies and physicians—with the exception of physicians permitted to treat narcotic dependence—do not receive regulatory investigations by the DEA. These registrants are regularly investigated by the states in which they conduct business. According to DEA officials, they focus their efforts related to regulatory investigations on the wholesale registrants because such registrants are the sources of supply to criminal schemes such as rogue pharmacies and pill mills. To conduct these investigations, DEA Diversion Investigators arrive at the registrant unannounced and inspect and verify the registrant’s records, take a physical inventory of the registrant’s controlled substances, and inspect any other items necessary to verify the registrant’s compliance with the CSA and its implementing regulations. If deficiencies are found during the investigation, DEA may work with the registrant to correct the deficiencies. DEA may also take administrative, civil, or criminal action against the registrant depending on the type, severity, and frequency of the deficiencies found. Complaint Investigations: Complaint investigations are investigations that are started on the basis of information or a tip provided to DEA or state regulators, or other information DEA has regarding purchases or losses of controlled substances. The origin of the information could be from any number of sources, such as a state or local official or citizen that saw something suspicious, employees of a registrant, the identification of unusual purchasing trends by a registrant such as a pharmacy tracked by DEA through its ARCOS, or a report of a loss of controlled substances by a registrant. Diversion Investigators conduct preliminary investigative work to determine whether the information is valid and warrants a full investigation. Depending on the outcome of the preliminary complaint investigation, DEA determines whether the investigation will be handled as a regulatory noncompliance issue, a criminal case, or a dismissal. Criminal Investigations: DEA also conducts investigations into criminal activities involving diversion of controlled substances. Criminal diversion may involve DEA registrants such as pharmacies and practitioners and nonregistrants such as pharmacy burglars or doctor shoppers, among others. Within its 21 field divisions, DEA utilizes a variety of personnel to carry out these investigative responsibilities: Diversion Investigators conduct investigations of regulatory, civil, and criminal issues pertaining to DEA registrants. The investigators do not have law enforcement authority and cannot perform law enforcement functions such as making arrests and conducting surveillance. Special Agents conduct diversion investigations and assist Diversion Investigators by performing law enforcement functions such as serving search warrants and making arrests. Diversion Program Managers oversee diversion control activities in their field division. Special Agents-in-Charge manage the activities of the DEA field division including diversion control activities. Assistant Special Agents-in-Charge assist the Special Agents-in- Charge in managing activities of the field division including diversion control activities. To respond to the increasing rate of criminal diversion and a growing registrant population, DEA has expanded its resources and targeted investigation strategies in ways to collaborate with state and local entities and enhance the effectiveness of its Diversion Control Program. Specifically, DEA has expanded its use of Tactical Diversion Squads, which work with DEA’s state, local, and other federal partners, to maximize resources and improve efforts to investigate, disrupt, and dismantle individuals or organizations involved in diversion schemes related to controlled substances and listed chemicals. DEA has also renewed its focus on regulatory oversight of the more than 1.3 million DEA registrants to ensure registrants comply with the CSA and implementing regulations. DEA accomplished this by increasing the frequency of scheduled investigations of DEA registrants that are registered to handle controlled prescription drugs. To help respond to the ever-changing methods of criminal diversion such as rogue pain clinics and rogue Internet pharmacy schemes, in October 2008 the DEA acting Administrator authorized the expansion of squads devoted to addressing criminal diversion of controlled substances and listed chemicals across the United States. DEA has historically utilized these squads, called Tactical Diversion Squads (squads), as a collaborative mechanism to address the criminal diversion of controlled substances. The squads are teams of DEA diversion personnel (such as Special Agents and Diversion Investigators), as well as state and local law enforcement personnel (task force officers) whose mission is to detect, investigate, and refer for prosecution, violators of federal and state statutes pertaining to diversion. They also develop investigative leads from information and intelligence obtained from participating agencies, undercover operations, and the use of informants. This multiagency effort helps coordinate the investigative activities of the participating agencies. According to DEA, the squads also allow DEA to provide manpower for diversion investigations at reduced costs to DEA because task force officer positions are less expensive than Special Agents or Diversion Investigators. For example, DEA compensates state and local Tactical Diversion Squad task force officers for overtime, use of a vehicle, equipment, and diversion training, while the parent agencies are responsible for their task force officers’ salary and benefits. requested an additional 60 Special Agent, 37 Diversion Investigator, and 64 task force officer positions for fiscal year 2011, and an additional 50 Special Agent, 16 Diversion Investigator, and 64 task force officer positions for fiscal year 2012. Because the Diversion Control program is funded through its fee account, DEA officials noted that such increases in personnel are contingent on the revision of the schedule of fees charged registrants, which is currently underway. They anticipate beginning to collect fees under the revised fee schedule in fiscal year 2012. DEA’s current annual registrant fees range from $184 to $2,293. The last time DEA revised its fees was in 2006. States such as Florida have experienced significant diversion problems through illegal pain clinics. According to DEA officials, Florida physicians order the majority of oxycodone compared to the rest of the country. In 2010, Florida dispensing physicians ordered over 41 million dosage units of oxycodone, while the rest of the country ordered a total of 4 million dosage units. Some of these physicians are reported to have links to illegal pain clinics where they either dispensed or wrote prescriptions that were not for legitimate medical purposes. Individuals from other states would come to Florida to visit the clinics to obtain controlled substances for abuse or resale. Florida recently enacted legislation to address these clinics. Similarly, Texas and Louisiana have experienced problems with illegal pain clinics and also enacted legislation to address this roblem. Among other things, the legislation for these states requires pain clinics to be owned and operated by licensed physicians with no previous medical board action, and to register with state regulators. squad has enabled local law enforcement agencies to carry out more complex investigations into diversion within their localities. For example, although some local law enforcement agencies had conducted investigations of lower level diverters such as doctor shoppers prior to the establishment of squads, they did not have the resources on their own to carry out the longer, more complex investigations required for targeting higher level diverters such as physicians and their clinics. DEA officials noted that state and local agencies also lack the administrative authorities DEA has to take action against a DEA registrant when necessary. The squad provided a means for state and local law enforcement to collectively pool their resources with DEA to investigate higher level diverters. Based on feedback from squad participants and DEA officials we interviewed, coordination and information sharing within the squads were reported as excellent and an improvement over presquad times. According to DEA and local officials we interviewed, the establishment of the squads has been a means to improve communication, coordination, and simplify information sharing as the squads have become the clearinghouse for diversion-related investigative information. As a result, information is now shared more rapidly and broadly between law enforcement agencies, according to these officials we interviewed. These squads have also become an important deconfliction mechanism for law enforcement agencies regarding the diversion cases they are working or information they receive from other sources. For example, one local law enforcement official with a task force officer on a squad stated that all leads his department receives for potential diversion investigations are first referred to the squad to determine whether there are any links to ongoing squad investigations or if the lead would be an appropriate target for it to take on as a new investigation. Federal agencies such as the Federal Bureau of Investigation (FBI), the U.S. Department of Health and Human Services (HHS), and the Internal Revenue Service (IRS) may also be involved in the squads’ criminal investigations depending on the case and if their expertise is needed. For example, FBI agents will generally join a squad’s investigation if fraud is involved; HHS investigators may become involved in investigations related to health care fraud; and IRS agents may assist in investigations involving tax evasion and money laundering. In March 2011, for example, the DEA in conjunction with the FBI and HHS, among other agencies, concluded an investigation into a Detroit physician for unlawfully distributing controlled substances, including the Schedule II controlled substance OxyContin (oxycodone), and fraudulently billing Medicare. According to DEA, a conviction of this offense carries a maximum of 20 years in prison, a fine of $1 million, or both. In another example, according to DEA squad officials, DEA, FBI, and IRS, among others, conducted a joint criminal investigation into a Texas business owner’s rogue Internet pharmacy scheme. The investigation resulted in a guilty plea to several offenses including unlawfully distributing controlled substances, money laundering, and fraudulently billing healthcare providers, among other offenses. According to DEA officials, joint investigations with other federal agencies are very helpful for the squad in advancing the investigation because the other federal agencies bring specific subject matter expertise in areas that DEA staff do not have. In addition to the expansion of the squads in October 2008, the DEA acting Administrator also called for an enhanced focus on DEA’s regulatory oversight aimed at ensuring that the more than 1.3 million DEA registrants comply with the CSA and its implementing regulations. According to DEA, the overall registrant population tends to grow at a rate of 2 to 2.5 percent annually; however, registrants such as Drug Addiction Treatment Act waived physicians (DWPs) have grown faster. For example, from fiscal year 2002 to fiscal year 2010 the number of DEA registered DWPs increased from 1,451 to 19,211, an increase of about 1,300 percent. DWPs are physicians who dispense or prescribe Federal Food and Drug Administration approved buprenorphine products for treatment of narcotic addiction/dependence on an outpatient basis. In an effort to help meet the demand for this specialty, the Drug Addiction Treatment Act of 2000 waived the requirement for qualified physicians to obtain a separate DEA registration as a Narcotic Treatment Program in order to provide medication-assisted chemical substance therapy. With the enactment of the act, the Substance Abuse and Mental Health Services Administration within HHS aggressively pursued training for interested physicians to help meet this demand. As a result, there was a significant increase in the number of physicians who registered with DEA as DWPs. In response to this growing registrant population, DEA increased the frequency of scheduled investigations of DWPs as part of the enhanced regulatory oversight called for by the acting Administrator. For example, in October 2008, DEA decided to move towards conducting regulatory investigations of all DWPs every 5 years to monitor for compliance. Previously DEA was conducting regulatory investigations of only one DWP in each of its 21 Field Divisions annually, a rate that, given the growth of that registrant type, would have taken decades for DEA to investigate all registered DWPs, according to the Executive Assistant to the Deputy Assistant Administrator for the Diversion Control Program. According to DEA’s Chief of the Regulatory Section, the decision to increase the rate for conducting regulatory investigations of DWPs was also due, in part, to some DWPs not complying with regulatory requirements relating to recordkeeping and the loss of controlled substances used to treat patients. DEA also increased the frequency of regulatory investigations for other registrant types as well, such as registrants involved in the manufacture and distribution of drugs (from once every 5 years to once every 3 years), and chemicals (from once every 3 years to once every 2 years). For some registrant types that had not previously been subject to regulatory investigation, such as researchers, analytical labs, and teaching institutions, DEA required that regulatory investigations be conducted once every 5 years. According to DEA’s Chief of the Regulatory Section, the increase in the frequency of regulatory investigations for some registrant types was also due to the registrants’ noncompliance with the CSA and DEA’s implementing regulations. For example, some distributors did not report suspicious orders for controlled substances to DEA, as required by regulation. Reflecting the changes in requirements for regulatory investigations, DEA more than tripled the number of regulatory investigations from 1,173 in fiscal year 2009 to 3,731 in fiscal year 2010 (see fig. 2 below). According to the Executive Assistant to the Deputy Assistant Administrator for Diversion Control, DEA was able to increase its regulatory investigations primarily by using the squads to free up Diversion Investigator resources that had previously been working both criminal and regulatory cases and DEA plans to hire additional diversion staff in the future to conduct investigations. To keep up with the level of regulatory investigations to be completed in the future, DEA plans to hire additional staff. For example, for fiscal year 2011 DEA requested 60 Diversion Investigator positions and for fiscal year 2012 requested an additional 50 Diversion Investigator positions, pending completion of the revision of the schedule of fees charged registrants, which must provide the funding necessary to fill those positions. According to DEA officials, of the 60 Diversion Investigator positions requested for fiscal year 2011, 23 were requested to support regulatory activities while 37 were to support the squads; for fiscal year 2012, of the 50 Diversion Investigator positions requested, 34 were for regulatory activities and 16 for support of the squads. In addition to conducting regulatory investigations, DEA has also actively engaged registrants and their industry associations to help the registrants understand current trends in diversion and the regulatory obligations they must demonstrate that they have fulfilled during regulatory investigations. For example, DEA periodically hosts conferences for the chemical and pharmaceutical industries to share information on current trends, issues, federal laws, and regulations, and to discuss practices to prevent diversion. Industry associations reported that DEA also attends industry- sponsored conferences and shares useful information and guidance. In addition, regulated industry reported that DEA provides information to registrants on DEA’s Web site as well as through policy letters and correspondence. According to DEA officials, they also speak at conferences such as the National Association of Boards of Pharmacy, the American Society of Interventional Pain Physicians, pharmacy schools, and other industry venues. Furthermore, DEA has conducted other targeted outreach efforts to specific registrant types to inform them of specific regulatory responsibilities or help them prepare for regulatory investigations: In 2005 DEA established an initiative to better inform wholesale distributors of controlled substances of their responsibilities under the CSA to report suspicious orders from pharmacies that are possibly filling invalid prescriptions. As part of this initiative, DEA created a presentation explaining the laws, regulations, and DEA policies. The presentation provided examples of Internet pharmacies and rogue pain clinics as well as their purchase patterns and methods of operation. The presentation was designed to emphasize the need for wholesalers to utilize due diligence, and when appropriate, stop supplying retail outlets with controlled substances where diversion is occurring. From August 2005 through March 2011, DEA reported briefing 74 corporations concerning illegal Internet pharmacy operations and rogue pain clinics. Since the launch of the program, DEA reports that distributors have voluntarily stopped selling or restricted sales of controlled substances to approximately 1,390 customers believed to be placing suspicious orders for such substances. During 2009 and 2010, DEA’s Office of Diversion Control officials met with a number of DWPs and industry associations that represent DWPs to inform them about the regulatory investigation process and regulatory requirements. They discussed recordkeeping and the security of controlled substances, among other items, that DWPs must meet to comply with the CSA and its implementing regulations. DEA helps to ensure the quality of its diversion control investigations through the use of internal controls, but could enhance its efforts to measure the results of its Diversion Control Program. To ensure that Diversion Investigators and Special Agents have the necessary skills to carry out their responsibilities and that DEA monitors the results of its employee guidance and training, DEA has established internal control activities, which are consistent with Standards for Internal Control in the Federal Government. DEA has established performance measures to assess and report on its progress toward meeting its performance goal of reducing the diversion of licit drugs, but could reassess the measures to identify ways to better capture and report on the results of DEA’s investigations. Diversion investigations are the primary means DEA uses to monitor registrant compliance with the CSA and to identify diversion activities. As such, it is important that the employees responsible for conducting investigations—Diversion Investigators and Special Agents—have the necessary skills to carry out their responsibilities and that DEA management monitors the results of its investigative efforts. To accomplish this, DEA has established internal control activities related to guidance, training, and monitoring. Given DEA’s increased focus on regulatory and criminal investigations in response to growing and evolving diversion, these internal controls help to provide reasonable assurance that investigators and agents have the necessary skill levels to meet existing program requirements for diversion investigations and changing organizational priorities as new trends in diversion emerge. DEA has established internal control activities related to guidance and training such as program policy and procedures manuals and diversion investigation courses. These efforts are consistent with Standards for Internal Control in the Federal Government, which state that agency management should help to ensure it has a workforce that has the required skills that match those necessary to achieve organizational goals. Specifically, DEA provides guidance in the form of manuals to its Diversion Investigators and Special Agents on the policies and procedures they are to follow in conducting diversion investigations. DEA officials told us that they use this guidance for conducting diversion investigations and reviewing employee work products. The Diversion Investigator Manual describes and explains the policies and procedures for Diversion Investigators in carrying out their regulatory and investigative responsibilities, the processes for conducting diversion investigations, and the procedures for developing investigative reports. The Special Agent Manual describes and explains the responsibilities of Special Agents in diversion investigations. In order to familiarize employees with the process for conducting diversion investigations and related policies and procedures, DEA requires basic training for new employees and offers advanced and supplemental training courses to existing personnel within the Diversion Control Program to help them maintain the knowledge and skills necessary to conduct diversion investigations. Specifically, DEA’s Office of Training provides a 12-week basic course to newly hired Diversion Investigator personnel, which includes techniques for diversion investigations among other relevant subjects, to help ensure that they have the required skills for performing investigator responsibilities. The training is provided through a combination of in-classroom lessons and practical application; direct observation; and instructor-to-trainee feedback. Course trainees must maintain an 80 percent average on exams and simulated on-site investigations in order to pass the course and be certified as a Diversion Investigator. After the completion of basic training, the investigators enter into duty under a 1-year probationary period with a midpoint review provided after 6 months of duty. In addition, according to DEA officials we spoke with, group supervisors may go on- site with newly hired employees to help ensure that they are familiar with the requirements of investigations. DEA also requires its Diversion Investigators to complete an advanced (or in-service refresher) training course every 2 years to help ensure their investigative skills and knowledge remain current. The advanced training course is a 1-week course that focuses on current legal issues in diversion, recent updates to DEA program policies and technology, investigative techniques, and any other new initiatives or programs that DEA has incorporated as part of the diversion control program within the previous 2 years. Officials in DEA’s Office of Training told us that the topics that are covered during the advanced training course are identified through a biannual survey of Diversion Investigators and group supervisors to find out what issues they are facing in their work or what additional guidance is needed. DEA’s efforts to help ensure Diversion Investigators maintain their investigative skills and are informed of new program initiatives and program policy changes are consistent with federal internal controls standards which state that training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Beyond the required basic and advanced training courses, Diversion Investigators and supervisors may take additional courses in other relevant subject matter areas as time, resources, and needs permit. For example, officials in DEA’s Office of Training told us that they offer specialized courses on specific issues related to diversion control investigations such as interviewing techniques, chemical investigations, techniques for financial investigations, and asset forfeiture, among others. Furthermore, the Diversion Control Program’s field divisions may occasionally sponsor supplemental training for personnel that they determine would be beneficial. Typically, such training is shorter in duration and narrowly focused on topics such as report writing, interviewing techniques, or legal or investigative issues specific to that division. Group supervisors of Diversion Investigators also receive supervisory training to help ensure that they have the requisite knowledge to perform their supervisory responsibilities, including those responsibilities related to reviewing the work of Diversion Investigators. Specifically, when first promoted, supervisors attend a supervisory institute to learn their new roles and responsibilities as supervisors as well as receive training in management and leadership techniques. Group supervisors also have electronic access to PowerPoint presentations, handouts, and administrative manuals to help guide them in carrying out these responsibilities once they return to duty. As with the Diversion Investigators, supervisors also receive a 1-week advanced supervisor refresher course every 2 years. Special Agents assigned to the Diversion Control Program are also provided training related to conducting criminal diversion investigations. The training for Special Agents includes a 1-week course to provide them with an in-depth understanding of criminal diversion investigations and includes instruction on methods of diversion, Internet investigations, and the investigative techniques to develop criminal investigations, among other issue areas related to diversion control. Furthermore, DEA’s Office of Diversion Control recently developed and implemented a new training curriculum designed to retrain and retool all Diversion Investigators. According to DEA officials, as the reorganization of the diversion program required Diversion Investigators to conduct more regulatory investigations than previously, the retraining was developed to refresh the investigators’ skills and abilities for conducting the investigations. DEA officials reported that as of December 2010, all Diversion Investigators completed this training. These efforts are consistent with federal internal control standards which provide that training should help to retain employee skill levels in order to meet changes in organizational needs. To assess the effectiveness of its training courses, officials in DEA’s Office of Training stated that they obtain student feedback on a training course evaluation form at the conclusion of each training course. Additionally, DEA training officials review the curriculum for basic Diversion Investigator training every 3 years using feedback from students and input from a training working group comprised of Diversion Investigators and group supervisors to ensure that the material being presented is relevant and up to date. DEA officials also reported that the Office of Training is in constant communication with diversion management staff at headquarters and in the field to ensure that the training curriculums include updated policies relating to diversion operations. As DEA continues to enhance its diversion control efforts, it is important that it has controls in place to review the quality of its diversion investigations and to test the effectiveness of its review process in order to readily identify and resolve deficiencies related to its key compliance activity. Standards for internal control in the federal government provide that internal control monitoring should assess the quality of performance over time and ensure that findings of audits and other reviews are promptly resolved. DEA’s internal control monitoring activities collectively are consistent with these standards, which also state that internal controls should generally be designed to assure that ongoing monitoring occurs in the normal course of operations. Internal control monitoring includes regular management and supervisory activities among other activities and is performed continually. DEA has implemented a multilayered approach to monitor the work of its Diversion Control Program personnel to help ensure that they are following policies and procedures for diversion investigations. The monitoring process includes direct supervisory review, self-inspection/peer review, and on-site internal inspection. Additionally, DEA assesses the effectiveness of its monitoring process by reviewing the results of inspections conducted as a part of the overall program evaluation responsibilities of DEA’s Office of Inspections (IN) and determining actions necessary for improvement and additional employee training needs. Furthermore, DEA’s 2009-2014 Strategic Plan reflects that the agency plans to use the Office of Inspections to help ensure effective and efficient program oversight through its on-site inspections. DEA field division supervisory officials reported that they directly review employee work products to assess the extent to which employees are following required policies and procedures for diversion investigations. Specifically, these supervisory officials review reports and active case files submitted by their employees for completeness, accuracy, and adherence to reporting procedures. If any discrepancies are found that need to be corrected, feedback is provided to employees as appropriate detailing what needs to be revised or clarified. Additionally, supervisory officials in three of the five field divisions we spoke with reported that they maintain regular communication to help ensure that employees are completing investigations in an accurate and timely manner. DEA officials also reported that group supervisors work with Diversion Investigators on- site when necessary to help advise them on the appropriate steps to take during an investigation. Whenever a case is being elevated for disciplinary action (civil or criminal), Division management presents a summary of the case to the program manager detailing the facts and rationale for the disciplinary action. Division management reviews the case summary and determines approval for further action (e.g., prosecution). In addition to direct supervisory review of work products, DEA’s Office of Inspections also has a Self-Inspection Program (SIP) in which DEA field divisions are required to conduct annual self-inspections of five major program areas: enforcement management; enforcement effectiveness; financial management; confidential source management; and evidence. According to the DEA officials we spoke with, during the on-site inspection process, field division group supervisors inspect each others’ group case files to determine if investigations were conducted in accordance with required policies and procedures. Supervisory officials in all five field divisions we spoke with stated that they conduct the self- inspections on an annual basis. The results of the self-inspection reports are reviewed by the Office of Inspections. According to DEA’s 2009-2014 Strategic Plan, information related to the SIP is used as the starting point for the Office of Inspection’s cyclic, on-site inspections. The Chief of the Diversion Control Program’s Regulatory Section reported that field division officials submit to headquarters for review a copy of the investigative reports for every regulatory investigation that has been conducted. DEA officials then conduct a quality review of these reports which assists them in identifying deficiencies and determine the training needs of diversion personnel as they relate to completing regulatory investigations. The chief of the Diversion Control Program’s Regulatory Section stated that if report errors are identified during the review process, officials in the Regulatory Section follow up with the respective field division to address the issue and submit supplemental report information. The Office of Inspections also conducts on-site internal inspections of DEA’s 21 field divisions to ensure that employees are following required program policies and procedures—in accordance with the Diversion Investigator manual. The office’s primary objective for on-site inspections of the diversion control program is to determine how the diversion control work is being conducted by the field divisions and identify and address any problems. According to the Chief Inspector the Office of Inspections, it is the Office of Inspection’s goal to conduct on-site inspections every 3 years as resources allow. See figure 3 for a description of the steps involved in the internal inspection report process: According to DEA officials, the Office of Inspections briefs headquarters- level management about the issues identified, and sends the report to the field division. For findings, the field division then has 60 days to provide a written response about the corrective actions that the field division has taken or plans to take. DEA officials also reported that they use internal inspections as an internal management tool to review their areas of responsibility. We reviewed DEA’s most recent inspection reports available for each of its 21 field divisions which summarized the results of interviews with management and staff, reviews of program operations, and case files reviews for policy compliance, among other items. We found that the inspections did not identify widespread findings or issues related to the timeliness and overall quality of the diversion investigations. Given DEA’s increased focus on regulatory and criminal investigations in response to growing prescription drug diversion, it is critical for DEA to determine and report on the extent to which these additional efforts are helping to reduce diversion. In this regard, DEA has established performance measures to assess and report on its progress towards meeting its performance goal of reducing the diversion of licit drugs, but could enhance its set of performance measures to better capture and report on investigative outcomes and their results on diversion. We have previously reported that performance information can be used to help decide among competing priorities and allocate resources in a results- oriented management system. Such performance information allows program managers to compare their programs’ results with goals and thus help determine where to target resources to improve performance. In addition, one of the key characteristics of successful hierarchies of performance measures is the ability of the measures to demonstrate how well a program is achieving its goals. As shown in table 2, DEA has developed five measures to track and publicly report the progress and results of its efforts in reducing the diversion of licit drugs. According to DEA program officials, these measures were selected as a result of a performance measure review by the Department of Justice (DOJ) in 2009. For this review, DOJ asked all of its components to reexamine their performance measures to identify and discontinue performance measures that were confusing or did not adequately reflect the core mission. In place of such measures, DOJ asked the components to develop five core measures that are easy to understand and explain what is being accomplished with the resources expended. Our analysis of the measures found that while some indicate results, such as the number of organizations disrupted or dismantled that were involved in diverting prescription drugs, when taken together, the set of measures does not clearly demonstrate to what extent the additional efforts DEA has made in investigations in recent years are having an effect on the diversion problem. As a result, the set of measures do not clearly explain how they demonstrate progress towards the overall program performance goal of reducing diversion. DEA program officials acknowledged that these measures do not fully reflect the results of the program towards the reduction of diversion and as a result, they do not rely on them exclusively for managing the program or determining where best to allocate program resources. They stated that for the purposes of internal program planning and management, they have access to and utilize other data and measures not reported, or can pull up additional information on investigative results that provide more detail on what the program is achieving towards the reduction of diversion. DEA has designated an overall outcome measure to track the results of the diversion control program as a whole; however, this measure does not demonstrate program results. This measure—Milestones for Development, Implementation, and Maintenance of Data Warehouse to Monitor Closed Distribution System—tracks the development of an information warehouse system DEA is developing for use in diversion investigations. According to DEA officials, when completed, this warehouse—known as the Rapid Targeting Online Reports Tool (RapTOR)—will facilitate data and trends analysis as part of diversion investigations. DEA officials explained that RapTOR is intended to streamline the investigation process by providing a comprehensive data warehouse tool that is linked to other DEA databases such as ARCOS, the drug theft/loss reporting system, and a system that tracks the number of asset forfeitures, arrests, and other enforcement data. While the RapTOR appears to hold promise as a useful tool in diversion investigations, tracking the milestones of its development as the outcome measure for the overall diversion program does not demonstrate results or capture outcomes from the program as a whole as it is only one project within the program. According to OMB guidance to agencies on preparing strategic plans and performance reports, outcome measures are to describe the intended result of carrying out a program and define an event or condition that is external to the program and is of direct importance to the intended beneficiaries or the public. While tracking milestones for the RapTOR’s deployment may be useful as project- specific outcome measures, due to their focused nature they do not provide information on results of the diversion control program as a whole. For instance, reporting on RapTOR’s testing and deployment status does not provide program management or other decision makers such as Congress information to indicate the results of DEA’s regulatory and criminal investigations are having towards the reduction of diversion of licit drugs, the program’s performance goal. Development of an outcome measure that more directly demonstrates the external results of the overall program could provide better information to DEA program managers and other decision makers such as Congress about program successes which could also help determine how to most effectively use resources. According to DEA’s fiscal year 2012 budget submission, the RapTOR will allow for the development of an outcome measure. When asked if they planned to develop an outcome measure to replace the RapTOR, DEA officials indicated that until RapTOR is fully developed and implemented, it would be too soon to tell when a replacement outcome measure would be necessary. Furthermore, DEA officials could not explain how they use the RapTOR measure to show overall program results or outcomes or how it will be used to develop a measure that reports such results or outcomes. Two of DEA’s performance measures track results DEA has achieved through criminal investigations of priority targets. In April 2001, DEA implemented the Priority Target Organization (PTO) program as a strategic initiative to identify, target, investigate, and disrupt or dismantle drug trafficking and/or money laundering organizations having a significant impact on drug availability within the United States. Although the Diversion Control Program was not officially part of the DEA’s Priority Targeting Program prior to fiscal year 2010, with the creation of Tactical Diversion Squads in every domestic DEA field division, the Diversion Control Program has since begun focusing on the identification of PTOs and their eventual disruption and dismantlement. DEA has two separate measures to track the number of PTOs disrupted and dismantled—one for those with identified links to Consolidated Priority Organization Targets (CPOTs) and another for those without links to CPOTs. As a participant in the PTO program, the Diversion Control Program is required to report on these performance measures. Whereas PTOs are organizations with an identified hierarchy engaged in drug trafficking or drug money laundering operations, CPOTs are the command and control elements of a major international drug trafficking organization and/or money laundering enterprise that significantly impacts the U.S. drug supply. An example of a diversion PTO cited by DEA officials was a practitioner who prescribed large quantities of controlled substance pharmaceuticals for nonmedical purposes to “patients” from at least five different states. DEA officials stated examples of CPOTs involved in diversion include international chemical distributors that traffic in chemicals used to manufacture methamphetamine while other CPOTs traffic in pharmaceuticals or counterfeit pharmaceuticals. Specifically, these measures report the extent to which DEA disrupted (disrupt) or stopped (dismantle) the operations of PTOs and these organizations’ ability to divert controlled substances, which helps to reduce the diversion of licit drugs, the program’s overall performance goal. For example in fiscal year 2010, DEA reported that it disrupted one PTO with linkages to a CPOT and dismantled one PTO with CPOT linkages. For PTOs without linkages to a CPOT, DEA reported disrupting 96 and dismantling 65 in fiscal year 2010. According to DEA officials, the PTO-related measures are useful in helping the program to focus criminal investigations on those priority targets against which they are likely to have the greatest impact on the diversion of licit drugs. While DEA has some performance measures to demonstrate the results of its criminal investigations, it lacks measures that clearly track resulting outcomes DEA has achieved through its additional regulatory investigations. For example, DEA has a measure that provides a numerical count of the scheduled or regulatory investigations completed. According to DEA’s Fiscal Year 2009-2014 Strategic Plan, one of the objectives for the diversion control program is to ensure 98 percent compliance of all registrants by fiscal year 2014. However, while the performance measure is focused on the regulatory investigations and provides a count of the number of investigations completed, this measure does not demonstrate the results of those completed investigations or give a sense as to the extent to which registrants were found to comply with the CSA and thereby the extent to which DEA is achieving its stated objective. According to DEA officials, while they previously reported on the compliance rate of a subset of wholesale registrants as the program’s outcome measure, the reexamination of program performance measures in 2009 resulted in discontinuing use of the measure. DEA officials stated that because the compliance level among registrants tends to be very high in general, the values of the measure did not significantly change from year to year. Consequently, they stated, the measure did not provide a meaningful gauge of the results regulatory investigations were having. However, DEA data reported before it discontinued use of this measure showed that the compliance rate, while always relatively high, fluctuated between 88.5 percent to as high as 97.7 percent between fiscal years 2003 and 2008. Further, as stated in DEA’s strategic plan, one of the key objectives of the program is to ensure a certain level of compliance among registrants. Without the reporting of a measure that directly tracks a level of compliance among registrants, the public and other external stakeholders such as Congress will not be able to determine the extent to which DEA is achieving that specific objective. In addition, given that DEA more than tripled the number of regulatory investigations conducted from fiscal year 2009 to fiscal year 2010 including investigations of previously excluded registrant groups as well as increasing the frequency of investigations for a rapidly growing DWP registrant group—it will be important for DEA to be able to assess and report on the potential results these additional investigations are having on regulatory compliance. In addition, the other performance measure reports on the number of sanctions DEA has taken against diverters or noncompliant registrants over the past year. As such, it is one indicator of the results of DEA investigations. However, as it is a count of the sanctions, it only demonstrates the number of sanctions taken, but does not provide context as to the severity of the sanctions or the reason for the sanctions. For example, administrative sanctions resulting from deficiencies in a registrant’s recordkeeping found during regulatory inspections may reflect a lack of compliance with the CSA but not necessarily instances of actual diversion. In contrast, criminal sanctions, such as prison time given to an individual or registrant for diversion of controlled substances, reflect sanctions taken against actual diversion that has occurred and identified during a criminal investigation. Because the sanctions are tallied together for the performance measure, it is difficult to determine to what extent they have resulted from regulatory noncompliance issues or instances of criminal diversion. Another difficulty with combining the total number of administrative, civil, and criminal sanctions in one total is that changes in the number of the respective type of penalties mean different things in terms of what they indicate about the potential risk for diversion. For example, an increase in the number of criminal sanctions resulting from DEA’s criminal investigations indicates that individuals or PTOs involved in diversion have been disrupted or dismantled, reducing the potential risk for future diversionary activities, and is therefore a desirable change. However, an increase in the number of administrative sanctions resulting from regulatory investigations could indicate a trend of rising noncompliance among registrants, which is an undesirable change as it implies that DEA’s outreach efforts with industry may not have been effective and the potential risk for diversion is higher as a result of registrants’ noncompliance. As a result, this measure does not provide a clear indication as to the effect DEA’s investigative efforts are having on the problem of diversion. By tracking sanctions resulting from regulatory noncompliance combined with sanctions resulting from criminal diversion, program managers and other decision makers may lack information on what type of noncompliance is increasing and be able to determine what adjustments to the program’s efforts, if any, might be necessary to address the root causes of increases in the number of sanctions. DEA officials acknowledged that this measure by itself is not detailed enough to provide that information. However, they stated they supplement the measure for internal program planning and management functions by conducting analyses that separate out the different types of sanctions and provide more meaningful data on the sanctions to identify diversion trends, determine the results of their efforts, and inform future program plans and policy decisions. Officials also noted that providing a single count of sanctions without breaking them out helped simplify the measure and meet DOJ’s goal of limiting the number of overall performance measures to five. While this may be more manageable for the purpose of providing performance information, the measure does not clearly tie to outcomes and demonstrate program performance—a key goal of DOJ’s performance measure reexamination effort—and does not provide sufficiently meaningful information and data to external stakeholders and policy makers such as Congress about the types of sanctions DEA has taken as a result of both regulatory and criminal investigations. The growing problem of controlled substance diversion presents a serious and constantly evolving threat to public health and safety. In responding to this threat, DEA faces a unique challenge in being proactive to investigate and stop the diversion of controlled prescription drugs and substances, while at the same time, ensure that individuals with legitimate needs and uses for such substances can obtain them. In recent years, DEA has taken steps to adjust its approach to increase its efforts in conducting regulatory and criminal investigations to facilitate registrant compliance with the CSA and enhance coordination and leverage the resources and abilities of other federal, state, and local partners when conducting investigations into criminal diversion. Given the steps DEA has taken, it is important for DEA management to track the results its efforts are having against diversion in order to determine what benefits are being realized and what, if any, adjustments need to be made to make them more effective. DEA has established a set of performance measures for the program, but the link between most of the measures and how they demonstrate the progress DEA is making towards the overall goal of reducing diversion is unclear. Making more meaningful information available externally about the program’s results would enable program managers and external stakeholders to better understand what the program is accomplishing and provide more effective oversight. By developing an outcome measure that demonstrates programwide results of benefit to the public and revising other performance measures to better track and report on the results of investigations and their results on reducing diversion of prescription drugs, DEA could make the measures more effective for demonstrating results. Doing so could also provide DEA program managers and other decision makers such as Congress better information to target program approaches accordingly to further optimize results against diversion. In order for DEA to better determine to what extent its efforts are decreasing diversions and to inform future program decisions, we recommend that the Administrator of DEA strengthen the agency’s performance measurement for the Diversion Control Program by reassessing its set of performance measures for the program to identify ways to enhance the measures and their link to the program outcome goal of reducing diversion. We requested comments on a draft of this report from DOJ. DEA provided written comments, which are summarized below and reprinted in full in appendix I. In its comments, DEA stated it would take action to address the recommendation to strengthen its set of performance measures for the Diversion Control Program but that it disagreed with the finding that its performance measures do not adequately measure how its efforts reduce diversion or that such deficiencies impede resource allocation decisions. In an e-mail received on August 4, 2011, the Acting Assistant Director of DOJ’s Audit Liaison Group clarified DEA’s position stating that DEA did not concur with the recommendation. In its comment letter and attachment, DEA stated that the report demonstrated that its management is appropriately directing its resources towards key points of diversion and confirms that DEA has been successful in accomplishing its objectives. DEA reiterated that performance measures must be viewed within the context of other information to assess the results that DEA efforts have on public health and safety as well as the reduction of diversion. To this end, DEA stated that its leadership provides policy makers and legislators information though a variety of other sources such as budget requests, intelligence reports, briefings, and testimonies. They also noted that the majority of such information presented to policy makers is based on investigative data and intelligence which is broader in scope than performance measures. In regards to developing or implementing measures to track regulatory performance, DEA stated that further strengthening the current performance measures to include regulatory performance measures would not provide any additional benefit in assisting the agency or other decision makers in the allocation of resources or targeting of program approaches to further optimize results. DEA stated that it would be extremely difficult to do so because the vast majority of registrant inspections do not uncover serious violations of the CSA and thus a very small number of registrants are subject to sanctions during the annual inspection cycle. Further, DEA stated that the deterrent effect of regulatory investigations cannot be quantified making it impossible to measure the lack of diversion resulting from DEA’s efforts. As the report indicates, we recognize that DEA has taken steps to allocate resources and position the program to respond to emerging diversion trends. However, the report does not state that DEA management has appropriately directed its resources or confirm that DEA has been successful in accomplishing its objectives. The review on which this report is based describes how DEA manages its investigations to address the growing and evolving nature of diversion and did not evaluate those actions for their efficiency or effectiveness as implied by DEA. At the same time, as our evidence did not suggest that DEA’s use of current performance measures has directly impeded its resource allocation decisions to date, we made changes to the report to minimize any inference of such a finding. Moreover, the fact that a program may appear well managed on the basis of anecdotal and qualitative evidence does not negate the need or obligation for an agency to develop and use performance measures that hold it accountable for determining, articulating, and reporting what a program is accomplishing. As performance measurement is a key part of an agency being results- oriented, that is, tracking and being held accountable for the results or outcomes an agency produces through its programs, our recommendation is intended to ensure that the program’s performance measures meet the standards for performance measures established by DOJ and OMB and are the best measures possible to demonstrate and report the program’s results to program management, other external decision makers such as Congress, as well as the public. We agree that program managers and decision makers can and should use other relevant program information in addition to performance measures when allocating resources and making program decisions. However, this also does not negate the need or obligation for an agency to develop and use performance measures that meet the standards established by DOJ and OMB. On the basis of our evaluation of the program’s performance measures against the guidance and criteria for performance measures provided by DOJ and OMB, as well as our previous work on performance measurement, we believe that further refinements to the program’s performance measures are merited and have the potential to help make the measures provide more useful information on the achievements of the program. Because many outside parties, such as industry members and the American public, may not have access to other contextual information DEA may provide policy makers and legislators, refinement of the current set of program performance measures could enable DEA to better assess and externally report on the results of the program in a more meaningful and understandable way. As DOJ guidance to component agencies suggests, performance measures should clearly articulate what an agency is accomplishing with the resources used in language outsiders can understand. Some of the key measures DEA is using do not meet this standard. For example, according to DEA, tracking the milestones for the development, implementation, and maintenance of the program’s Rapid Targeting Online Reports Tool (RapTOR) was chosen as the program’s outcome measure so that managers could monitor the development and implementation of the system to ensure it was done in a timely and cost-efficient manner. While we agree that project schedule and cost should be closely monitored, this measure does not articulate to outsiders what the program is accomplishing as called for by DOJ’s guidance for performance measures. Further, given that the RapTOR is an internal data warehouse tool DEA is developing, the reporting of milestones for the development, implementation, and maintenance of the tool does not provide an overall indicator of success for DEA’s diversion program or its stated goal of reducing the diversion of licit drugs. As a result, it also does not meet OMB’s criteria that requires outcome measures to describe or capture an event or condition external to the program that is of importance to the public. Indeed, DEA program officials could not describe how they use this measure more broadly beyond tracking the progress of the project itself. In regards to developing or implementing a performance measure to track the impact of the regulatory inspection process, we disagree with DEA that including a regulatory performance measure would not provide any additional benefit. DEA stated that it would be extremely difficult to develop such a measure because the vast majority of registrant inspections do not uncover serious violations and thus sanctions are taken against a very small number of registrants. While this may be the case, reporting the number of administrative, civil, and criminal sanctions taken as a single count as DEA currently does, does not provide perspective as to how many sanctions are a result of regulatory infractions and how many are a result of criminal infractions. Also, as DEA points out, the severity of sanctions and their impacts can vary greatly ranging from requiring on-site corrections by a registrant for minor infractions to DEA pursuing legal sanctions against a registrant which could have a profound effect on the wider registrant population as a whole. Given the differences between regulatory sanctions and criminal sanctions and the potential severity of different sanction types, we continue to believe it would be useful for DEA to develop a measure that separately tracks the results of regulatory investigations or the number and severity of regulatory sanctions taken for identified infractions. With such a measurement, more information would be available to program managers, other decision makers, and the public on what type of noncompliance, if any, is increasing and thereby decision makers would be better able to determine what adjustments to the program’s efforts, if any, might be necessary to address the causes of increases in the number of sanctions. In terms of tracking the lack of diversion or similarly, the reduction in diversion resulting from DEA’s efforts, DEA stated that it would be impossible to measure. However, given that one of the key program objectives DEA identified in its strategic plan is ensuring a level of compliance with the CSA among DEA registrants, whose compliance in turn directly maintains the closed system of distribution established by the CSA, it is important that DEA have a performance measure that directly links to this objective. We and OMB have acknowledged the difficulty in developing measures for programs that aim to deter or prevent specific behaviors, and have reported that in such instances proxy measures should be designed to assess the effectiveness of program functions. Proxy measures can be used to assess the effectiveness of program functions rather than directly assess the effectiveness of the program. In this regard, one possible approach DEA could use is to develop a proxy measure that tracks the compliance rate of wholesale registrants based on the results of regulatory investigations completed that year. Also, OMB has pointed out, it may be necessary to have a number of proxy measures to help ensure sufficient safeguards are in place to account for performance results. Given the significant and growing problem of the diversion and abuse of pharmaceutical-controlled substances in the United States, having a set of performance measures that clearly conveys the accomplishments of the Diversion Control program is perhaps even more important now. By reassessing the program’s current performance measures and making changes where necessary to the measures, DEA will be in a better position to provide enhanced information to program managers, other decision makers such as Congress, and the public on the extent to which the program is achieving its stated longer range performance goal of reducing diversion. DEA also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to interested congressional committees, the Attorney General, the Administrator of the DEA, and other interested parties. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report or wish to discuss the matter further, please contact me at (202) 512-8777, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contact named above, Kirk Kiester, Assistant Director, and Christopher Hatscher, Analyst-in-Charge, managed this assignment. Frances Cook, Vanessa Dillard, Sally Gilley, Jessica Orr, and Alechia Smith made significant contributions to the report. | The Drug Enforcement Administration's (DEA) Diversion Control Program is responsible for enforcing the Controlled Substances Act (CSA) and ensuring the availability of prescription drugs such as pain relievers and stimulants while preventing their diversion for abuse. The CSA requires entities handling controlled substances--such as manufacturers, pharmacies, and physicians, among others-- to register with DEA, which conducts regulatory investigations of registrants, as well as criminal investigations. GAO was asked (1) how DEA manages diversion investigation efforts, and (2) how DEA ensures policies and procedures are followed for investigations and the extent to which it determines the results of its efforts. GAO reviewed DEA policies and procedures, and interviewed DEA, state, and local officials at eleven locations which were selected on the basis of volume of cases handled, geographic diversity, and other considerations. These observations are not generalizable, but provided insights on DEA operations. To respond to the increasing rate of criminal diversion of prescription drugs and a growing registrant population, DEA has expanded its resources and targeted its investigation strategies to collaborate with state and local entities and enhance the effectiveness of its diversion investigations. Specifically, the agency expanded its use of Tactical Diversion Squads (squads) of DEA personnel as well as other federal, state, and local partners investigating diversion schemes to maximize resources and improve efforts to investigate criminal diversion. DEA currently has 40 squads across the country and plans to establish more. According to squad participants and DEA officials GAO contacted, the squads have improved communication and coordination and simplified information sharing for investigations. Because of the growing registrant population and noncompliance by some with the CSA and implementing regulations, DEA renewed its focus on regulatory oversight of registrants to better ensure compliance. By using the squads to free up resources previously dedicated to both criminal and regulatory cases, DEA used those resources to increase regulatory investigations of the registrants. As a result, the number of regulatory investigations more than tripled between fiscal years 2009 and 2010. DEA also conducted outreach to specific registrant types to inform them of regulatory responsibilities and prepare them for regulatory investigations. DEA has taken steps to ensure that investigators follow policies and procedures for such investigations, but could better assess how its efforts are reducing the diversion of prescription drugs. To ensure that diversion investigators and special agents have the necessary skills to carry out their responsibilities and that DEA monitors the extent to which policies and procedures are followed during investigations, DEA has established internal controls related to guidance, training, and oversight of investigations. These controls include providing and updating guidance to investigators to follow during investigations, providing initial and on-going training to investigators, and monitoring the quality of investigations through a combination of direct supervisory reviews, self-inspections, and on-site internal inspections by DEA's Office of Inspections. Recent reports from on-site internal inspections of each of DEA's field divisions did not identify any widespread or systematic issues related to the timeliness and overall quality of diversion investigations. Given DEA's increased focus on investigations in response to growing prescription drug diversion, it is critical for DEA to determine the extent to which these additional efforts are reducing diversion. DEA has established performance measures for the Diversion Control Program, but these measures do not clearly demonstrate the effect the additional efforts are having on the diversion problem the program seeks to address. For example, for its overall performance measure of the diversion control program, DEA is tracking the development and implementation of an internal information technology project. By more closely linking performance measures to the goal of reducing diversion, DEA could better capture the results of the Diversion Control program to help inform decision makers in allocating resources. GAO recommends DEA reassess the program's performance measures to better link them to the goal of reducing diversion. DEA did not concur. GAO continues to believe the measures could be enhanced as discussed in this report. |
Under the Export Administration Act of 1979 as amended and the implementing Export Administration Regulations, Commerce is authorized to require firms to seek licenses for exports of dual-use technologies that pose national security or foreign policy concerns. Such technologies could be used by countries of concern to upgrade their military capabilities. The Commerce Control List identifies technologies that must be licensed before they can be exported to specific countries, including technologies associated with certain nuclear materials, facilities, and equipment; chemicals, “microorganisms” and toxins; materials processing; electronics; computers; telecommunications and information security; lasers and sensors; navigation and avionics; marine systems; and propulsion systems and space vehicles. Violators may face administrative or criminal penalties, including fines, denial of export privileges, and imprisonment. The act defines exports to include transfers of technology within the United States to (1) affiliates of controlled countries or (2) persons with the knowledge or intent to transfer the technology to unauthorized parties. According to Commerce regulations, a transfer of technology within the United States to a foreign national who is not a permanent resident of the United States is deemed to be an export. Such a “deemed export” may occur when a foreign national visits or works in the United States and accesses controlled dual-use technology. Access can include opportunities to review written materials or discussions about controlled technologies. In 2000, Commerce’s Inspector General concluded that compliance with deemed export licensing regulations appeared lax. The Inspector General pointed out that the number of foreign workers authorized to enter the United States using certain specialty employment visas was far larger than the number of deemed export license applications received by Commerce in fiscal year 1999. Export Administration Regulations, part 734.2(b)(1). Part 772 of the Export Administration Regulations defines “technology” as specific information necessary for the “development,” “production,” or “use” of a product. Congress is currently considering legislation that would, among other things, (1) define an export to be the release of an item—i.e., any good, technology, or service--to a foreign national within or outside the United States and (2) require the Secretary of Commerce, in concurrence with the Secretaries of State and Defense to issue regulations governing such exports (H.R. 2581, section 2(9)(iii) and 601(c)(3)). To work with controlled dual-use technology in the United States, foreign nationals and the firms that employ or sponsor them must comply with U.S. export control and visa regulations. Commerce, in consultation with other departments, is responsible for issuing deemed export licenses to firms that employ or host foreign nationals. While the Department of State is responsible for issuing visas to foreign nationals outside the United States, INS is responsible for approving requests from foreign nationals in the United States seeking to change their immigration status. The review process for a deemed export license application parallels the review process for an application for a license to export commodities or technologies overseas. Under U.S. export control regulations, a firm is required to seek a deemed export license if the export of the technology to the foreign national’s country of citizenship would require a license. If a license is required, the exporter must submit a license application to Commerce identifying the technology, the reason it is controlled, the proposed destination, and the intended end user. In the case of deemed export license applications, firms must also provide the foreign national’s resume, visa type, and a list of his or her publications. An application for a deemed export license may list more than one foreign national. Under Executive Order 12981, the departments of State, Defense, and Energy have the authority to review license applications (unless they decline) to help Commerce determine whether a license would be in the best interests of the United States. Based on their review, an application may be rejected, approved, approved with conditions, or returned without action. Commerce officials stated that they consider evidence of the foreign national’s intent to remain in the United States in assessing deemed export license applications. For example, they asserted that they consider the presence of family members in the United States or a stated intention to apply for permanent residency in the United States as a factor in granting a license. Deemed export licenses are generally valid for 2 years. Almost 10 percent of all export licenses approved by Commerce authorize deemed exports. The U.S. government requires foreign nationals from most countries to obtain visas before entering the country. Requirements for obtaining a visa vary, depending on the purpose of the trip and the nationality of the person seeking the visa. Typically, a foreign national begins the process by submitting a visa application to the Department of State, generally through a U.S. overseas post. The application requires, among other items, information regarding his or her nationality, education, employment history, purpose of visit, and if seeking employment, the sponsor. The Department of State is responsible for determining the applicant’s eligibility and issuing the visa. State personnel at U.S. embassies and consulates overseas may interview applicants to determine their eligibility to enter the United States. According to the Department of State, in fiscal year 2001, it adjudicated 10.6 million nonimmigrant visa applications at 196 posts and issued 7.6 million visas. Many foreign nationals seeking to work in the United States apply for H-1B specialty employment visas. An H-1B visa allows a U.S. employer to temporarily fill specialty occupations (such as those requiring electrical or software engineers) with foreign workers. A foreign national overseas may obtain an H-1B visa from the Department of State, if INS determines that an employer may import the foreign national as a temporary worker (see fig. 1). A foreign national already in the United States may have his or her immigration status changed to H-1B by INS. For example, an employer seeking to hire a foreign student who has graduated from a U.S. college or university could petition INS to change the foreign national’s immigration status from student to H-1B. INS is solely responsible for approving and issuing such changes in status. In fiscal year 2001, Commerce approved 822 deemed export license applications and rejected 3. Each license authorized one or more foreign nationals to access controlled dual-use technology. Our analysis of Commerce’s licensing data found that most licenses approved in fiscal year 2001 involved countries of concern. As shown in figure 2, China accounted for 73 percent of licenses approved in fiscal year 2001. Seven other countries of concern--Russia, Iran, India, Syria, Israel, Iraq, and Pakistan—accounted for another 14 percent. The remaining 13 percent involved 29 other countries, including the United Kingdom, Germany, Bulgaria, Romania, and Ukraine. About 90 percent of the licenses approved in fiscal year 2001 authorized foreign nationals to work with advanced electronics, computer, or telecommunications and information security technologies (see fig. 3). Electronics technologies constituted the largest single share at 46 percent. Telecommunications and information security technologies accounted for another 24 percent. Computer technologies were included in 20 percent of the licenses approved. The most common country-technology combination for deemed export licenses involved China and electronics technologies. About 44 percent of all licenses approved in fiscal year 2001 authorized citizens of China to work with electronics technologies, including semiconductor technology. Not all domestic transfers of technology to foreign nationals require a deemed export license. For example, one exception allows technology and software controlled only for national security purposes to be accessed without a license by foreign nationals from countries of concern such as India, Pakistan, and Israel. Under this exception, a firm employing an Indian software engineer would not need a deemed export license to allow him or her access to controlled dual-use technology. The exception does not apply to technology and software that are also controlled for other reasons, such as antiterrorism or nuclear nonproliferation. Also, foreign nationals who engage in research that is or will be publicly available are exempted from export controls. For example, a U.S. university would not need a deemed export license to allow a Chinese graduate student to engage in technological research if the results of that research are to be published in a professional journal. A U.S. firm that hired the same Chinese national to engage in proprietary research to develop a new commercial product would not qualify for this exception. To better direct its efforts to detect possible unlicensed deemed exports, Commerce screens applications for H-1B and other types of visas submitted overseas and develops potential cases for enforcement staff in the field. However, it does not screen H-1B change-of-status applications submitted domestically to INS for foreign nationals already in the United States. Also, Commerce cannot readily track the disposition of potential cases referred to the field. To identify potential unlicensed deemed exports and opportunities to educate firms about deemed export licensing requirements, Commerce screens visa applications it receives from U.S. posts overseas. In fiscal year 2001, Commerce analysts reviewed about 54,000 such applications for various visa types. According to Commerce guidance, the analysts consulted Commerce’s enforcement database, DOD comments on rejected license applications, and other sources of information to detect linkages between foreign entities of concern and visa applicants. Commerce does not screen data on foreign nationals already in the United States who change their immigration status to H-1B specialty employment. Commerce and INS officials stated that Commerce does not obtain information on foreign nationals who seek a change in immigration status. INS has data available on foreign nationals who change their status to H- 1B. Our analysis of INS’s H-1B data indicates that during fiscal year 2001 at least 15,000 foreign nationals from countries of concern potentially subject to deemed export licensing requirements changed their immigration status to H-1B specialty employment. Our estimation of 15,000 individuals only includes foreign nationals who sought H-1B status for employment related to science and technology. It does not include other nonsensitive H-1B fields, such as fashion modeling, architecture, and accounting. In fiscal year 2001, Commerce analysts screened about 54,000 visa applications received from overseas posts. Their efforts resulted in the referral of 160 potential cases to Commerce’s eight enforcement field offices. Commerce staff stated that field offices conduct some limited follow-up enforcement and outreach activities in response to such referrals. These activities include meetings with firms and individuals to determine if the firms should have applied for a deemed export license. Commerce enforcement officials could not provide us with complete information regarding the disposition of these 160 potential cases. Commerce does not have a mechanism for its field enforcement staff to report the results of their reviews of these cases back to headquarters. As a result, its analysts in headquarters cannot determine if their screening methods are effective in targeting potential deemed export cases. Commerce plans to install a new computerized database by the end of 2002 that would correct this problem by allowing headquarters staff to track the disposition of cases referred to field enforcement staff. Commerce does not determine whether firms comply with license conditions intended to limit transfers of controlled dual-use technology to foreign nationals. Commerce officials stated that ensuring such compliance is a low priority and that they cannot readily enforce conditions included in licenses. Almost all deemed export licenses include security conditions. According to DOD officials, these conditions are needed to mitigate the risk to U.S. national security posed by providing controlled dual-use technology to a foreign national. These officials stated that the conditions are crucial to DOD’s willingness to agree to many deemed export license applications. Without these conditions, DOD would recommend that Commerce reject many deemed export license applications. Commerce uses several of these conditions to limit the level of technology to which foreign nationals may be exposed. For example, standard conditions bar foreign nationals from unmonitored use of high-performance computers, involvement in the design of computers that exceed a specified accessing technical data on advanced microprocessors or certain types of lithography equipment, or accessing classified data or munitions data licensed by the Department of State. The licensing conditions were first formulated in 1997 by an interagency group that included representatives of the departments of Commerce, Defense, State, and Energy. The departments of Commerce and Defense currently maintain updated lists of 12 standard conditions for deemed exports involving (1) semiconductors (electronics) and computers and (2) telecommunications. According to Commerce officials, the departments may add conditions or adjust the standard conditions to accommodate specific circumstances. A firm may also be required to monitor the immigration status of the foreign employee and to document whether the foreign national leaves the firm before becoming a permanent resident of the United States. The firm is also required to develop security procedures for ensuring compliance with conditions in the approved license and to provide copies of these procedures to Commerce. Other executive branch agencies rely on Commerce to ensure that firms comply with these conditions. DOD’s copy of the standard license conditions specifies that Commerce “will monitor to ensure that the applicant’s compliance is effective.” Identical language is included in many deemed export licenses. Officials from the departments of Defense and State stated that they presumed that Commerce is acting to ensure compliance with the security conditions. Commerce does not have an effective monitoring system in place to ensure compliance with key deemed export license conditions, such as a program of regular visits to firms. Staff at the department’s enforcement field offices stated that they rarely visit firms to ensure compliance with deemed export license conditions. In addition, officials at the private sector firms we visited confirmed that Commerce officials rarely conduct on-site verifications of their compliance with licensing conditions. Commerce officials agreed that they do not have an effective monitoring system in place and that their compliance efforts are limited to checking if firms have submitted their security procedures to the department. Commerce officials stated that they consider ensuring compliance with deemed licensing conditions to be a relatively low priority for their resources compared to other demands, including activities to combat terrorism. They stated that the export licensing system is based on the assumption that firms are honest. These officials also asserted that almost all of the foreign nationals covered by deemed export licenses have indicated that they plan to remain in the United States, although they could not provide us with data on repatriations to support this assertion. Commerce officials also stated that prosecutors are reluctant to pursue criminal cases based on technical violations of license conditions. However, they acknowledged that Commerce could use the results of on- site visits as the basis for imposing administrative sanctions and denying future license applications. Commerce officials also asserted that some conditions are not readily enforceable. They maintained that some involve highly technical matters that do not fall within the training provided to Commerce enforcement personnel. For example, Commerce officials stated that enforcement staff would be unable to determine whether the feature size of a semiconductor is smaller than the micron limit specified in one license condition. Similarly, Commerce officials asserted that enforcement personnel would be unable to verify compliance with conditions that proscribe intangible transfers of technology, such as conversations between foreign nationals and their coworkers. Commerce’s deemed export licensing system does not provide adequate assurance that U.S. national security interests are properly protected. Key vulnerabilities in the licensing process could help countries of concern advance their military capabilities by obtaining sensitive dual-use technology. Because Commerce does not review all relevant visa and immigration data, it may overlook foreign nationals potentially subject to deemed export licensing requirements. Because Commerce rejects very few deemed export license applications, executive branch agencies must therefore rely on security conditions to help ensure that the licenses approved—more than 90 percent of which involve China and other countries of concern—do not allow foreign nationals unauthorized access to controlled technologies. However, Commerce does not have a monitoring process in place to ensure compliance, thus undermining the value of the conditions. These weaknesses call for a reexamination of the current approach to limiting foreign national access to controlled technology in the United States. We recommend that the Secretary of Commerce work with INS to use all existing U.S. government data in its efforts to identify all foreign nationals potentially subject to deemed export licensing requirements. We also recommend that the Secretary of Commerce—in consultation with the Secretaries of Defense, State, and Energy—establish a risk-based program to monitor compliance with deemed export license conditions. In doing so, the Secretary of Commerce should draw upon the full range of technical expertise available to him, including that within the department or elsewhere in the federal government. If the secretaries of these agencies conclude that certain security conditions are impractical to enforce, we recommend that they jointly develop enforceable conditions or alternative methods to ensure that deemed exports do not place U.S. national security interests at risk while promoting U.S. commercial interests. We provided a draft of this report to the Secretaries of Commerce, Defense, and State, and to the INS Commissioner for their review and comment. We received written comments from the departments of Commerce and Defense that are reprinted in appendixes II and III. DOD concurred with our recommendations, and Commerce said it would consult with other relevant departments on the practicality of implementing our recommendations. More specifically, Commerce stated that it would contact INS to discuss the possibility of establishing a procedure for referring to Commerce H-1B change-of-status applications involving employment that might result in access to sensitive technology. It also stated that it is in the process of developing a more extensive monitoring program for firms that have been issued deemed export licenses. Commerce said it is currently impossible to fully monitor all of the conditions placed on these licenses and agreed that more realistic conditions need to be developed. It also said that it has initiated an interagency dialogue to develop a new set of standard conditions for deemed export licenses. In response to a recommendation in the draft report, Commerce stated that its new Investigation Management System would establish a system for tracking referrals to its enforcement field offices once it becomes operational at the end of calendar year 2002. It subsequently provided us with documentation on the new tracking system. However, Commerce disagreed with our assessment that it lacks an effective monitoring process. It stated that Commerce staff monitor the submission of required internal control plans by firms and contact firms who fail to submit these documents. Commerce also stated that it would continue to visit select firms to monitor compliance with license conditions. In addition, it stated that the vast majority of individuals applying for H-1B visas would not be employed in jobs that would give them access to technology controlled under U.S. export control laws. Commerce stated that INS regulations permit the issuance of H-1B visas to foreign nationals seeking employment in such fields as fashion modeling, architecture, and accounting. It said that the likelihood of foreign nationals working in such fields requiring deemed export licenses is remote. Given Commerce’s limited resources, and the large number of H-1B applications filed annually, it questioned whether it was feasible for Commerce analysts to perform a second comprehensive review (in addition to INS’s own review) of each such INS file. We disagree with Commerce’s assertions regarding the effectiveness of its monitoring process. As noted in our report, Commerce’s monitoring process is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted required paperwork. We found no evidence that it selects and visits certain firms to verify compliance with deemed export license conditions. As a result, our recommendation that Commerce develop a risk-based program to monitor compliance is still appropriate. We agree with Commerce’s concern that it should not review immigration change-of-status applications of foreign nationals who are seeking employment in fields that are unlikely to involve controlled technology. Anticipating such concerns, we had specifically targeted technology- related occupations—and excluded nonsensitive fields, such as modeling, architecture, and accounting—in developing our estimate of 15,000 foreign nationals. We have included language in this report describing how we developed this estimate. We are sending copies of this report to appropriate congressional committees and to the Secretary of Commerce, the Secretary of Defense, the Secretary of State, and the Commissioner of the Immigration and Naturalization Service. Copies will be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8979. Another GAO contact and staff acknowledgments are listed in appendix IV. To describe the deemed export license process, we reviewed laws and procedures governing export controls; attended Department of Commerce export licensing workshops in Boise, Idaho and Los Angeles, California; and interviewed Commerce officials. To learn about the process for reviewing and approving visa applications overseas, we reviewed Department of State documents that describe the process for issuing visas and provide guidance for referring applications. We also interviewed State officials. To understand the specialty employment (H-1B) and change-of- status processes, we met with officials from the Immigration and Naturalization Service (INS). They described the process and procedures for obtaining an H-1B petition and for changing immigration status while in the United States. To determine the number and nature of deemed export license applications approved by Commerce, we obtained and analyzed information included in Commerce’s licensing database for fiscal year 2001. The data were extracted based on the date of final action on each license. We analyzed the data to determine the number of applications that Commerce approved, rejected, or returned without action. We also determined which countries and technologies were included in the approved applications. All of our analyses were dependent on the reliability of Commerce’s licensing database. We did not attempt to independently verify the accuracy of the database or the data that it contains. To review Commerce’s efforts to detect unlicensed deemed exports, we relied on INS data on H-1B applications granted in fiscal year 2001. We developed this data by asking INS to determine the number of changes-of- status to H-1B that involved (1) occupational codes related to science and technology and (2) countries of concern. We did not independently confirm the accuracy of INS data. Although we recognize that foreign nationals with immigration classifications other than H-1B may be subject to the deemed export licensing requirements, we did not attempt to incorporate other classifications into our analysis. We also identified and interviewed 15 firms that employed foreign nationals but did not have a deemed export license. To better understand the Commerce program for detecting unlicensed deemed exports, we reviewed Commerce program guidance. We also interviewed Commerce officials associated with the review effort. To evaluate Commerce’s efforts to ensure compliance with approved licenses, we obtained copies of the standard conditions from both Commerce and the Department of Defense (DOD) and reviewed license conditions as recorded in Commerce’s licensing database. We also interviewed officials of 11 firms that have received deemed export licenses and met with Commerce licensing and enforcement officials. To obtain detailed information on enforcement activities, we interviewed special agents of all eight Commerce enforcement field offices. To better understand the rationale for the conditions, we spoke with officials at DOD and the Department of State, including analysts at the Defense Intelligence Agency and policy officials from the Defense Technology Security Agency. We conducted our review from November 2001 through August 2002 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Commerce’s letter dated August 19, 2002. 1. We have modified our report to reflect Commerce’s comment. Our draft report’s statement that a deemed export license typically covers one to five individuals was based on an estimate provided to us by the head of Commerce’s deemed export licensing unit. As noted in our draft report, Commerce could not readily determine the total number of individuals included in all deemed export licenses due to limitations in its automated database. 2. We agree that the countries depicted in the chart may represent different levels of concern from a foreign policy and national security standpoint. However, we used the Department of State’s guidance for screening technology-related visa applications to develop a list of countries of concern. According to guidance sent to all diplomatic and consular posts, particular attention is given to cases involving nationals of countries designated as state sponsors of terrorism—Cuba, Libya, Iran, Iraq, North Korea, Sudan, and Syria—or a region subject to the Nonproliferation Export Control regulations—China, India, Israel, Pakistan, and Russia. We have added information in this report to note Commerce’s observation that most deemed export licenses involve countries of concern, given that U.S. export controls focus on such countries. 3. We do not agree that Commerce has an effective process in place to monitor compliance with license conditions. We found Commerce’s current process to be inadequate for two reasons: (1) it is essentially limited to administrative checks by headquarters staff to determine whether firms have submitted the required paperwork; and (2) it does not include a program for conducting on-site visits to confirm that firms are complying with license conditions. Accordingly, we have maintained our draft recommendation that Commerce develop a risk-based monitoring program. 4. Our estimate of 15,000 H-1B change-of-status applications only represents individuals seeking employment in technology-related occupations. It does not include nonsensitive fields, such as modeling, architecture, and accounting, as Commerce notes in its comments. We therefore targeted our analysis to applications involving employment that might result in access to sensitive technology that Commerce should control through its deemed export process. We have modified the language of our report to clarify how we developed this estimate. 5. In response to our recommendation in the draft report that Commerce establish a system for tracking visa cases referred to the field offices, Commerce provided us with documentation of the new case management system’s capabilities. Based on our review of documents describing the case-tracking capability of the new system, we have not included this recommendation in our final report. In addition to the individual named above, Pierre Toureille, Lynn Cothern, Julie Hirshen, Richard Slade, and Jennifer Li Wong made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | To protect its national security and foreign policy interests, the United States controls exports of civilian technologies that have military uses. U.S. firms may be required to obtain a license from the Department of Commerce before exporting these "dual-use" technologies from the United States to many other countries, including countries of concern. Since Commerce regulations also deem domestic transfers of controlled dual-use technologies to citizens of these countries to be exports, Commerce may require firms that employ foreign nationals working with these technologies in this country to obtain "deemed" export licenses. The firms should, in many cases, hold a deemed export license, and the foreign nationals should have an appropriate visa classification, such as an H-1B specialized employment classification. Commerce issues deemed export licenses to firms that employ or sponsor foreign nationals after consulting the Departments of Defense, State, and Energy. Deemed export licenses are generally valid for 2 years and comprise almost 10 percent of all export licenses approved by Commerce. In fiscal year 2001, Commerce approved 822 deemed export license applications and rejected 3. Most of the approved licenses allowed foreign nationals from countries of concern to work with advanced computer, electronic, or telecommunication and information security technologies in the United States. To better direct its efforts to detect possible unlicensed deemed exports, in fiscal year 2001 Commerce screened thousands of applications for H-1B and other types of visas submitted by foreign nationals overseas. From these applications, it developed 160 potential cases for follow-up by enforcement staff in the field. However, Commerce did not screen thousands of H-1B change-of-status applications submitted domestically to the Immigration and Naturalization Service for foreign nationals already in the United States. In addition, Commerce could not readily track the disposition of the 160 cases referred to field offices for follow-up because it lacks a system for doing so. Commerce attaches security conditions to almost all licenses to mitigate the risk of providing foreign nationals with controlled dual-use technologies. However, according to senior Commerce officials, Commerce staff do not regularly visit forms to determine whether these conditions are being implemented because of competing priorities, resource constraints, and inherent difficulties in enforcing several conditions. |
The Rail Passenger Service Act of 1970 created Amtrak to provide intercity passenger rail service because existing railroads found such service unprofitable. Although Amtrak was given significant flexibility with respect to its route system by the Amtrak Reform and Accountability Act of 1997, that act also directed it to operate a national passenger rail system that ties together existing and emerging regional passenger rail service and other intermodal passenger services. Amtrak operates a 22,000-mile conventional passenger rail system (with train speeds typically up to 79 miles per hour), primarily over tracks owned by freight railroads. (See fig. 1.) Federal law requires that freight railroads give Amtrak trains priority access and charge Amtrak the incremental cost—rather than the full cost—associated with the use of their tracks. Amtrak owns 650 miles of track, primarily on the Northeast Corridor, which runs between Boston and Washington, D.C. On some portions of this corridor, Amtrak provides high-speed service (up to 150 miles per hour). In addition, access to this corridor is crucial for 8 commuter railroads (operated by state and local governments) that serve 1.2 million passengers each work day. Finally, according to Amtrak, about 38 trains from 6 freight railroads use the corridor each day. Currently, intercity passenger rail plays a small part in the nation’s overall transportation system (with the exception of some shorter distance corridors). On average, about 64,000 passengers in 45 states and the District of Columbia rode Amtrak trains each day in fiscal year 2001. (According to Amtrak about two-thirds of its ridership is either wholly or partially on the Northeast Corridor.) In contrast, in 2000, the latest year for which data are available, domestic airlines carried about 1.8 million passengers per day; and intercity buses carried about 984,000 passengers per day. Amtrak carried fewer than 1,000 passengers a day, on average, in 34 of the states where it operated in fiscal year 2001. (See fig. 2.) Further, Amtrak carried fewer than 100 passengers a day, on average, in 12 of these states. Amtrak’s ridership in many markets is limited, in part, because it is generally neither time- nor price-competitive with air service for longer distances. As a result, Amtrak’s market share relative to air service falls off rapidly as travel distance—and therefore travel time—increases. (See fig. 3.) In addition, highways have made cars competitive with conventional trains for shorter distances, particularly because the marginal cost of an additional automobile rider in a single vehicle is small. On a train, the additional passenger would typically pay an additional fare. Further, in contrast to Amtrak’s system, highway and scheduled air systems are true networks. Amtrak’s system is largely linear, connecting most stations to other stations on the same route. Transfer points are few, and limited train frequency can make changing trains impractical. A significant federal investment led to the development of the extensive air system and highway network. For example, the federal government invested $225 billion in aviation systems and $607 billion in highways from 1971 through 2000 (in 2000 dollars, latest data available). In contrast, the federal government provided Amtrak over $39 billion (in 2000 dollars) for capital and operating expenses from 1971 through 2002. The federal government also provided substantial incentives to railroads (over whose tracks Amtrak runs) in the 19th century to help develop these transportation systems. Amtrak’s financial condition has been deteriorating over recent years. Although its revenue has been increasing, its expenses have been increasing at a greater rate. It has deferred maintenance on equipment and structures and has limited funds available for making safety improvements. Amtrak has mortgaged just about all of its assets other than the Northeast Corridor to provide it with enough cash to survive. In February 2002, Amtrak announced that it would need $1.2 billion in federal financial assistance in 2003 to meet basic needs, more than twice the amount that Congress provided in 2002. The Department of Transportation’s Inspector General has stated that Amtrak cannot survive the year on recent levels of federal support. Proponents of high-speed rail systems (with speeds over 90 miles per hour) see these systems as a promising means for making trains more competitive with other modes of transportation. They see the introduction of high-speed rail systems in various areas of the country as a cost-effective means of increasing transportation capacity (the ability to carry more travelers) and relieving air and highway congestion, among other things. However, high-speed rail service outside Amtrak’s Northeast Corridor has not yet been established, partly because of its multibillion- dollar cost and because of concerns about overly optimistic ridership estimates. High-speed trains can operate on tracks owned by freight railroads that have been upgraded to accommodate higher speeds or on dedicated rights-of-way. The greater the passenger train’s speed, the more likely it is to require a dedicated right-of-way for both safety and operating reasons. Ten corridors (not including Amtrak’s Northeast Corridor) have been designated as high-speed rail corridors, either through legislation or by the Department of Transportation. (See fig. 4.) The 10 federally designated corridors are generally in various early stages of planning and may be eligible for federal assistance for planning and technology improvements through several Department of Transportation programs. Intercity passenger rail has the potential to generate benefits to society (often called public benefits) by complementing other more heavily used modes of transportation in markets in which rail transport can be competitive. These possible benefits include reduced highway and air travel congestion, pollution, and energy dependence; increased safety; and an option for travelers to use passenger rail systems in the future. However, intercity passenger rail service is more likely to achieve these benefits in some markets rather than others. One potential public benefit of intercity passenger rail service that is often cited is the reduced highway congestion that will result if some people travel by train rather than on highways. The time that people spend stuck in traffic represents, in part, lost productivity to the economy. Where congestion exists, intercity passenger rail would not have to capture a large share of the travelers who would otherwise use other modes to generate substantial public benefits from reduced highway congestion. Roadway congestion and gridlock often result when a small number of vehicles access a roadway that is already at or near capacity. These additional users have disproportionate, detrimental effects on the flow of traffic and the users’ travel times. As a result, diverting a small group of highway users to rail transport could have substantial public benefits by reducing roadway congestion. Because these benefits accrue to highway users and not rail passengers, an operator of intercity passenger rail service cannot expect to capture the value of these benefits in fares that rail passengers are willing to pay. The specific markets where intercity passenger rail service has the most potential to generate public benefits from reduced highway congestion now and in the future are regions where the highway arteries are consistently operating beyond capacity and are characterized by slow- moving traffic. (See fig. 5.) Therefore, the rail service likely to alleviate the most highway congestion would parallel congested corridors that link cities with significant intercity transportation demand and urban congestion, such as those in the Northeast. For example, the cities of Seattle, Washington, and Minneapolis/St. Paul, Minnesota, both have significant urban highway congestion problems; however, there is little highway congestion on the route that connects them. Intercity passenger rail service operating between Boston, Massachusetts, and New York City, or Los Angeles and San Diego, California, would probably generate greater public benefits from reduced highway congestion than service running from Seattle to Minneapolis/St. Paul. However, realizing these potential public benefits may be difficult because the prices people pay to drive do not reflect the true costs of driving, some of which are borne by others due to pollution and congestion. In addition, Americans continue to have a strong attachment to cars as their principal transportation choice. The public benefits of intercity passenger rail service are also potentially greater between cities that have well-developed intracity mass transit systems because intercity passenger rail is more likely to be competitive with driving on those routes. One reason a traveler may choose driving between cities over using the train is the mobility a personal vehicle provides once the traveler has reached his or her destination. All else being equal, demand for intercity passenger rail service may potentially be greater between cities with efficient mass transit systems—for example, Philadelphia and Washington, D.C.—than between cities without or with less extensive intracity mass transit systems—for example Sacramento and San Jose, California—because there is potentially less of a need for a personal vehicle at the destination. Similarly, congestion is more likely to be alleviated in those cases where travelers view rail as a more attractive “door-to-door” travel option (in terms of price, time, comfort, and safety) than driving if rail terminals are convenient to riders’ starting points and ultimate destinations. Finally, the potential for intercity passenger rail to reduce highway congestion is greater where there is little or no additional space to build additional highway lanes and interchanges to reduce congestion. Intercity passenger rail service could also potentially ease air travel congestion (takeoff and landing delays) if it is able to capture enough market-share to reduce the number of flights between cities through frequent, competitively priced, and attractive service. (See fig. 6.) As would be the case with reductions in highway congestion, air travelers, not rail passengers, would benefit from reductions in air travel congestion. As a result, for similar reasons, rail service operators may not be able to set fares that capture the value of these benefits. For rail transport to capture the market-share necessary to reduce air travel congestion, the distance between potential intercity passenger rail cities must be short enough to make rail travel times competitive with air travel times (at comparable costs and levels of comfort). For example, during the first quarter of 2001, the number of air passengers (as measured by the number of trips) flying between Chicago, Illinois, and Detroit, Michigan, was comparable to the number of passengers flying between Chicago and Orlando, Florida. However, the nonstop air distance from Chicago to Detroit is 233 miles, and the distance from Chicago to Orlando is almost 1,000 miles. Accordingly, it will be harder for intercity passenger rail to obtain a sizeable market share between Chicago and Orlando because the travel time by rail is significantly greater (about 3 hours by air and 40 hours by rail). As previously mentioned, Amtrak’s market share decreases rapidly as travel time increases. Studies also suggest that as the speed of intercity passenger rail service increases, the potential benefits attributable to reductions in airport (and highway) delays increase, as does the potential distance over which rail is able to compete with air transport. Similar to highway congestion, the potential for intercity passenger rail to reduce air congestion is greater where there is little or no additional space for runways. For example, San Francisco International airport has fewer options for increasing capacity than the Denver International Airport. The potential to reduce air congestion is also greater for markets where limited competition among airlines results in relatively high air fares. In such markets, intercity passenger rail service will be better able to compete than in markets where greater competition among airlines keeps air fares relatively low. Proponents of high-speed rail service state that a potential public benefit of intercity passenger rail is a reduced overall level of vehicle emissions, which results in lower pollution levels and indirectly reduces some health and environmental costs. If intercity passenger rail service can provide an incentive for travelers to shift from automobile to rail travel, this switch could reduce vehicle emissions and pollution. However, the magnitude of vehicle emission reductions will depend in part on the type of technology used to power rail locomotives. In addition, within the range that most vehicles are driven, automobile carbon monoxide and hydrocarbons emissions increase as vehicle speed decreases. Therefore, where intercity passenger rail is successful at easing roadway congestion, this reduced congestion could result in less of these forms of pollution from the remaining vehicles on the highway(s). To the extent that they can be attained, the benefits from reduced pollution are similar to the benefits from reduced congestion in that they accrue to society as a whole, and not solely to the riders of intercity passenger trains. The ability of intercity passenger rail service in a particular market to generate benefits from reduced vehicle emissions depends on both the level of pollution and the likelihood that travelers will choose rail service over other modes of travel. (See fig. 7.) Markets where intercity passenger rail service could be competitive with other modes in terms of price, travel time, and quality and frequency of service are likely to offer the greatest opportunity to reduce pollution. Where intercity passenger rail exists, results from studies examining the impact of changes in vehicle emissions and air pollution vary. A 2002 study by the California Department of Transportation found that improvements to the three state-supported Amtrak intercity rail routes in California—the Pacific Surfliner route between San Diego and San Luis Obispo, the San Joaquin route between Oakland/Sacramento and Bakersfield, and the Capitol Corridor route between San Jose and Auburn—would decrease air pollution from hydrocarbon and carbon monoxide emissions. However, the study also found that air pollution from certain nitrous oxide and particulate compounds emitted from the diesel fuel-burning locomotives would increase. Our 1995 analysis of the Los Angeles to San Diego corridor projected that eliminating rail service between the cities would lead to a net increase—although small—in vehicle emissions from added automobiles, intercity buses, and aircraft. Intercity passenger rail may also generate some public benefit by reducing the country’s dependency on gasoline and fossil fuels and, therefore, the costs associated with vulnerability to an energy supply disruption. These benefits, which would accrue to the public as a whole rather than to intercity passenger rail travelers only, may be achieved if intercity passenger rail would require less fuel than would other modes that the rail passengers might use if intercity passenger rail service were not available. The extent of these benefits would depend upon how many fewer trips would be taken via other modes of travel and the technology of the locomotive(s) used. Furthermore, similar to the link between highway congestion and vehicle emissions, automobiles burn fuel more efficiently at higher speeds (up to a point) compared to idling in traffic. Therefore, where intercity passenger rail service is successful at reducing roadway congestion, the amount of fuel consumed by the remaining vehicles could be reduced as well. A 2002 California Department of Transportation study that examined the impact of passenger rail on fuel consumption estimated that in 2011, 13 million gallons of gasoline could be saved by expanded service on the three intercity rail corridors cited previously. Similarly, the Congressional Research Service reported that Amtrak is much more energy-efficient than air travel; yet, it also found that Amtrak is much less energy-efficient than intercity bus transportation and about equally as energy-efficient as automobiles for trips longer than 75 miles. However, our analysis of the Los Angeles to San Diego corridor projected that eliminating rail service between the cities would lead to a net increase in fuel consumption. Another area of potential public benefits from intercity passenger rail is the relative safety of passenger travel by rail. According to the Federal Railroad Administration, from 1997 through 2000 Amtrak itself was responsible for only one passenger fatality. Furthermore, the Transportation Research Board reports that rail operators caused no passenger fatalities in 25 years of high-speed rail travel in Japan and France. If passengers believe passenger rail is safer than other modes, they may opt to travel by rail, all else being equal, to improve their own safety. In addition, some public benefits might also result from more travelers using a safer mode of travel. For example, if travelers switch from cars to trains, the reduced highway congestion may lead to fewer accidents for those travelers continuing to use highways. In addition, society as a whole may benefit from reduced fatalities and injuries through reduced public spending on medical care and less lost productivity. These potential public benefits may be greater for routes that parallel corridors where many accidents occur and the public benefits from travelers’ switching from car to rail are likely to be the greatest. Other public benefits may result from intercity passenger rail—even if ridership is fairly limited. One such benefit is sometimes called option demand: society might be willing to pay to maintain intercity rail service to retain the option to use it in the future. That is, for some people, having the option of rail service available in case circumstances change—such as the availability of air travel or concerns about air travel safety—could have some value, even if they do not currently plan to use it. A second type of benefit is sometimes called non-use, or existence, value. This concept, which is most commonly used as a basis for valuing natural resources, such as the Grand Canyon, is that people receive value from knowing that some things exist even if they do not plan to directly use them. Although option demand and non-use value are concepts that analysts widely accept, quantifying these benefits is difficult and sometimes controversial. They are frequently measured by survey techniques that attempt to estimate willingness-to-pay. Many researchers find that estimates obtained with such techniques are less persuasive than estimates derived from information on actual purchases of goods and services. Intercity passenger rail systems, like other intercity transportation systems, are expensive to build, maintain, and operate. Federal spending to support intercity passenger rail service would have the greatest effect where the expected public benefits warrant the costs expected to be incurred. Estimates of the costs of maintaining and expanding current systems and developing new ones are preliminary. Although we have not assessed the quality of these estimates, we agree that such systems will be costly. For example, the amount of funding that Amtrak will likely need for both capital and operating assistance to maintain intercity passenger rail service at today’s service levels far exceeds the amounts that have been provided in recent years. For example, in February 2001, Amtrak estimated that it would need about $16 billion (in constant 2000 dollars) in federal capital support from 2001 through 2020 just to maintain current levels of service. Amtrak expects that an additional $14 billion during this period would be needed to expand and enhance services. Amtrak anticipated that state and private support would supplement federal assistance. This $30 billion estimate is again about half more than the $19.6 billion (in 2000 dollars) that Amtrak has received in both federal capital and operating support over the past 20 years (1983 through 2002). Similarly, the annual amount Amtrak called for—about $1.5 billion per year—is about 50 percent more than the average annual amount that Amtrak has received from Congress over the past 5 years ($1 billion per year, in 2000 dollars). In addition to the substantial funding needed to maintain (and perhaps enhance) current Amtrak conventional and Northeast Corridor service, full development of high-speed rail corridors throughout the country would also be very expensive. Overall costs to develop high-speed corridors are unknown because these initiatives are in various stages of planning. However, according to a preliminary Amtrak estimate, the capital costs to fully develop the federally designated high-speed rail corridors and the Northeast Corridor could be $50 billion to $70 billion over 20 years. The federal government could be expected to provide much of these funds. For example: The Midwest Regional Rail Initiative, compromised of nine Midwestern states, estimates that providing high-speed and other enhanced service could cost $4.1 billion (in 1998 dollars) over 10 years. The proposal calls for federal funds to cover 80 percent of infrastructure costs. California estimates that it would cost $4 billion (in 2000 dollars) over 10 years to implement incremental high-speed rail service in that state. It expects that the federal government will contribute about $3 billion of this amount. Recently introduced legislation has also recognized the substantial capital investment required for intercity passenger rail systems. For example, in the House of Representatives, the Rail Infrastructure Development and Expansion Act for the 21st Century (H.R. 2950) would authorize the issuance of tax-exempt bonds, grants, direct loans, and loan guarantees of over $71 billion (in nominal dollars) for high-speed rail infrastructure, corridor development, rehabilitation, and improvement. In the Senate, the National Defense Rail Act (S. 1991) would authorize significant funding for passenger rail infrastructure investment, including $1.5 billion (in nominal dollars) a year over 6 years for high-speed rail corridor development. In addition to capital subsidies, intercity passenger rail will likely require operating subsidies from federal, state, and/or local stakeholders in order to be competitive with other transportation modes. In particular, operating a national intercity passenger rail system as currently structured will require operating subsidies. Amtrak has only one route—the Metroliner service on the Northeast Corridor—on which train revenue covers operating costs. Metroliner service earned an operating profit of $51 million in fiscal year 2001. Operating losses on other routes ranged from $600,000 to $71.5 million. In addition, if potential private operators were allowed to bid for the opportunity to provide train service over discrete routes, operating subsidies would likely be required. We contacted five private rail companies that have been identified as possible intercity rail providers. Four said that although they could provide efficient intercity passenger rail service, they would still need operating subsidies. The fifth private operator stated that it had not yet determined whether operating subsidies would be needed. We also contacted the six freight carriers in North America about providing intercity passenger rail service. Three of the six said they would consider providing passenger service if it made business sense and did not interfere with freight services. However, most of these railroads indicated that operating subsidies would be needed. Given the diverse potential benefits of intercity passenger rail systems and the large costs associated with them, the development of a national intercity passenger rail policy represents a major challenge. This challenge is made more difficult because of longer-term fiscal pressures and the new commitments undertaken after September 11th. Congress will have to consider what is the proper role of the federal government in intercity passenger rail as it examines competing claims and new priorities. When considering development of a policy for the future of intercity passenger rail service in the United States, Congress will face the question of whether and where the potential public benefits are sufficient to warrant government intervention to ensure that intercity passenger rail service—which the private sector has not found profitable to provide on its own—will exist. As Congress debates a transformation of intercity passenger rail, including whether continued direct federal government support is warranted, initial considerations that could be of use are (1) establishing clear, non- conflicting goals for federal support for intercity passenger rail systems; (2) establishing the roles of governmental and private entities and developing funding approaches that focus on and provide incentives for results and accountability; and (3) ensuring that the strategies developed address diverse stakeholder interests, to the extent possible, and limit unintended consequences. Numerous mechanisms and stakeholders could be used to help Congress incorporate these considerations into a national policy for intercity passenger rail. A critical initial decision for Congress concerns the goals of an intercity passenger rail system within the context of the nation’s passenger transportation network. Clearly defined goals will provide a foundation for making other decisions, such as determining the structure of a passenger rail system, identifying the level of funding required, and determining how assistance will be provided. For example, Congress might establish the goal of providing intercity passenger rail service to as many cities and towns that have existing railroad infrastructure so as to provide enhanced transportation choice. In contrast, Congress might establish a more limited goal of contributing to alleviating congestion and improving air quality by providing intercity passenger rail only between select densely-populated areas. Clearly, the nature and scope of the selected goals establishes expectations for the federal government’s financial commitment to intercity passenger rail. To help ensure the goals are achieved, conflicting goals should be avoided to the extent possible because attempts to attain one goal might reduce the likelihood of attaining another. An example of such a conflict can be seen in Amtrak’s efforts to maintain its national route system while becoming free from federal operating assistance. In an effort to maintain a national system Amtrak has continued to run routes for which fare revenues do not cover operating costs, even when subsidized by other Amtrak revenues. As cited earlier, only one route made an operating profit in 2001 without state support. In addition, the goals should be measurable—that is, they should identify the amount of public benefits to be attained. Stating goals in measurable terms makes it easier to assess the success or failure of government support for intercity passenger rail service, and ultimately to hold the intercity passenger rail system accountable for the results. Establishing the relative roles of the federal, state, and local governments and private entities in providing intercity passenger rail service will help ensure, to the extent practicable, that the goals can be achieved. This step is critical because defining these roles will help to establish incentives for leadership, financial participation, risk-sharing, and accountability. Roles are defined not only by specific structures and organizations but, perhaps more significantly, by the forms, conditions, and terms of assistance. Regarding structures and organizations, for example, should there still be a government-established entity, such as Amtrak, that provides intercity passenger rail service? Or should federal and state governments allow private operators to receive government assistance on a competitive basis to provide intercity passenger rail service, whether nationally or regionally? In addition, federal, state, local, and private roles will need to be established regarding how decisions about routes are made, how costs will be shared, and what safeguards are used to protect the federal government’s interests. For example, should any new rail system reflect a top-down approach in which the federal government or another entity (like Amtrak) determine the route structure on the basis of a national focus? Or, should it be a bottom-up system in which entities closer to rail users (such as states or regional collections of states) decide where intercity passenger service will generate the most public benefits for their citizenry? Currently, passenger route decisions are made at a national level through Amtrak. Regarding financing, the federal government is currently the major public sector financer of intercity passenger rail (about $1 billion per year on average from 1998 through 2002). Comparatively, Amtrak estimates that states will contribute $223 million in 2002 to support specific Amtrak routes and improve infrastructure. Maintaining current intercity passenger rail service will likely continue to cost a minimum of $1 billion per year according to Amtrak and the Department of Transportation’s Inspector General. Federal funding for intercity passenger rail service will continue to compete with other national transportation and non- transportation needs. Most of the officials from the 17 state departments of transportation whom we contacted indicated that they would be willing to provide funds to continue intercity passenger rail operations in their states. However, the officials stated that continued federal investment would also be needed. Moreover, to ensure that intercity rail was on equal footing with other transportation modes, they suggested that an 80/20-federal/state cost- sharing arrangement would be appropriate. However, the officials also expressed concerns about their ability to form partnerships with other states to finance intercity passenger rail, noting that determining fair cost- sharing arrangements for capital improvements among the states would be difficult. In addition, some officials commented that investing state funds in improvements in another state is often politically difficult and, in some cases, prohibited by law. The choice and design of tools for providing federal financial assistance have important consequences for performance, transparency, and accountability. Governments have at their disposal a wide variety of funding mechanisms for providing financial assistance, such as grants, bonds, tax subsidies, loans, loan guarantees, and user fees. The numerous tools vary in the extent to which they allow federal assistance to (1) generate a stable source of revenue sufficient to provide the capital needed to develop intercity passenger rail systems; (2) ensure that investments provide an appropriate return relative to investments in other intercity transportation systems; (3) leverage the federal dollar by providing positive incentives for investments by others and discouraging the replacement of state and local funds with federal funds (commonly called supplantation or substitution); and (4) strike a balance between accountability and flexibility. Various funding mechanisms can also be structured to support or facilitate the development of partnerships between government and private entities across regions. Regardless of the tool(s) selected, specific safeguards would be needed to protect the federal government’s interests. The safeguards could vary, depending on the nature of the financial assistance tools used. For example, the Federal Transit Administration’s (FTA) New Starts program provides several such safeguards. In this program, FTA evaluates and rates potential transit projects against project justification and local financial commitment criteria. The criteria include mobility improvements, environmental benefits, cost effectiveness, operating efficiencies, local cost sharing, and quality of capital and operating finance plans. FTA uses the ratings to decide which projects will proceed to preliminary engineering and final design phases, be recommended for funding, and receive grants. In addition, the grant agreement establishes the terms and conditions for federal participation in a project, including the maximum amount of federal funds to be made available. Project sponsors are generally responsible for higher than expected costs. In addition to the financial tools, other mechanisms could be used to hold the recipients of financial assistance accountable for results. To improve federal program effectiveness and public accountability, Congress passed the Government Performance and Results Act of 1993 (the Results Act). Under this act, executive agencies must prepare 5-year strategic plans, annual performance plans, and annual reports on the extent to which goals were met and on what actions are needed to achieve or modify goals that have not been met. By requiring these actions, the Results Act seeks to hold agencies accountable for results. Similar accountability mechanisms could be built into intercity passenger rail policy. Another way to promote performance and accountability would be to require the intercity passenger rail operator(s) to assume some level of financial risk. For example, the operator might receive a fixed level of subsidy plus all the ticket revenue generated. If the sum of the fixed subsidy and ticket revenue were less than operating expenses, the shortfall would be the operator’s responsibility to meet. This arrangement would encourage operators to provide quality service that attracts customers and to operate efficiently. Several potential private operators that we contacted said that they would be willing to assume some level of financial risk. Revising intercity passenger rail policy could have substantial effects on a number of stakeholders, including Amtrak and its employees, the railroad retirement and unemployment systems, commuter railroads, states, and freight railroads. Important attributes of any new national intercity passenger rail policy are that it addresses diverse stakeholder interests, to the extent possible, and limits unintended consequences. Amtrak, its creditors, and its employees could be the groups most directly affected by substantial changes in intercity passenger rail policy. The most sweeping effect on these stakeholders would occur if Amtrak were to be liquidated. Amtrak recently estimated that the net cost (net from sales of assets) of liquidation could be $7.7 billion to $11.5 billion (in nominal dollars) over a 5-year period. This cost includes possible losses by creditors (including labor protection payments to Amtrak employees) and the railroad retirement and unemployment insurance systems. We are updating our 1998 assessment of the potential costs of an Amtrak liquidation for this committee and expect to report on this topic later this summer. Similarly, Amtrak’s Northeast Corridor is a vital piece of infrastructure that would have to be dealt with carefully because of its many other users. Currently, the corridor handles about 1,200 Amtrak, commuter railroad, and freight railroad trains a day. By far, the heaviest users of the corridor are the commuter railroads, which depend at least in some part on access to the corridor to bring their riders into major cities (on average, about 1.2 million riders per day). Many state officials told us that intercity passenger rail is an important part of their transportation systems. Officials in most of the 17 states that we contacted indicated that they would try to continue some type of intercity rail service if Amtrak service was discontinued in their states. However, these officials expressed a number of concerns about their ability to do so. Two common concerns that they raised were whether new operators could obtain a right to use freight railroads’ tracks under terms similar to those that apply to Amtrak and whether states could form partnerships with other states to support intercity passenger rail service. In particular, the states worry that the freight railroads would not grant a new operator access rights or would increase their fees above the incremental costs. Thus, obtaining these rights would greatly affect states’ decisions to support intercity passenger rail. Freight railroads would also be directly affected because freight railroads own nearly all of the tracks in the United States. Freight railroad officials are concerned about the degree to which providing intercity passenger rail service does and will affect their ability to serve their customers and to earn profits. Freight railroads are concerned about the impact on their business and liability issues if additional conventional passenger rail service and/or high-speed rail service operates on their tracks. Operating high-speed trains on their tracks amplifies these problems because as passenger train speeds increase, freight railroads must provide more room in order to operate both passenger and freight trains safely. In addition, freight railroad officials believe that they are not fully compensated for providing this service. Although the officials were generally open to the idea of giving new passenger operators access to their tracks, they stated that they would seek to charge more than the incremental costs associated with this use. As mentioned earlier, states that we contacted generally had different expectations about access fees than the freight railroads, which would also affect their willingness to participate. In summary Mr. Chairman, there is a growing consensus that the current approach to providing intercity passenger rail system needs revision. If Congress wants to retain a system such as the one in place today, substantially more capital and operating funds are likely to be needed than are currently provided. Congress will have to weigh the decision of whether to provide this additional funding for intercity passenger rail against short- and long-range fiscal challenges in other areas of the federal budget. With this backdrop, Congress will soon have to decide if and how intercity passenger rail service can provide public benefits and complement other modes of transportation as an integrated part of our national transportation network. The first step is to establish clear and nonconflicting goals for providing federal assistance for intercity passenger rail service as part of complementary and mutually reinforcing national policies for other modes of transportation. All decisions—from establishing incentives for participation, to ensuring accountability for results, to determining the structure of intercity passenger rail systems, to ensuring that the strategies developed address diverse stakeholder interests—will cascade from the goals that are established. Numerous mechanisms and stakeholders could be used to help Congress develop a national policy for intercity passenger rail. We stand ready to assist Congress in examining this issue. This concludes our prepared remarks. We would be pleased to answer any questions you or other members of the Subcommittee may have. To assess the potential public benefits of intercity passenger rail service, we reviewed published economic and transportation literature relating to intercity passenger rail. To provide information on the costs of providing intercity passenger rail service, we obtained information from Amtrak, the Amtrak Reform Council, the Department of Transportation’s Inspector General, and, where available, from high-speed rail corridors. To determine the initial considerations that could guide Congress as it debates the future role of the federal government in supporting intercity passenger rail service, we relied upon a number of products that we have issued on setting budget priorities, assessing investment decisions, and evaluating federal financial assistance to financially struggling organizations. We also contacted 30 organizations—states (on and off the Northeast Corridor), commuter railroads, and freight railroads—that are affected by Amtrak, 5 prospective intercity rail operators, and Amtrak. Our work was carried out from January through March 2002 in accordance with generally accepted government auditing standards. For further information, please contact either JayEtta Z. Hecker at [email protected] or James Ratzenberger at [email protected]. Alternatively, they can be reached at (202) 512-2834. Individuals making key contributions to this testimony include Jay Cherlow, Angela Clowers, Libby Halperin, Alexander Lawrence, Gail Marnik, Jerome Nagy, Ryan Petitte, and James Ratzenberger. Regulatory Programs: Balancing Federal and State Responsibilities for Standard Setting and Implementation. GAO-02-495. Washington, D.C.: March 20, 2002. Budget Issues: Long-Term Fiscal Challenges. GAO-02-467T. Washington, D.C.: Feb. 27, 2002. Mass Transit: Many Management Successes at WMATA, but Capital Planning Could be Enhanced. GAO-01-744. Washington, D.C.: July 3, 2001. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: Mar. 1, 2002. Commercial Aviation: A Framework for Considering Federal Financial Assistance. GAO-01-1163T. Washington, D.C.: Sept. 20, 2001. Federal Budget: Choosing Public Investment Programs. GAO/AIMD-93- 25. Washington, D.C.: July 23, 1993. Guidelines for Rescuing Large Failing Firms and Municipalities. GAO/GGD-84-34. Washington, D.C.: Mar. 29, 1984. Intercity Passenger Rail: The Congress Faces Critical Decisions About the Role of and Funding for Intercity Passenger Rail Systems., GAO-01- 820T. Washington, D.C.: July 25, 2001. Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty Controlling Its Costs and Meeting Capital Needs. GAO/RCED-00-138. Washington, D.C.: May 31, 2000. Northeast Rail Corridor: Information on Users, Funding Sources, and Expenditures. GAO/RCED-96-144. Washington, D.C.: June 27, 1996. Intercity Passenger Rail: Financial and Operating Conditions Threaten Amtrak’s Long-Term Viability. GAO/RCED-95-71. Washington, D.C.: Feb. 6, 1995. The High Speed Rail Investment Act of 2001. GAO-01-756R. Washington, D.C.: June 25, 2001. | Because of Amtrak's worsening financial condition, there is growing agreement that the current mission, funding, and structure for providing intercity passenger rail needs to be changed. Intercity passenger rail has the potential to complement other more heavily used modes of transportation in markets where rail transport can be competitive. The potential benefits include reduced air and highway congestion, reduced pollution caused by automobiles, reduced fuel consumption and energy dependency, and greater safety. Intercity passenger rail systems, like other intercity transportation systems, are expensive. Amtrak has called for $30 billion in federal capital support over 20 years to upgrade its operations and to invest in high-speed rail corridors. Amtrak also estimates that the cost to fully develop the 10 federally designated high-speed rail corridors and Amtrak's Northeast Corridor could exceed $50 billion over 20 years. Congress must determine if and how intercity passenger rail fits into the nation's transportation system. and what level of federal investment should be made in light of other competing national priorities. Key initial steps in this framework could include (1) establishing clear, non-conflicting goals for federal support of intercity passenger rail systems; (2) establishing the roles of governmental and private entities and developing funding approaches to provide incentives for results and accountability; and (3) ensuring that the strategies developed address stake holder interests and limit unintended consequences. |
Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies’ rules. As we noted early in the implementation of CRA, it is important to assure that executive branch agencies are responsive to citizens and businesses about the reach, cost, and impact of regulations, without compromising the statutory mission given to those agencies. CRA seeks to accomplish this by giving Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. With certain exceptions, CRA applies to most rules issued by federal agencies, including the independent regulatory agencies. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. CRA defines a “major” rule as one which results or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic and export markets. CRA specifies that the determination of what rules are major is to be made by the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB). Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Nonmajor rules become effective when specified by the agency, but not before they are filed with Congress and GAO. CRA established a procedure by which members of Congress may disapprove agencies’ rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency’s rule. If such a resolution becomes law, the rule then cannot take effect or continue in effect. In addition, CRA prohibits an agency from reissuing such a rule in substantially the same form, or a new rule that is substantially the same as the disapproved rule, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule. Members of Congress seldom have attempted to use this disapproval process. Over the past decade, 37 joint resolutions of disapproval have been introduced regarding 28 rules. Only once has Congress used this disapproval process to nullify a rule, when it disapproved the Department of Labor’s rule on ergonomics in 2001. GAO’s only stated role under CRA is to provide Congress with a report on each major rule concerning GAO’s assessment of the promulgating federal agency’s “compliance with the procedural steps” required by various acts and executive orders governing the regulatory process. These include preparation of a cost-benefit analysis, when required, and compliance with the Regulatory Flexibility Act, the Unfunded Mandates Reform Act of 1995 (UMRA), the Administrative Procedure Act (APA), the Paperwork Reduction Act, and Executive Order 12866. GAO’s report must be sent to the congressional committees of jurisdiction within 15 calendar days of the publication of the rule or submission of the rule by the agency, whichever is later. While the CRA is silent with regard to GAO’s role concerning nonmajor rules, we found that basic information about those rules also should be collected in a manner that can be of use to Congress and the public. To compile information on all the rules submitted to us under CRA, we established a database, available to the public on the Internet. Our database gathers basic information about the 15–20 major and nonmajor rules that we receive each day, including the title, the agency, the Regulation Identification Number, the type of rule, the proposed effective date, the date published in the Federal Register, the congressional review trigger date, and any joint resolutions of disapproval that may have been introduced. We created a standardized submission form available on the Internet, which is used by almost all the agencies, to allow more consistent information collection. Since CRA was enacted on March 29, 1996, we have received and submitted timely reports on 610 major rules and entered 41,218 nonmajor rules into the database. As noted earlier, before a rule can become effective, it must be filed in accordance with CRA. We conduct an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and us. We perform the review to both verify the accuracy of our database and to ascertain the degree of agency compliance with CRA. We forward a list of unfiled rules to OIRA for their handling, and, in the past, they have disseminated the list to the agencies, most of which file the rules or offer an explanation of why they do not believe a rule is covered by CRA. Although we reported that agencies’ compliance with CRA requirements was inconsistent during the first years after CRA’s enactment, compliance improved over time. In general, we have found the degree of compliance to have remained fairly constant, with roughly 200 nonmajor rules per year not filed with our office. In the 10 years since CRA was enacted, all major rules have been filed in a timely fashion. In the past 10 years, we also have issued eight opinions regarding what constitutes a “rule” under CRA in response to requests from congressional committees and members concerning various agency pronouncements and memorandums. CRA contains a broad definition of the term “rule,” including more than the usual notice and comment rulemakings published in the Federal Register under APA. Under CRA, “rule” means the whole or part of an agency statement of general applicability and future effect designed to implement, interpret, or prescribe law or policy. For example, in 1996 we concluded that a memorandum issued by the Secretary of Agriculture in connection with the Emergency Salvage Timber Sale Program constituted a rule under CRA and should have been submitted to Congress and GAO before it could become effective. Similarly, in 2001, we concluded that a Fish and Wildlife Service Record of Decision entitled “Trinity River Mainstem Fishery Restoration” was a rule covered by CRA. We believe these opinions have strengthened the reach of CRA by insuring compliance with the main thrust of the Act, which was to insure that agency actions, whether labeled a “rule” by the agency or not, are subject to congressional review. We have noted that certain congressional committees, such as the Joint Committee on Taxation, were taking an active role in overseeing agency compliance with CRA. As a result, for example, Internal Revenue Service procedures, rulings, regulations, notices, and announcements are forwarded as CRA submittals. The one major area of noncompliance with the requirements of the Act has been that agencies have not always delayed the effective date of major rules for 60 days as required by the Act. Agencies have filed 610 major rules with our office, and, for 71 of those rules, the agencies did not delay the effective date for the required 60 days. One reason for noncompliance with the 60-day delay is that the agencies have misapplied the “good cause” exception which waives the delay of the rule if it would be impracticable, unnecessary, or contrary to the public interest. Since the enactment of CRA, our office has consistently held that the “good cause” exception is only available if a notice of proposed rulemaking was not published and public comments were not received. Many agencies, following a notice of proposed rulemaking and receipt of comments, have stated in the preamble to the final major rule that “good cause” existed for not providing the 60-day delay. The other reason for noncompliance is that the statute that an agency is implementing by issuing the final major rule contains a date by which the Secretary or Administrator must issue the regulation, and the date, in many instances, does not permit the 60-day delay. However, the CRA states that it shall apply notwithstanding any other provision of law. Agencies and GAO have provided Congress a considerable amount of information about forthcoming rules in response to CRA. The limited number of CRA joint resolutions introduced might suggest that this information generates little additional oversight of rulemaking. However, as we found in our review of the information generated on federal mandates under UMRA, the benefits of compiling and making information available on potential federal actions should not be underestimated. Further, as we also found regarding UMRA, the availability of procedures for congressional disapproval may have some deterrent effect. The Congressional Research Service has reported that several rules have been affected by the presence of the review mechanism, suggesting that the CRA review scheme has had some influence. Still, as I noted in my testimony before this Subcommittee last November, efforts to enhance presidential oversight of agencies’ rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. In particular, our reviews have noted the growing influence and authority of OIRA in the oversight of the regulatory process. Some of this increased activity reflects administration initiatives, but it also includes some new responsibilities assigned by Congress through statute, such as the requirement for OMB to issue governmentwide guidance to implement the Information Quality Act. In contrast, there does not appear to have been a similar expansion of direct congressional influence and authority over the regulatory process, although bills have been introduced over the years to enhance the mechanisms available for congressional oversight of agencies’ rulemaking. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review—and potential disapproval—of agencies’ rules. As the major example of the first category of proposals, Congress passed the Truth in Regulating Act (TIRA) in 2000 to provide a mechanism for it to obtain more information about certain rules. In contrast to the essentially procedural reviews that GAO now conducts under CRA, TIRA contemplated a 3-year pilot project during which GAO would perform independent evaluations of “economically significant” agency rules when requested by a chairman or ranking member of a committee of jurisdiction of either House of Congress. However, during the 3-year period contemplated for the pilot project, Congress did not enact any specific appropriation to cover TIRA evaluations, as called for in the Act, and the authority for the 3-year pilot project expired on January 15, 2004. Therefore, we have no information on the potential effectiveness of this mechanism. Congress has considered reauthorizing TIRA, and we have strongly urged that any reauthorization of TIRA continue to contain language requiring a specific annual appropriation for GAO before we are required to undertake independent evaluations of major rulemakings. Such an expansion of GAO’s current lines of business without additional dedicated resources would pose a serious problem for us, especially in light of what will likely be increasing budgetary constraints in the years ahead. It would also likely serve to adversely affect our ability to provide the same level of service to the Congress in connection with our existing statutory authorities. We have also recommended that TIRA evaluations be conducted under a pilot project basis. Members of Congress have also introduced several bills over the past year that would provide additional mechanisms for direct review and approval (or disapproval) of agencies’ rules. Some of these proposals would modify how Congress reviews information submitted under CRA and how the disapproval procedures would work. These bills could, for example, create a joint committee that would be tasked with reviewing all rules to determine whether a disapproval resolution under CRA should be introduced. We have conducted no work that would provide information on the potential effectiveness of such changes. Mr. Chairman, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other Members of the Subcommittee might have at this time. If additional information is needed regarding this testimony, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512-6806 or [email protected]. 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 year marks the 10th anniversary of the Congressional Review Act (CRA). Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies' rules. This statement provides an overview of the purpose and provisions of CRA; GAO's role and activities in fulfilling its responsibilities under the Act; and trends on CRA within the broader context of developments in presidential and congressional oversight of federal agencies' rulemaking. CRA gives Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget specifies which rules are designated as major rules based on criteria set out in the CRA. Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Congress may disapprove agencies' rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency's rule. Members of Congress seldom have attempted to use this process. GAO's role under CRA is to provide Congress with a report on each major rule concerning GAO's assessment of the promulgating federal agency's compliance with the procedural steps required by various acts and executive orders governing the regulatory process. GAO compiles information on the rules it receives under CRA in a database containing basic information about major and nonmajor rules. GAO also conducts an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and GAO. Although we reported that agencies' compliance with CRA requirements was inconsistent during the first years after CRA's enactment, compliance improved over time. There have been a limited number of CRA joint resolutions, but the benefits of compiling and making information available on potential federal actions should not be underestimated. The procedures for congressional disapproval also may have some deterrent effect. Efforts to enhance presidential oversight of agencies' rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review--and potential disapproval--of agencies' rules. |
The Medicare program’s day-to-day operations rely on numerous large- scale information systems, which house or process information on, among other things, beneficiaries’ enrollment and utilization of services, claims, and payments to providers. These systems serve Medicare’s traditional fee- for-service component, which enrolls the bulk (about 85 percent) of the program’s beneficiaries, and the managed care component, which enrolls the rest. CMS—along with about 50 insurance companies with which it contracts to process Medicare claims—operates these systems. Contractors use one of Medicare’s several standard systems to process fee-for-service claims. Fiscal intermediaries are contractors that process part A claims (claims for hospital services and care provided by other institutional providers, such as skilled nursing facilities), while carriers are contractors that process part B claims (claims for physician care and other covered expenses, such as laboratory services). The fiscal intermediaries use one of two standard systems to process part A claims; the carriers use one of four standard systems to process part B claims. These contractor-run standard systems review claims to ensure that all required fields are complete, conduct utilization checks to determine whether the services provided correspond to the beneficiary’s diagnosis, and calculate the payment amount for the claim. Contractors sometimes modify the standard claims processing systems they have adopted to address local claims processing needs, such as determinations as to whether claims are payable given their local medical coverage policies. Contractor-processed claims are then transmitted to a CMS-operated prepayment validation and authorization system. This system—called the Common Working File (CWF)—screens the priced claims for consistency with rules, eligibility for coverage, and duplication with previously processed claims and then approves, adjusts, or denies payment accordingly. In the early 1990s, HCFA launched a large systems modernization initiative to replace Medicare’s multiple, contractor-operated claims processing systems with a single, more technologically advanced one. It was envisioned that the new, single-system computing environment would result in simplified program administration and reduced administrative costs, comply with Year 2000 standards, and improve the agency’s ability to spot improper billing practices. However, this initiative failed through a series of planning and development missteps. When the contract for this initiative was terminated in August 1997, Medicare was left with numerous independent systems that needed Year 2000 modifications. The Year 2000 work delayed other planned IT initiatives, including the consolidation of Medicare’s standard claims processing systems—an initiative designed to reduce maintenance costs and some inconsistencies across the different contractor systems. CMS is now refocused on modernizing its IT environment to better implement congressionally mandated payment policy and other modifications and on modernizing its information systems. Critical responsibilities for leading these IT efforts reside with the agency’s Chief Information Officer (CIO), who heads CMS’ Office of Information Services (OIS). Under the CIO’s direction, OIS is responsible for managing the acquisition and operation of CMS’ information systems that are enterprisewide—those affecting the agency as a whole. It is also responsible for setting agencywide IT policies with which the agency’s three major organizational units, or programmatic “centers”—such as the Center for Medicare Management and the Center for Beneficiary Choices—and its other administrative offices must comply in their efforts to develop systems to support statutory and administrative program requirements. In addition to OIS, other units share responsibility for various aspects of CMS’ IT activities. CMS’ programmatic centers and its administrative offices are generally charged with developing, acquiring, and maintaining systems that are specific to their individual missions, under the CIO’s guidance and direction. For example, CMS’ Center for Beneficiary Choices is responsible for systems that contain information on Medicare+Choice plans; CMS’ administrative Office of Financial Management is responsible for systems that track agencywide financial transactions for accounting purposes. In the last decade, the agency has faced heightened expectations for payment accuracy, program integrity, and the timely implementation of new and complex payment methods. Efforts to meet these expectations have brought the agency’s IT and data quality deficiencies into sharp focus. In response, CMS has begun several modernization initiatives and has planned others that are intended to help the agency demonstrably boost the performance of its core functions. One of CMS’ fundamental responsibilities, to process and pay health care claims, is a highly automated operation that relies on multiple, large-scale computer systems run by Medicare contractors. Through the computerized screening of claims, the contractors seek to ensure that beneficiaries are properly enrolled in the program and that any changes to their status are promptly updated. The contractors also seek to ensure that payments are made only to health care professionals who are authorized to bill Medicare and that the amount paid for, and the services delivered to, a beneficiary are consistent with program rules. In a static environment, efficiently processing almost a billion claims from almost a million hospitals, and other health care providers each year would be task enough. However, the Medicare claims processing systems are subject to frequent modifications to reflect regular annual updates, new policies, and changes in statutory requirements. In recent years, when major Medicare legislation added new benefits and created new payment methods to improve the program’s fiscal health, many system changes had to be implemented. According to the Blue Cross and Blue Shield Association, which represents many of Medicare’s contractors, in calendar year 2000 contractors received 719 formal change orders—more than two and a half times the number received in fiscal year 1998. These orders are instructions sent by CMS for contractors to modify their claims processing systems. Implementing changes can be complicated and resource-intensive. Even though there are six standard systems, contractors have their own systems, in addition, to perform certain claims administration functions. As a result, for some changes, individual contractor sites require separate programming solutions. In addition, as systems have been altered over the decades, the alterations have not always been properly documented. Thus, implementing new changes, in some instances, takes considerable time and programming expertise. The difficulties of implementing changes complicate CMS’ efforts to respond to new legislative requirements. Changes required by the Balanced Budget Act of 1997 (BBA) provide a recent illustration. In 2000, when the BBA-mandated prospective payment method for home health services was implemented, the standard systems had to adopt a complex claims pricing logic, requiring the retrofitting of systems that were designed to use a much simpler set of payment rules. For a time, some providers reported that claims that should have been promptly paid were inappropriately denied or suspended for further review. Program monitoring and oversight is another critical agency function that is fundamental to ensuring that Medicare beneficiaries have access to quality health care services and that the program is paying claims properly. This function is particularly important to guard against unintended effects as payment methods undergo change. BBA and subsequent legislation gave CMS significant tools to adjust its payment methods, but inadequacies in CMS’ information systems have made it difficult to implement these measures and to track the effect of program changes. For instance, monitoring the effectiveness of program policies requires obtaining timely and accurate information about the services beneficiaries receive and the payments made to their providers. However, CMS’ IT systems have often been of little help. The reason is that several of CMS’ key databases—such as its National Claims History (NCH) database, which maintains the electronic files of Medicare’s paid claims—are structured in a way that makes the quick retrieval of beneficiary utilization and provider payment information difficult. Retrieving data from hundreds of millions of claims and generating statistics to answer policy questions requires special programming for each query and may take months. Similarly, the design and stand-alone nature of the various systems that maintain Medicare’s financial information limit CMS’ ability to respond promptly to financial status questions, such as how much money in overpayments is owed to Medicare. To answer such questions, CMS must rely largely on its claims administration contractors’ systems, which produce a fragmented, rather than coherent, picture of the financial matter at hand. These problems have been exacerbated by lapses in ensuring data quality. At times, CMS has used data from separate systems that were neither updated on the same schedule nor subsequently reconciled. As a result, CMS lacks key financial information needed to properly manage the program. For example, the Medicare fee-for-service accounts receivable net balance was more than $3.7 billion at the end of fiscal year 2000. However, CMS could not generate a complete and up-to-date list of delinquent debts that it could use to monitor the efforts of its contractors to refer such debts for collection. A third critical management function involves the oversight of Medicare+Choice—Medicare’s managed care component. In Medicare+Choice, health plans compete for Medicare beneficiary enrollees by offering additional benefits—such as coverage for outpatient prescription drugs—at low or no premiums. To give beneficiaries managed care choices, CMS has to collect and disseminate information about plans to inform beneficiaries and then be able to record and maintain information on the beneficiaries’ enrollment choices, once they have enrolled in plans. CMS also collects and analyzes information to ensure that payments to managed care organizations are appropriate. The agency’s managed care functions are currently supported by a “family” of systems, and these systems, in turn, interface with other application systems and databases. Some of the systems were developed a decade ago and have been modified many times to meet increasingly complex requirements and growing capacity demands. The current systems are labor-intensive to modify and validate and do not respond promptly to beneficiary enrollment and health plan inquiries. According to CMS officials, the underlying structure of these systems limits the extent to which additional modifications are possible. Properly adjusting plan payments is another area in which CMS’ current systems do not provide adequate support to the agency. BBA required the agency to refine its managed care rate adjuster to better reflect patients’ health status. The adjustment is designed to pay health plans appropriately when they enroll a disproportionate number of healthier or sicker than average beneficiaries. Calculating this adjustment requires data on enrollees’ use of medical services, known as encounter data. However, CMS’ existing systems are not organized to maintain service utilization data at the individual enrollee level, thus impeding efforts to modify the rate adjuster as required. In 1998, HCFA developed a strategic vision for agencywide IT modernization in which modular units that perform different functions would be interconnected with central databases. The central databases— such as those for maintaining beneficiary data and claims history data— are being designed to serve as the source from which agency systems obtain information. This structure is designed to reduce redundancy in data maintenance and modification efforts and improve data consistency and quality. CMS’ current plans for implementing modernization improvements include making incremental changes to some systems while replacing others with more advanced technology. Already under way are CMS efforts to consolidate its standard claims processing systems to ease the burden of modifying multiple systems. CMS is reducing the number of standard processing systems from six to three—one for fiscal intermediaries, one for other carriers, and one for Durable Medical Equipment Regional Carriers (DMERC). (See app. II for more detail on this consolidation.) According to CMS officials, reducing the number of standard systems will reduce maintenance costs and inconsistencies across the different contractor systems and simplify making program changes. CMS is also planning to redesign the CWF, the critical prepayment system in the overall claims process. Prior to paying a claim, the contractors submit their claims to the CWF to check whether the claim is for a valid beneficiary and whether the beneficiary is entitled to the service, in order to authorize the claim for payment. Several key activities are fully dependent on the effectiveness and operational quality of the CWF, including program safeguard checking, query resolution, and compiling information on approved claims for parts A and B services. In other modernization efforts, CMS intends to substantially improve its ability to monitor the care provided to beneficiaries and payment integrity in Medicare’s fee-for-service component. One project is to replace Medicare claims history files with a modern database that can be readily queried and can generate up-to-date information quickly. The new system—the National Medicare Utilization Database (NMUD)—will use advanced database management software to enhance and speed data access. CMS tested the ability of an NMUD prototype to answer complex questions about beneficiaries’ use of services and provider payments and found that it could respond—in a matter of hours—to queries that had taken weeks to answer using CMS’ previous technology. With regard to fiscal management, CMS has a system development initiative under way to improve its underlying financial reporting systems. Called HCFA’s Integrated General Ledger Accounting System (HIGLAS), the system will be designed to interconnect with the agency’s other financial and claims processing systems, including a new system intended to improve contractors’ efforts to recover Medicare payments that should have been made by another insurer. The Medicare payment recovery system is expected to, among other things, establish and maintain accounts receivables associated with contractors’ recovery activities. To improve the use of its systems containing managed care data, CMS has several initiatives under way designed to perform functions required by BBA, such as conducting an information campaign to educate beneficiaries about competing health plans and refining payment adjustments. Among other things, the agency is doing the following work. CMS is building a new data repository within its Health Plan Management System (HPMS) that will collect and maintain data about plan benefit packages, premiums, and service areas. HPMS is expected to enable CMS to conduct an improved information campaign to educate Medicare beneficiaries about plan options and conduct better oversight of health plans’ offerings and the quality of care provided to enrollees. CMS is obtaining medical encounter data from the new NMUD claims history database so that it can develop health plan payment adjusters based on patient health status. With such a large array of routine operations, systems maintenance, and critical system improvement activities under way, CMS needs well- developed IT planning and implementation oversight processes. Although CMS has a strategic vision and has made progress in developing key IT planning documents, certain gaps remain in the documentation of the agency’s current and planned IT environments and in its process to manage IT investments. If not addressed, CMS’ IT planning and investment management weaknesses could put critical modernization efforts at risk. Although CMS has made notable progress in developing the foundation for its blueprint of its current and planned systems environment—its enterprise architecture—critical elements are not in place or have not been developed in sufficient detail. CMS’ enterprise architecture is contained in a multivolume document presented in a framework consistent with Office of Management and Budget (OMB) and other federal guidance. The agency’s enterprise architecture includes, among other things, a broad description of core program and operational activities, their purpose, and the centers or administrative offices responsible for their performance; a discussion of how technology is and will be used to support these activities; a general explanation of the policies, standards, and tools needed to develop IT applications and ensure system security; a broad description of CMS’ hardware, software, and network technologies; and an explanation of the IT decision-making hierarchy and process for resolving disputes. Key pieces of the architecture document, however, are either incomplete or have not been developed at all. To develop some of these, CMS’ programmatic staff play a significant role. For example, Major “business” functions, such as claims processing, are not well documented in terms of the key steps in how the activities are conducted, what agency units are involved, and what might cause the function to change. Without this documentation, CMS cannot easily reengineer its operations in line with the agency’s system modernization efforts. The agency’s information flows—indicating how information is shared across the agency—have not been developed in detail. The data model that is intended to chart the location of, and relationships between, common data elements in CMS’ various IT systems is also incomplete. As of July 2001, the model included data on use of services by Medicare beneficiaries and on enrollment and managed care, as well as Medicaid data. CMS officials told us that they intended to model financial data as part of HIGLAS, but had not begun to do so. There are no plans in the near future to include quality of care data. The officials attributed the data model completion problems to insufficient staff to conduct this effort and budgetary constraints. For a description of additional elements that are weak or missing from the architecture document, see appendix III. With key descriptions of the agency’s IT environment missing from the enterprise architecture, CMS lacks sufficient detail to formally map the implementation steps to move from its existing IT environment to the one outlined in the agency’s enterprise architecture and then take those steps. This map is known as a “migration plan.” It is typically developed from a “gap analysis,” or study of the differences between the agency’s current and desired IT environments and includes required hardware and software changes. A migration plan can suggest the priorities for, and sequencing of, future IT development—with scheduled milestones for system upgrades, modifications, and development consistent with the agency’s capacity to handle these changes. CMS’ 5-year information resources management plan discusses in a broad way certain projects that it considers key to its modernization effort, but it does not indicate how these projects will be ranked in order of priority. CMS is beginning to develop a strategy for moving toward its desired IT environment but has not completed a detailed migration plan. The absence of such a migration plan can create difficulties when CMS is determining its project priorities. In addition to having a blueprint, having a process to manage IT investments can help mitigate modernization risks. CMS’ IT workload includes major systems developments, systems operation maintenance, and systems modifications, such as those designed to implement program changes. An effective IT investment management process is critical to ensure that resources are used as effectively as possible. Federal requirements and guidance direct agencies to manage their IT projects as a portfolio of investments. This involves developing a process that (1) establishes project selection criteria and quantifies the benefits and risks of each project, (2) ensures that projects continue to meet mission needs and provides senior management with progress reports that detail each project’s cost, quality, and timeliness, and (3) includes a project evaluation phase that can inform future project selection and management. An IT investment management process following this guidance is intended to provide agencies with the information needed to better control their IT budgets; reduce the risks associated with building, acquiring, and maintaining systems; and increase the likelihood of improving program operations. The number and complexity of CMS’ IT projects require a strong agencywide IT investment management process. As of January 2001, 102 of the 183 IT projects under way were classified by CMS as complex and expensive (levels C and D). (See table 1.) Because they take longer to implement and are more costly, they pose a greater risk to the agency. The rest were classified as lower cost or short-term projects—such as systems maintenance and 1-year purchases and leases (levels A and B). A little over 40 percent of level C and D projects are managed directly by OIS. The rest are managed primarily by the center or administrative office responsible for the program activity to which the project is linked, while OIS maintains an oversight and technical assistance role. For example, the Office of Financial Management has primary responsibility for nearly half of non- OIS level C and D projects because they generally relate to maintaining or improving systems that provide financial management or program integrity information. CMS’ process for selecting and managing these substantial projects falls short of recognized commercial and public sector best practices and guidance in the following ways. Despite the importance of involving senior-level management in reviews of project cost, quality, and timeliness, executive-level monitoring of critical IT projects at CMS is uneven. CMS’ Executive Council, in conjunction with its Financial Management Investment Board (FMIB), serve as its IT investment review board as required by federal law. The FMIB reviews project funding requests annually when it defines funding priorities and makes its annual funding recommendations to the Executive Council, and the Executive Council is briefed on the progress of some of the projects. The CIO receives monthly status reports on about a third of the major projects OIS manages. However, neither the FMIB nor the CIO routinely receives status reports on projects managed by the agency’s program units, particularly such critical projects as the development of the system needed to maintain information on Medicare+Choice plans. Without their systematic involvement, senior managers will not be able to make timely and appropriate decisions if cost, schedule, and performance outcomes are not achieved. CMS has not formally defined criteria for project funding. The agency’s FMIB bases its decisions on high-level criteria that are used for selecting IT investments. These criteria are focused on meeting mission needs, but do not include explicit cost, schedule, benefit, or risk criteria— considerations that would be helpful in making trade-offs among investments competing for limited resources. In addition, CMS has not developed written selection criteria. Some projects were approved for funding before the benefits and risks, including technical considerations, had been analyzed and reported. HCFA implemented a database for tracking IT projects in mid-1999. However, at the time of our review, the database was not useful for monitoring projects. Our review of records and discussions with project managers indicated that cost, schedule, and milestone information in the database was missing, incomplete, or outdated. CMS does not conduct project evaluations, making efforts to examine a project’s performance relative to expectations and efforts to identify lessons learned largely haphazard. Although officials told us that they intend to add a postimplementation review process, details and milestones to put this step in place have not been developed. In response to these acknowledged weaknesses, CMS officials told us of several improvements planned or under way. During our review, CMS issued a guide to implementing more structured controls in its investment management process. As part of its improvements, the agency has begun to implement a more effective project selection process. For example, “seed money” funding to develop a business case analysis for a project— which includes a study of the project’s estimated costs, benefits, and risks—before proceeding with further development was provided for some CMS’ newest major projects, including the CWF redesign project.The business case analysis is intended to provide the FMIB with more information on the project’s needs, scope, and cost when making funding decisions. CMS also expects to implement more structured management controls, including ongoing CIO monitoring for cost, performance, and scheduling of level C and D projects, with technical reviews performed at critical project milestones. For example, CMS plans to have the CIO Technical Advisory Board perform technical reviews of projects at the end of the design phase and before testing is performed, but the details of this process have not been finalized. In addition, CMS implemented a new version of its IT investment database in November 2000 with enhancements intended to improve its usefulness in tracking project spending and performance. Despite the actions taken and planned, however, achievement of the agency’s IT goals remains at risk until these and other key improvements are fully implemented in its IT planning and management efforts. The weaknesses identified in CMS’ IT planning efforts and project management procedures are part of a larger set of interrelated problems involving the agency’s budget, workforce, and strategic management approach. CMS’ budget and workforce are not commensurate with the agency’s congressionally mandated workload. At the same time, however, CMS has made limited use of performance measures to achieve accountability and results. Developing major projects while maintaining current IT systems and infrastructure and other programmatic operations is an expensive undertaking that involves difficult budgetary trade-offs. As the agency’s mission has grown over the years, its discretionary dollars that fund IT and other operations to adminster its programs have been stretched thinner. Budget pressures have forced the Congress to make difficult decisions to limit agencies’ discretionary spending. Like many other federal agencies, CMS has been operating with a discretionary budget to administer its programs that has only slightly increased over the past 10 years. Yet, during the last decade, mandatory spending on Medicare benefit payments has doubled, and CMS’ overall and IT workload increased appreciably. This is due mainly to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and BBA requirements and new non-Medicare programmatic responsibilities, such as the State Children’s Health Insurance Program (SCHIP). BBA alone had 335 provisions requiring CMS to make substantial changes to the Medicare program. In 1998—a key BBA implementation year—the agency was doing this work with about 1,000 fewer employees than it had in 1980. In fiscal year 2000, Medicare’s operating costs represented less than 2 percent of the program’s benefit outlays, far below the percentage for private or nonprofit insurers, even after accounting for differences in the functions each performs. CMS’ IT projects compete for resources with other agency responsibilities of national importance, some of which are also lacking in funds and staff. For example, in the area of nursing home quality, CMS has made negligible use of its most effective oversight technique—a federally conducted nursing home inspection to assess how well state inspectors have identified serious deficiencies in nursing facilities. Conducting these independent inspections, known as comparative surveys, is important to check the quality of state inspections because some state inspectors have missed significant problems. However, CMS has lacked sufficient staff to perform an adequate number of these checks. CMS’ ability to oversee the performance of its Medicare claims administration contractors is similarly constrained. After weaknesses in contractors’ performance of critical activities to assure accurate payment were detected, in fiscal year 2001, the agency requested funding for 100 additional positions to focus on key contractor oversight activities, such as monitoring claims processing and reviewing payments made to providers. With the many program priorities in CMS—including maintaining current systems—allocating funds for IT improvements is a difficult juggling act. Currently, HIGLAS, which is CMS’ planned financial management system now under development, is one of the agency’s top IT priorities. It is expected to have the capacity to aggregate financial information that now resides in the stand-alone claims processing systems of the contractors. The agency allotted an additional $10 million to HIGLAS for its development in fiscal year 2001 to purchase and customize needed software. At the same time, funding had to be decreased or eliminated entirely for other systems, including the Provider Enrollment, Chain and Ownership System (PECOS), a centralized national provider enrollment database; NMUD; and the Contractor Management Information System (CMIS), a contractor monitoring database. (See table 2 for discussion of the role these systems are designed to play in modernizing Medicare.) Delays in developing these systems have considerably slowed efforts by CMS and its contractors to conduct Medicare program monitoring and policy development activities more competently and efficiently. Because CMS must make trade-offs that affect its ability to manage the Medicare program, having a process to manage its IT and other programmatic investments can help ensure that the most critical activities are funded. The development of CMS’ database for beneficiaries’ use of services—NMUD—is a case in point. CMS originally allotted $600,000 to the NMUD project for fiscal year 2001. However, this amount did not reflect the funds needed to build in the capacity to assemble and maintain beneficiary encounter data used in Medicare+Choice to fulfill the BBA requirement for a health-based risk adjuster. Once staff recognized the necessity of storing encounter data, CMS redistributed IT funds to support developing a component in NMUD that had the capacity to assemble and maintain those data in a user-friendly format. One of the difficulties of trying to conduct long-term improvement projects is that unexpected new priorities requiring immediate attention, such as new program requirements with short implementation time frames, can push longer term projects to the end of the funding queue. For example, due to an unexpected spike in claims processing and appeals workloads, CMS staff told us that claims administration contractors would either need to be allocated more funding than anticipated in fiscal year 2001 or the contractors would have to shift funds from other functions, such as their provider and beneficiary education efforts, to address added claims processing and appeals workload. Statutory mandates often have hidden systems costs that can become ongoing expenses for which the agency does not get additional funding. For example, while adding an improved risk adjuster for Medicare+Choice appeared to be a small legislative provision, maintaining information for the risk adjuster will end up costing the agency about $20 million to $30 million per year as a new, ongoing cost. The success of CMS’ efforts to modernize its systems and implement effective planning and management processes hinges on its ability to build, prepare, and manage its IT workforce. However, CMS already has a shortage of skilled IT staff and, like other agencies, faces challenges to fill its gaps. Staff shortages—in terms of skills and numbers—have seriously undercut CMS’ efforts to carry out IT best practices. The CIO told us that OIS staffing levels and expertise are not adequate to simultaneously conduct the system maintenance, contract monitoring, and system development work that is being demanded of the staff. Specifically, CMS officials pointed to data security and project management as areas where expertise needs strengthening. According to the CIO, some IT security projects have been delayed for at least a year because OIS lacked employees with requisite skills. CMS also faces the possibility of losing its current employees who have technical and managerial expertise. An estimated 36 percent of the agency’s computer and telecommunications specialists are eligible to retire by the end of fiscal year 2005. In efforts to recruit new employees, CMS—like other federal agencies—must cope with the demand for, and at times short supply of, qualified IT workers. Despite the recent economic slowdown, employers from every sector, including the federal government, are still finding it difficult to meet their needs for highly skilled IT workers. In the long term, demand for skilled IT personnel is likely to increase. In order to address its skill needs, CMS has begun an agencywide workforce planning effort, which includes assessing employees’ IT skills through a survey. However, as noted, CMS lacks a complete architecture and migration plan to detail its current capacity and proposed IT needs. Without such information about its needs, CMS will have difficulty determining the skills needed to accomplish its IT modernization. In addition, the agency has not developed a comprehensive plan for using training, hiring, outsourcing, and retention strategies to fill skill gaps and staffing needs. Part of CMS’ challenge for planning its future workforce is to determine the right balance between work performed by CMS employees and by contractors. Despite CMS’ many resource-related challenges—including rehabilitating its information systems—the agency has not documented its resource needs well. In January 1998, we reported that the agency lacked an approach—consistent with the Government Performance and Results Act of 1993 (GPRA)—to develop a strategic plan for its full range of program objectives. Since then, the agency has developed a plan, but it has not tied global objectives to day-to-day program operations. To encourage a greater focus on results and improve federal management, the Congress enacted GPRA—a results-oriented framework that encourages improved decision-making, maximum performance, and strengthened accountability. Managing for results is fundamental to an agency’s ability to set meaningful goals for performance, measure performance against those goals, and hold managers accountable for their results. In May 2001, we reported on the results of our survey of federal managers at 28 departments and agencies on strategic management issues. The proportion of CMS managers who reported having output, efficiency, customer service, quality, and outcome measures was significantly below that of other government managers for each of the performance measures. CMS was the lowest-ranking agency for each measure—except for customer service, where it ranked second lowest. Moreover, CMS managers’ responses concerning whether they were held accountable for results to a great or very great extent—42 percent—was significantly lower than the 63 percent reported by the rest of the government. Apart from any other challenge, no agency can function effectively without adequate resources coupled with appropriate accountability mechanisms. Adequate resources are vital to support the kind of oversight and stewardship activities that Americans have come to count on from the Medicare program—inspection of nursing homes and laboratories, certification of Medicare providers, and collection and analysis of critical health care data, to name a few. In the case of other agencies or programs with serious resource challenges, the Congress has helped jump-start improvements by providing agencies with additional funds tied to improvements in management capability. In conjunction with such an increase in resources, CMS needs to have its IT funded at adequate levels to ensure both that the existing systems can be maintained and replaced by more functional, modernized systems and that its IT can provide more effective and efficient mission support. Providing IT funding that can be obligated over a multiyear period provides added flexibility when developing long-term projects, such as new systems. In the case of CMS, such additional multiyear funding would provide the stability and flexibility the agency needs to maintain and modify some systems while gradually replacing or redesigning others. As it has done in other cases, the Congress could provide CMS the funding in a separate account or line item appropriation, if that were deemed necessary to ensure that the money would be used for IT purposes. CMS’ IT funding levels should support and be commensurate with demonstrated improvements in key IT management capabilities. This includes the further development of its enterprise architecture and migration plan and enhanced IT investment management processes to strengthen its decision-making. Further development of its enterprise architecture and investment management processes will help ensure the most effective use of funds. However, CMS will need support while further developing its enterprise architecture and management process because it cannot abandon its current efforts. These include maintaining current systems and ongoing improvement efforts as well as responding to needed programmatic changes that require IT solutions. Without such concurrent efforts, the performance of key Medicare operations could be jeopardized, a situation that would be unacceptable to beneficiaries and providers and inconsistent with congressional expectations for implementing legislative mandates effectively within reasonable time frames. Providing additional funds could be made contingent on the agency making sufficient progress in developing its enterprise architecture, investment practices, and human capital capabilities, and on providing the Congress with a detailed annual plan for its IT modernization efforts. With Medicare reform at the forefront of the nation’s domestic agenda, the IT environment in which the program operates day-to-day must be capable of supporting effective program management and adaptable to change and innovation. In our view, the successful modernization of CMS’ systems is fundamental to a health financing program that can serve its major stakeholders—beneficiaries, health care providers, and taxpayers—with the efficiency and effectiveness that will be demanded of such a program in the future. The role of CMS in strengthening its IT modernization efforts is clear. To ensure greater rigor in the execution of its systems renovation and development, the agency must develop key IT planning documents and requisite processes that are currently lacking. This includes further developing the enterprise architecture documentation, particularly the agency’s information flows and data elements. However, this cannot be accomplished by OIS alone. The agency’s top leadership must engage the efforts not only of the technical staff in OIS but also of staff members in program and administrative units to complete its enterprise architecture plans. The participation of key program and administrative staff members is particularly important to establish the processes needed to ensure data reliability and relevance. In conjunction with CMS’ other units, the CIO needs to develop a migration plan that will prioritize and sequence IT projects so that officials throughout the agency understand the roadmap they are following to move toward a modernized IT environment. CMS must also tighten project review, approval, and evaluation procedures, ensuring that the selection and management of IT projects receive adequate attention from senior officials agencywide. Selection and management would be strengthened when CMS develops and uses written criteria to prioritize project selection, requires technical reviews, and has an adequate agencywide process for monitoring the status of projects. In addition, CMS is not currently realizing the full value of lessons learned from its modernization efforts because it does not have a systematic process to evaluate them. Such an evaluative process could help the agency capitalize on successes and avoid obstacles in developing its next generation of projects. Furthermore, while CMS has been taking steps to assess its workforce skills, it still needs to complete its assessment of IT staffing needs and identify and fill skill gaps. Given the importance of human capital to achieving mission results, such a deficit leaves the agency more vulnerable to IT development mishaps. The combination of stronger IT management plans and processes, coupled with adequate resources, would improve the chances that CMS’ IT challenges will be met. We believe that the Congress can address both the agency’s resource needs as well as its tactical management shortcomings. The Congress could provide CMS with additional funding—with authority to obligate the funds over several years—but could tie the agency’s authority to obligate funds to a requirement that it invest, and demonstrate improvements, in its IT planning and investment management, as well as its human capital management. With the certainty of longer term project funding tied to an increased expectation for performance and accountability, the likelihood of achieving success in modernizing Medicare’s information systems could be greatly improved. To help CMS successfully modernize its IT environment, the Congress may wish to provide additional, multiyear funding for CMS’ IT projects, under certain conditions that link funding increases to efforts to improve and demonstrated progress in technical, program, and human capital management. Because the absence of an effective enterprise architecture and IT investment management process hinders CMS’ ability to manage its IT environment, the Congress may wish to consider making the authority to obligate funds contingent upon the agency using the funds initially to support only ongoing program operations, maintenance of existing systems, and IT projects currently under way; efforts to develop an effective enterprise architecture and IT investment management process, as well as to obtain the human capital needed to modernize IT practices and operations; and statutorily required activities. The Congress may wish to make subsequent funding available for new IT development projects contingent on the agency’s (1) providing a satisfactory plan specifying the use of funds for the upcoming fiscal years and (2) demonstrating sufficient progress in implementing the following recommendations for improving critical IT capabilities necessary to successfully manage large and more complex projects. We recommend that, to ensure the success of the agency’s IT modernization, the Administrator of CMS and its senior management become more involved in IT planning and management efforts, and thus elevate the priority given to these efforts throughout the agency. To improve development and implementation of the agency’s enterprise architecture, the Administrator should direct center and administrative unit officials to complete, in conjunction with OIS, the enterprise architecture documentation, particularly of the business functions, information flows, and data elements for the systems for which their respective units are responsible, and direct the CIO to specify in a migration plan the priorities for, and sequencing of, IT projects. To improve the investment management process, the Administrator should establish sufficient and written criteria to ensure a consistent process for funding IT projects agencywide; require that major IT projects undergo a technical review before the agency approves them for further development; direct the CIO and FMIB to develop sufficient information to monitor the status of IT projects; establish a systematic process for evaluating completed IT projects that includes cost, milestone, and performance data; and direct the CIO to develop an IT workforce strategy that outlines a plan to assess staffing needs, identify skill gaps, and fill the gaps. In written comments on a draft of this report, CMS officials said that they had undertaken a series of steps to make the agency more responsive to beneficiaries and to changes in the health care industry, and that strengthening management of its IT was essential to the success of these efforts. They stated that resource limitations have hampered their implementation of some IT management processes as well as the development of several key systems modernization efforts. Notwithstanding these resource limitations, agency officials agreed that they would take steps to address the weaknesses identified in this report, but were not specific about the actions that they would take. In addition, CMS provided technical comments, which we incorporated where appropriate. CMS’ written comments are reprinted in appendix IV. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date on this letter. At that time, we will send copies to the Secretary of the Department of Health and Human Services, the CMS Administrator, interested congressional committees, and others. We will also make copies available upon request. If you or your staff have any questions about this report, please contact me at (312) 220-7600. Another contact and GAO staff acknowledgments are listed in appendix V. Our review of CMS’ IT modernization efforts described aspects of CMS’ current IT environment and projects CMS has under way to improve its systems, examined the agency’s IT planning efforts and IT management process, and discussed the challenges that need to be addressed to meet the agency’s IT goals. We focused specifically on CMS’ ability to support Medicare’s claims processing, financial management, and managed care activities. To these ends, we did the following. We interviewed the agency’s program managers and staff responsible for contractor oversight, financial management, and managed care activities and discussed the information systems that support these functions as well as the development and management of projects to consolidate, replace, or redesign these systems. In addition, we discussed the architectural plan and investment management processes with the CIO, the Chief Architect, and the Executive Secretary of FMIB as well as other CMS IT officials. We assessed the agency’s compliance with applicable sections of the Clinger-Cohen Act of 1996, OMB’s guidance related to IT architectural plan development and the acquisition and management of information resources, and our architectural plan and IT investment management guidance. We analyzed the agency’s enterprise architecture, IT Investment Management Process Guide, and related documentation. We reviewed internal documents, such as IT Council meeting minutes, funding and spending plans, and the charters for various entities involved in the IT architectural plan and IT investment management processes. We examined the agency’s IT investment database, which is used to track agency IT projects. We examined documents and interviewed officials regarding the agency’s budget formulation and IT funding. This included reviewing documents on Medicare’s administrative budget, such as the agency’s operating plan for fiscal year 2001, and its budget justification and supporting documentation for fiscal years 2000 and 2001. It also included conducting interviews with agency officials in the Office of Financial Management, including the Chief Financial Officer, the Director of Budget Formulation, and the Executive Secretary of the FMIB, and IT project managers. We did not validate the accuracy of the data in the agency’s budget documents. We identified certain system changes mandated by HIPAA; BBA; the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999; and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000. We identified IT workforce challenges by reviewing agency policies, practices, plans, and current data on IT job series, retirement, hiring, training, and retention; interviewed relevant agency officials; and examined the consistency of the agency’s workforce planning efforts with Clinger-Cohen Act requirements and our human capital self-assessment checklist. To gain more insight into how CMS selects and manages IT projects, we reviewed eight IT projects, selected because they were (1) either level C or D, (2) in different life cycle stages (e.g., requirements definition, design, or operations and maintenance), and (3) managed by different CMS centers and offices. The following projects were selected: Medicare Managed Care System Redesign, Common Working File Redesign, Medicare Beneficiary Database, National Medicare Utilization Database, Health Plan Management System, Contractor Management Information System, Provider Enrollment Chain and Ownership System, and Medical Review for Skilled Nursing Facility Prospective Payment System. Our work was conducted from April 2000 through August 2001 in accordance with generally accepted government auditing standards. To reduce variation in claims processing and lower its systems maintenance costs, CMS is consolidating the number of IT systems used by its claims administration contractors to process Medicare fee-for- service claims. At present, the Medicare claims contractors use one of six systems. Two systems are used by fiscal intermediaries and four are used by carriers. All of the DMERCs use a single system. CMS plans to consolidate its claims processing into three selected systems: one for fiscal intermediaries, one for carriers, and one for DMERCs. Table 3 summarizes the planned consolidation for each type of contractor, the current systems used, and the anticipated completion date of these consolidation efforts. CMS’ enterprise architecture—a blueprint of the agency’s current and planned IT environment—is documented in a set of volumes, each detailing a different component of CMS’ IT environment. Described below are examples of missing elements from the business, information, application, infrastructure, and security volumes of CMS’ enterprise architecture and the potential impact on IT modernization efforts. In addition to the person named above, Margaret Davis, Hannah Fein, Sandra Gove, Norm Heyl, Erin Kuhls, Linda Lambert, Anh Le, Henry Sutanto, and Marcia Washington made key contributions to this report. Human Capital: Building the Information Technology Workforce to Achieve Results (GAO-01-1007T, July 31, 2001). Medicare Management: CMS Faces Challenges to Sustain Progress and Address Weaknesses (GAO-01-817, July 31, 2001). Medicare Management: Current and Future Challenges (GAO-01-878T, June 19, 2001). Health and Human Services: Status of Achieving Key Outcomes and Addressing Major Management Challenges (GAO-01-748, June 15, 2001). Managing For Results: Federal Managers’ Views on Key Management Issues Vary Widely Across Agencies (GAO-01-592, May 25, 2001). Major Management Challenges and Program Risks: Department of Health and Human Services (GAO-01-247, Jan. 2001). High-Risk Series: An Update (GAO-01-263, Jan. 2001). Human Capital: A Self-Assessment Checklist for Agency Leaders (GAO/OCG-00-14G, Sept. 2000). Federal Health Care: Comments on H.R. 4401, the Health Care Infrastructure Investment Act of 2000 (GAO/AIMD-00-240, July 11, 2000). Medicare: HCFA Faces Challenges to Control Improper Payments (GAO/T- HEHS-00-74, Mar. 9, 2000). Medicare Post-Acute Care: Better Information Needed Before Modifying BBA Reforms (GAO/T-HEHS-99-192, Sept. 15, 1999). HCFA Management: Agency Faces Multiple Challenges in Managing Its Transition to the 21st Century (GAO/T-HEHS-99-58, Feb. 11, 1999). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). | Congress has questioned whether the Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration, adequately implemented new payment methods, effectively safeguarded program payments, and adequately oversaw the quality of care provided to beneficiaries. CMS depends on hundreds of information technology (IT) systems to help manage the Medicare program. With year 2000 systems renovations successfully completed, CMS has focused on modernizing its IT systems. The agency's information systems are crucial to carrying out Medicare's core missions of claims processing and payment, program oversight, and administration of participating health plans. Medicare's major systems are aged, however, and many are incompatible with one another. To address these problems, CMS intends to modify, replace, or redesign systems on which key Medicare missions depend. CMS plans to make incremental system improvements while maintaining current functions and accommodating changes mandated by legislation. The agency's IT planning and management processes--intended to increase the likelihood that new systems will be successful and cost-effective--have shortcomings. The agency's blueprint documenting its existing and planned IT environments, also known as its enterprise architecture, is missing essential detail in critical parts, including well-documented business functions, information flows, and data models. CMS is trying to strengthen its planning and has developed guidance for an improved management process, but will need to make considerable effort to ensure that modernization stays on track. These weaknesses in IT planning and management are part of larger agency management challenges. Resource gaps, both in funding and staff expertise, threaten the success of planned IT improvements. At the same time, CMS has made little use of performance measures to ensure accountability and increase the likelihood of achieving results. |
During World War I, Public Health Service hospitals treated returning veterans and, at the end of the war, several military hospitals were transferred to the Public Health Service to enable it to continue treating injured soldiers. In 1921, those hospitals were transferred to the newly established Veterans’ Bureau. By the early 1990s, the veterans’ health care system had grown into one of our nation’s largest direct providers of health care, comprising more than 172 hospitals. In October 1995, VA began to transform its health care system from a hospital-dominated model to one that provides a full range of health care services. A key feature of this transformation involves the development of community-based, integrated networks of VA and non-VA providers that could deliver health care closer to where veterans live. At that time, about half of all veterans lived more than 25 miles from a VA hospital; about 44 percent of those admitted to VA hospitals lived more than 25 miles away. In making care more proximate to veterans’ homes, VA also began shifting the delivery of health care from high-cost hospital settings to lower-cost outpatient settings. To facilitate VA’s transformation, the Congress passed the Veterans’ Health Care Eligibility Reform Act of 1996, which furnishes tools that VA said were key to a successful transformation, including: new eligibility rules that allow VA to treat veterans in the most appropriate a uniform benefits package to provide a continuum of services; and an expanded ability to purchase services from private providers. Today, VA operates over 800 delivery locations nationwide, including over 600 community-based outpatient clinics and 162 hospitals. VA’s delivery locations are organized into 21 geographic areas, commonly referred to as networks. Each network includes a management office responsible for making basic budgetary, planning, and operating decisions concerning the delivery of health care to its veterans. Each office oversees between 5 and 11 hospitals, as well as many community-based outpatient clinics. To promote more cost-effective use of resources, VA is authorized to share resources with other federal agencies to avoid unnecessary duplication and overlap of activities. VA and the Department of Defense (DOD) have entered into agreements to exchange inpatient, outpatient, and specialty care services as well as support services. Local facilities also have arranged to jointly purchase pharmaceuticals, laboratory services, medical supplies, and equipment. Also, VA has been authorized to enter into agreements with medical schools and their teaching hospitals. Under these agreements, VA hospitals provide training for medical residents, and appoint medical school faculty as VA staff physicians to supervise resident education and patient care. Currently, about 120 medical schools and teaching hospitals have affiliation agreements with VA. About 28,000 medical residents receive some of their training in VA facilities every year. Veterans’ eligibility for health care also has evolved over time. Before 1924, VA health care was available only to veterans who had wounds or diseases incurred during military service. Eligibility for hospital care was gradually extended to war-time veterans with lower incomes and, in 1973, to peace time veterans with lower incomes. By 1986, all veterans were eligible for hospital and outpatient care for service-connected conditions as well as for conditions unrelated to military service. VA implemented an enrollment process in 1998 that was established primarily as a means of prioritizing care if sufficient resources were not available to serve all veterans seeking care. About 6.2 million veterans had enrolled by the end of fiscal year 2002. In contrast, the overall veteran population is estimated to be about 25 million. VA projects a decline in the total veteran population over the next 20 years while the enrolled population is expected to decline more slowly as shown in table 1. In addition to health care, VA provides disability benefits to those veterans with service-connected conditions. Also, VA provides pension benefits to low-income wartime veterans with permanent and total disabilities unrelated to military service. Further, VA provides compensation to survivors of service members who died while on active duty. Disabled veterans are entitled to cash benefits whether or not employed and regardless of the amount of income earned. The cash benefit level is based on the percentage evaluation, commonly called the “disability rating,” that represents the average loss in earning capacity associated with the severity of physical and mental conditions. VA uses its Schedule for Rating Disabilities to determine which disability rating to assign to a veteran’s particular condition. VA’s ratings are in 10 percent increments, from 0 to 100 percent. Although VA generally does not pay disability compensation for disabilities rated at 0 percent, such a rating would make veterans eligible for other benefits, including health care. About 65 percent of veterans receiving disability compensation have disabilities rated at 30 percent or lower; about 8 percent are 100 percent disabled. Basic monthly payments range from $104 for a 10 percent disability to $2,193 for a 100 percent disability. To process claims for these benefits, VA operates 57 regional offices. These offices made almost 800,000 rating-related decisions in fiscal year 2002. Regional office personnel develop claims, obtain the necessary information to evaluate claims, and determine whether to grant benefits. In doing so, they consider veterans’ military service records, medical examination and treatment records from VA health care facilities, and treatment records from private providers. Once claims are developed, the claimed disabilities are evaluated, and ratings are assigned based on degree of disability. Veterans with multiple disabilities receive a single, composite rating. For veterans claiming pension eligibility, the regional office also determines if the veteran served in a period of war, is permanently and totally disabled for reasons unrelated to military service, and meets the income thresholds for eligibility. Over the past several years, VA has done much to ensure that veterans have greater access to health care. Despite this, travel times and waiting times are still problems. Another problem faced by aging veterans is potentially inequitable access to nursing home care. The substantial increase in VA health care delivery locations has enhanced access for enrolled veterans in need of primary care, although many still travel long distances for primary care. In addition, many who need to consult with specialists or require hospitalization often travel long distances to receive care. Nationwide, for example, more than 25 percent of veterans enrolled in VA health care—over 1.7 million—live over 60 minutes driving time from a VA hospital. These veterans would have to travel a long distance if they require admissions or consultations with specialists, such as urologists or cardiologists, located at the closest VA hospitals. In October 2000, VA established the Capital Asset Realignment for Enhanced Services (CARES) program, which has a goal of improving veterans’ access to acute inpatient care, primary care, and specialty care. CARES is intended to identify how well the geographic distribution of VA health care resources matches projected needs and the shifts necessary to better align resources and needs. Toward that end, VA has divided, for analytical purposes, its 21 networks into 76 geographic areas—groups of counties—in order to determine the extent to which enrollees’ travel times exceed VA’s access standards. For example, as part of CARES, VA has mandated that the 21 network directors identify ways to ensure that at least 65 percent of the veterans in their areas are within VA’s access standards for hospital care—60 minutes for veterans residing in urban counties, 90 minutes for those in rural counties, and 120 minutes for those in highly rural counties. VA has identified 25 areas that do not meet this 65 percent target. In these areas, over 900,000 enrolled veterans have travel times that exceed VA’s access standards. In addition, as part of CARES, VA identified 51 other areas where access enhancements may be addressed at the discretion of network directors, given that at least 65 percent of all enrolled veterans in those areas have travel times that meet VA’s standard. In these areas, about 875,000 enrolled veterans have travel times that exceed VA’s standards. By contrast, VA has not mandated that network directors enhance access for veterans who travel long distances to consult with specialists. Unlike hospital care, VA has not established standards for acceptable travel times for specialty care. Currently, nearly 2 million enrolled veterans live more than 60 minutes driving time from specialists located at the closest VA hospital. When considering ways to enhance access for veterans, VA network directors may consider three basic options: construct a new VA-owned and operated delivery location; negotiate a sharing agreement with another federal entity, such as a DOD facility; or contract with nonfederal health care providers. Shifting the delivery of health care closer to where veterans live may have significant ramifications for other stakeholders, such as medical schools. For example, within the 76 areas, there are smaller geographic areas that contain large concentrations of enrollees outside VA’s access standards—10,000 or more—who live closer to non- VA hospitals than they do to the nearest VA hospitals. Such enrolled veterans could account for significant portions of the hospital workload at the nearest VA delivery locations. Therefore, a shifting of this workload closer to veterans’ residences could reduce the size of residency training opportunities at existing VA delivery locations. Enhancing veterans’ access can also have significant ramifications regarding the use of VA’s existing resources. Currently, VA has most of its resources dedicated to costs associated with its existing hospitals and other infrastructure, including clinical and support staff, at its major health care delivery locations. Reducing veterans’ travel times through contracting with providers in local communities or other options could reduce demand for services at VA’s existing, more distant delivery locations. Efficient operation of those locations could become more difficult given the smaller workloads in relation to the operating costs of existing hospitals. We also have found that excessive waiting times for VA outpatient care persist—a situation that we have reported on for the last decade. For example, in August 2001, we reported that veterans frequently wait longer than 30 days—VA’s access standard—for appointments with specialists at VA delivery locations in Florida and other areas of the country. More recently, a Presidential task force reported in its July 2002 interim report that veterans are finding it increasingly difficult to gain access to VA care in selected geographic regions. For example, the task force found that the average waiting time for a first outpatient appointment in Florida, which has a large and growing veteran population, is over a year. Although there is general consensus that waiting times are excessive, we reported, and VA agreed, that its data did not reliably measure the scope of the problem. To improve its data, VA is in the process of developing an automated system to more systematically measure waiting times. VA has also taken several actions to mitigate the impact of long waiting times, including limiting enrollment of lower priority veterans and granting priority for appointments to certain veterans with service-connected disabilities. VA faces an impending challenge, however, reducing the length of times veterans wait for appointments. Specifically, VA’s current projections of acute health care workload indicate a surge in demand for acute health care services over the next 10 years. For example, specialty outpatient demand nationwide is expected to almost double by fiscal year 2012. VA’s long-term care infrastructure, including nursing homes it operates, was developed when the concentration of veteran population was distributed differently by region. Consequently, the location of VA’s current infrastructure may not provide equitable access across the country. In addition, when VA developed its long-term care infrastructure, it relied more on nursing home care and less on home and community- based services than current practice. To help update VA’s long-term care policy, the Federal Advisory Committee on the Future of VA Long-Term Care recommended in 1998 that VA maintain its nursing home capacity at the level of that time but meet the growing veteran demand for long term care by greatly expanding home and community-based service capacity. The House Committee on Veterans’ Affairs has expressed concern that VA needs to maintain its nursing home capacity workload at 1998 levels. VA currently operates its own nursing home care units in 131 locations, according to VA headquarters officials. In addition, it pays for nursing home care under contract in community nursing homes. VA also pays part of the cost of care for veterans at state veterans’ nursing homes and in addition pays a portion of the construction costs for some state veterans’ nursing homes. In all these settings combined, VA’s nursing home workload—average daily census—has declined by more than 1,800 since 1998. See table 2. The biggest decline has been in community nursing home care where the average daily census was 31 percent less in 2002 than in 1998. Average daily census in VA-operated nursing homes also declined by 11 percent during this period. A 9 percent increase in state veterans’ nursing homes’ average daily census offsets some of the decline in average daily census in community and VA-operated nursing homes. VA headquarters officials told us that the decline in nursing home average daily census could be the result of a number of factors. These factors include providing more emphasis on shorter-term care for post-acute care rehabilitation, providing more home and community-based services to obviate the need for nursing home care, assisting veterans to obtain placement in community nursing homes where care is financed by other payers, such as Medicaid, when appropriate, and difficulty recruiting enough nursing staff to operate all beds in some VA-operated nursing homes. VA policy provides networks broad discretion in deciding what nursing home care to offer those patients that VA is not required to provide nursing home care to under the provisions of the Veterans Millennium Health Care and Benefits Act of 1999. Networks’ use of this discretion appears to result in inequitable access to nursing home care. For example, some networks have policies to provide long-term nursing home care to these veterans who need such care if resources allow, while other networks do not have such policies. As a result, these veterans who need long-term nursing home care may have access to that care in some networks but not others. This is significant because about two-thirds of VA’s current nursing home users are recipients of discretionary nursing home care. VA intended to address veterans’ access to nursing home care as part of its larger CARES initiative to project future health care needs and determine how to ensure equitable access. However, initial projections of nursing home need exceeded VA’s current nursing home capacity. VA said that the projections did not reflect its long-term care policy and decided not to include nursing home care in its CARES initiative. Instead, VA officials told us that they have developed a separate process to provide projections for nursing home, and home and community-based services needs. These officials expect that new projections will be developed for consideration by the Under Secretary for Health by July 2003. VA officials also told us that VA will use this information in its strategic planning initiatives to address nursing home and other long-term care issues at the same time that VA implements its CARES initiatives. Because VA has not systematically examined its nursing home policies and access to care, veterans have no assurance that VA’s $2 billion nursing home program is providing equitable access to care to those who need it. This is particularly important given the aging of the veteran population. The veteran population most in need of nursing home care—veterans 85 years old or older—is expected to increase from almost 640,000 to over 1 million by 2012 and remain at about that level through 2023. Until VA develops a long-term care projection model consistent with its policy, VA will not be able to determine if its nursing home care units in 131 locations and other nursing home care services it pays for provide equitable access to veterans now or in the future. In recent years, VA has made an effort to realign its capital assets, primarily buildings, to better serve veterans’ needs as well as institute other needed efficiencies. Despite this, many of VA’s buildings remain underutilized and patient support services are not always provided efficiently. VA could make better use of its resources by taking steps to partner with other public and private providers, purchase care from such providers, replace obsolete assets with modern ones, consolidate duplicative care provided by multiple locations serving the same geographic areas where it would be cost effective to do so, and assess various management options to improve the efficiency of patient support services. VA has a large and aged infrastructure, which is not well aligned to efficiently meet veterans’ needs. In recent years, as a result of new technology and treatment methods, VA has shifted delivery from inpatient to outpatient settings in many instances and shortened lengths of stay when hospitalization was required. Consequently, VA has excess inpatient capacity at many locations. For example, in August 1999, we reported that VA owned about 4,700 buildings, over 40 percent of which had operated for more than 50 years, and almost 200 of which were built before 1900. Many organizations in the facilities management environment consider 40 to 50 years to be the useful life of a building. Moreover, VA used fewer than 1,200 of these buildings (about one-fourth of the total) to deliver health care services to veterans. The rest were used primarily to support health care activities, although many had tenants or were vacant. In addition, most delivery locations had mission-critical buildings that VA considered functionally obsolete. These included, for example, inpatient rooms not up to industry standards concerning patient privacy; outpatient clinics with undersized examination rooms; and buildings with safety concerns, such as vulnerability to earthquakes. As part of VA’s transformation, begun in 1995, its networks implemented hundreds of management initiatives that significantly enhanced their overall efficiency and effectiveness. The success of these strategies— shifting inpatient care to more appropriate settings, establishing primary care in community clinics, and consolidating services in order to achieve economies of scale—significantly reduced utilization at most of VA’s inpatient delivery locations. For example, VA operated about 73,000 hospital beds in fiscal year 1995. In 1998, veterans used on average fewer than 40,000 hospital beds per day, and by 2001 usage had further declined to about 16,000 hospital beds per day. In 1999, we concluded that VA’s existing infrastructure could be the biggest obstacle confronting VA’s ongoing transformation efforts. During a hearing in 1999 before this Committee’s Subcommittee on Health, we pointed out that, although VA was addressing some realignment issues, it did not have a plan in place to identify buildings that are no longer needed to meet veterans’ health care needs. We recommended that VA develop a market-based plan for restructuring its delivery of health care in order to reduce funds spent on underutilized or inefficient buildings. In turn those funds could be reinvested to better serve veterans’ needs by placing health care resources closer to where they live. To do so, we recommended that VA comply with guidance from the Office of Management and Budget. The guidance suggested that market-based assessments include (1) assessing a target population’s needs, (2) evaluating the capacity of existing assets, (3) identifying any performance gaps (excesses or deficiencies), (4) estimating assets’ life cycle costs, and (5) comparing such costs to other alternatives for meeting the target population’s needs. Alternatives include (1) partnering with other public or private providers, (2) purchasing care from such providers, (3) replacing obsolete assets with modern ones, or (4) consolidating services duplicated at multiple locations serving the same market. During the 1999 hearing, the subcommittee chairman urged VA to implement our recommendations and VA agreed to do so. In August 2002, VA announced the results of a pilot study in its Great Lakes network, which includes Chicago and other locations. VA selected three realignment strategies in this network – consolidation of services at existing locations, opening of new outpatient clinics, and closure of one inpatient location. Currently, VA is analyzing ways to realign health care delivery in its 20 remaining networks. VA expects to issue its plans by the end of 2003. To date, VA has projected veterans’ demand for acute health care services through fiscal year 2022, evaluated available capacity at its existing delivery locations, and targeted geographic areas where alternative delivery strategies could allow VA to operate more efficiently and effectively while ensuring access consistent with its standards for travel time. For example, VA has the opportunity to achieve efficiencies through economies of scale in 30 geographic areas where two or more major health care delivery locations that are in close proximity provide duplicative inpatient and outpatient health care services. VA may also achieve similar efficiencies in 38 geographic areas where two or more tertiary care delivery locations are in close proximity. VA considers delivery locations to be in close proximity if they are within 60 miles of one another for acute care and within 120 miles for tertiary care. In addition, VA may achieve additional efficiencies in 28 geographic areas where existing delivery locations have low acute medicine workloads, which VA has defined as serving less than 40 hospital patients per day. VA also identified more than 60 opportunities for partnering with the DOD to better align the infrastructure of both agencies. VA faces difficult challenges when attempting to improve service delivery efficiencies. For example, service consolidations can have significant ramifications for stakeholders, such as medical schools and unions, primarily due to shifting of workload among locations and workforce reductions. Understandably, medical schools are reluctant to change long- standing business relationships involving, among other things, training of medical residents. For example, VA tried for 5 years to reach agreement on how to consolidate clinical services at two of Chicago’s four major health care delivery locations before succeeding in August 2002. This is because such restructuring required two medical schools to use the same location to train residents, a situation that neither supported. Unions, too, have been reluctant to support planning decisions that result in a restructuring of services. This is because operating efficiencies that result from the consolidation of clinical services into a single location could also result in staffing reductions for such support services as grounds maintenance, food preparation, and housekeeping. For example, as part of its ongoing transformation, VA proposed to consolidate food preparation services of 9 delivery locations into a single location in New York City in order to operate more efficiently. Two unions’ objections, however, slowed VA’s restructuring, although VA and the unions subsequently agreed on a way to complete the restructuring. VA also faces difficult decisions concerning the need for and sizing of capital investments, especially in locations where future workload may increase over the short term before steadily declining. In large part, such declines are attributable to the expected nationwide decrease in the overall veteran population by more than one-third by 2030; in some areas, veteran population declines are expected to be steeper. It may be in VA’s best interests to partner with other public or private providers for services to meet veterans’ demands rather than risk making a major capital investment that would be underutilized in the latter stages of its useful life. In cases when VA’s realignment results in buildings that are no longer needed to meet veterans’ health care needs, VA faces other difficult decisions regarding whether to retain or dispose of these buildings. VA has several options, including leasing, demolition, or transferring buildings to the General Services Administration (GSA), which has the authority to dispose of excess or surplus federal property. When there is no leasing potential, VA faces potentially high demolition costs as well as uncertain site preparation costs associated with the transfer of buildings to GSA. Given that such costs involve the use of health care resources, ensuring that disposal decisions are based on systematic analyses of costs and benefits to veterans poses another realignment challenge. The challenge of dealing with a misaligned infrastructure is not unique to VA. In fact, we identified federal real property management as a high-risk area in January 2003. For the federal government overall and VA in particular, technological advancements, changing public needs, opportunities for resource sharing, and security concerns will call for a new way of thinking about real property needs. In VA’s case, it has recognized the critical need to better manage its buildings and land and is in the process of implementing CARES to do so. VA has the opportunity to lead other federal agencies with similar real property challenges. However, VA and other agencies have in common persistent problems, including competing stakeholder interests in real property decisions. Resolving these problems will require high-level attention and effective leadership. As VA continues to transform itself from an inpatient- to an outpatient- based health care system, it must find more efficient, systemwide ways of providing patient care support services, such as consolidation of services and the use of competitive sourcing. For example, VA’s shift in emphasis from inpatient to outpatient health care delivery has significantly reduced the need for inpatient care support services, such as food and laundry services. To make better use of resources, some VA inpatient facilities have consolidated food production locations, used lower-cost Veterans Canteen Service (VCS) workers instead of higher-paid Nutrition and Food Service workers to provide inpatient food services, or contracted out for the provision of these services. Some VA facilities have also consolidated two or more laundries into a single location, contracted for labor to operate VA laundries, or contracted out laundry services to commercial organizations. VA needs to systematically explore the further use of such options across its health care system. In November 2000, we recommended that VA conduct studies at all of its food and laundry service locations to identify and implement the most cost-effective way to provide these services at each location. At that time, we identified 63 food production locations that could be consolidated into 29, saving millions of dollars annually. We estimated that VA could potentially save millions of dollars by consolidating both food and laundry production locations. VA may also be able to reduce its food and laundry service costs at some facilities through competitive sourcing—through which VA would determine whether it would be more cost-effective to contract out these services or provide them in-house. VA must ensure, however, that, if a decision to contract for services is made, contract terms on payments and service quality standards will continue to be met. For example, we found that weaknesses in the monitoring of VA’s Albany, New York laundry contract appear to have resulted in overpayments, reducing potential savings. In August 2002, VA issued a directive establishing policy and responsibilities for its networks to follow in implementing a competitive sourcing analysis to compare the cost of contracting and the cost of in- house performance to determine who can do the work most cost effectively. VA has announced that, as part of the President’s Management Agenda, it will complete studies of competitive sourcing of 55,000 positions by 2008. VA plans to complete studies of competitive sourcing for all its laundry positions by the end of calendar year 2003. Similar initiatives for food services and other support services are in the planning stages at VA. Overall, VA’s plan for competitive sourcing shows promise. However, VA has not yet established a timeline for implementing an assessment of competitive sourcing and the other options we recommended for all its inpatient food service locations. Until VA completes these assessments and takes action to reduce costs, it may be paying more for inpatient food services than required and as a result have fewer resources available for the provision of health care to veterans. We recognize that one of the options we recommended that VA assess, the competitive sourcing process set forth in the Office of Management and Budget (OMB) Circular A-76, historically has been difficult to implement. Specifically, there are concerns in both the public and private sectors regarding the fairness of the competitive sourcing process and the extent to which there is a “level playing field” for conducting public-private competitions. It was against this backdrop that the Congress in 2001, mandated that the Comptroller General establish a panel of experts to study the process used by the government to make sourcing decisions. The Commercial Activities Panel that the Comptroller convened conducted a yearlong study, and heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, and continuous performance improvement. The panel made a number of recommendations for improving sourcing policies and processes. As part of the administration’s efforts to implement the recommendations of the Commercial Activities Panel, OMB published proposed changes to Circular A-76 for public comment in November 2002. In our comments on the proposal to the Director of OMB this past January, we noted the absence of a link between sourcing policy and agency missions, unnecessarily complicated source selection procedures, certain unrealistic time frames, and insufficient guidance on calculating savings. The administration is now considering those and other comments as it finalizes the revisions to the Circular. Significant program design and management challenges hinder VA’s ability to provide meaningful and timely support to disabled veterans and their families. VA relies on outmoded medical and economic disability criteria. VA also has difficulty providing veterans with accurate, consistent, and timely benefit decisions, although recent actions have improved timeliness. In assessing veterans’ disabilities, VA remains mired in concepts from the past. VA’s disability programs base eligibility assessments on the presence of medically determinable physical and mental impairments. However, these assessments do not always reflect recent medical and technological advances, and their impact on medical conditions that affect the ability to work. VA’s disability programs remain grounded in an approach that equates certain medical impairments with the incapacity to work. Moreover, advances in medicine and technology have reduced the severity of some medical conditions and allowed individuals to live with greater independence and function more effectively in work settings. Also, VA’s rating schedule updates have not incorporated advances in assistive technologies—such as advanced wheelchair design, a new generation of prosthetic devices, and voice recognition systems—that afford some disabled veterans greater capabilities to work. VA has made some progress in updating its rating schedule to reflect medical advances. Revisions generally consist of (1) adding, deleting, and reorganizing medical conditions in the Schedule for Rating Disabilities, (2) revising the criteria for certain qualifying conditions, and (3) wording changes for clarification or reflection of current medical terminology. However, VA’s effort to update its disability criteria within the context of current program design has been slow and is insufficient to provide the up-to-date criteria VA needs to ensure meaningful and equitable benefit decisions. Completing an update of the schedule for one body system has generally taken 5 years or more; the schedule for the ear and other sense organs took 8 years. In August 2002, we recommended that VA use its annual performance plan to delineate strategies for and progress in updating its disability rating schedule. VA did not concur with our recommendation because it believes that developing timetables for future updates to the rating schedule is inappropriate while the initial review is ongoing. In addition, VA’s disability criteria have not kept pace with changes in the labor market. The nature of work has changed in recent decades as the national economy has moved away from manufacturing-based jobs to service- and knowledge-based employment. These changes have affected the skills needed to perform work and the settings in which work occurs. For example, advancements in computers and automated equipment have reduced the need for physical labor. However, the percentage ratings used in VA’s Schedule for Rating Disabilities are primarily based on physicians’ and lawyers’ estimates made in 1945 about the effects that service- connected impairments have on the average individual’s ability to perform jobs requiring manual or physical labor. VA’s use of a disability schedule that has not been modernized to account for labor market changes raises questions about the equity of VA’s benefit entitlement decisions; VA could be overcompensating some veterans, while under-compensating or denying compensation entirely to others. In January 1997, we suggested that the Congress consider directing VA to determine whether the ratings for conditions in the schedule correspond to veterans’ average loss in earnings due to these conditions and adjust disability ratings accordingly. Our work demonstrated that there were generally accepted and widely used approaches to statistically estimate the effect of specific service-connected conditions on potential earnings. These estimates could be used to set disability ratings in the schedule that are appropriate in today’s socio-economic environment. In August 2002, we recommended that VA use its annual performance plan to delineate strategies for and progress in periodically updating labor market data used in its disability determination process. VA did not concur with our recommendation because it does not plan to perform an economic validation of its disability rating schedule, or to revise the schedule based on economic factors. According to VA, the schedule is medically based; represents a consensus among stakeholders in the Congress, VA, and the veteran community; and has been a valid basis for equitably compensating disabled veterans for many years. Even if VA’s schedule updates were completed more quickly, they would not be enough to overcome program design limitations in evaluating disabilities. Because of the limited role of treatment in VA disability programs’ statutory and regulatory design, its efforts to update the rating schedule would not fully capture the benefits afforded by treatment advances and assistive technologies. Current program design limits VA’s ability to assess veterans’ disabilities under corrected conditions, such as the impact of medications on a veteran’s ability to work despite a severe mental illness. In August 2002, we recommended that VA study and report to the Congress on the effects that a comprehensive consideration of medical treatment and assistive technologies would have on its disability programs’ eligibility criteria and benefit package. This study would include estimates of the effects on the size, cost, and management of VA’s disability programs and other relevant VA programs; and would identify any legislative actions needed to initiate and fund such changes. VA did not concur with our recommendation because it believes this would represent a radical change from the current programs, and it questioned whether stakeholders in the Congress and the veterans’ community would accept such a change. VA’s disability program challenges are not unique. For example, the Social Security Administration’s (SSA) disability programs remain grounded in outmoded concepts of disability. Like VA, SSA has not updated its disability criteria to reflect the current state of science, medicine, technology and labor market conditions. Thus, SSA also needs to reexamine the medical and vocational criteria it uses to determine whether individuals are eligible for benefits. Even if VA brought its disability criteria up to date, it would continue to face challenges in ensuring quality and timely decisions, including ensuring that veterans get consistent decisions—that is, comparable decisions on benefit entitlement and rating percentage—regardless of the regional office making the decisions. VA has made some progress in improving disability program administration, but much remains to be done before VA has a system that can sustain production of accurate, consistent, and timely decisions. VA is making changes that will allow it to better identify accuracy problems at the national, regional office, and individual employee levels. In turn, this will allow VA to identify underlying causes of inaccuracies and target corrective actions, such as additional training. In response to our March 1999 recommendation, VA has centralized accuracy reviews under its Systematic Technical Accuracy Review (STAR) program to meet generally applicable government standards on segregation of duties and organizational independence. Also, the STAR program began reviewing more decisions in fiscal year 2002, with the intent of obtaining statistically valid accuracy data at the regional office level; regional office-level accuracy goals have been incorporated into regional directors’ performance standards. Further, VA is developing a system to measure the accuracy of individual employees’ work; this measurement is tied to employee performance evaluations. While VA has made changes to improve accuracy, it continues to face challenges in ensuring consistent claims decisions. In August 2002, we recommended that VA establish a system to regularly assess and measure the degree of consistency across all levels of VA claims adjudication. While VA agreed that consistency is an important goal, it did not fully respond to our recommendation regarding consistency because it did not describe how it would measure consistency and evaluate progress in reducing any inconsistencies it may find. Instead, VA said that consistency is best achieved through comprehensive training and communication among VA components involved in the adjudication process. We continue to believe that VA will be unable to determine the extent to which such efforts actually improve consistency of decision-making across all levels of VA adjudication now and over time. VA’s major focus over the past 2 years has been on producing more timely decisions for veterans, and it has made significant progress in improving timeliness and reducing the backlog of claims. The Secretary established the VA Claims Processing Task Force, which in October 2001 made specific recommendations to relieve the veterans’ claims backlog and make claims processing more timely. The task force observed that the work management system in many regional offices contributed to inefficiency and an increased number of errors. The task force attributed these problems primarily to the broad scope of duties performed by regional office staff—in particular, veterans service representatives (VSR). For example, VSRs were responsible for both collecting evidence to support claims and answering claimants’ inquiries. Based on the task force’s recommendations, VA implemented its claims process improvement (CPI) initiative in fiscal year 2002. Under this initiative, regional office claims processing operations were reorganized around specialized teams to handle specific stages of the claims process. For example, regional offices have teams devoted specifically to claims development, that is, obtaining evidence needed to evaluate claims. Also, VA focused on increasing production of rating-related decisions to help reduce inventory and, in turn, improve timeliness. In fiscal years 2001 and 2002, VA hired and trained hundreds of new claims processing staff. VA also set monthly production goals for fiscal year 2002 for each of its regional offices, incorporating these goals into regional office directors’ performance standards. VA completed almost as many decisions in the first half of 2003 (404,000) than in all of fiscal year 2001 (481,000). This increase in production has contributed to a significant inventory reduction; on March 31, 2003, the rating-related inventory was about 301,000 claims, down from about 421,000 at the end of fiscal year 2001. Meanwhile, rating-related decisions timeliness has been improving recently; an average of 199 days for the first half of fiscal year 2003, down from an average of 223 days in fiscal year 2002. While VA has made progress in getting its workload under control and improving timeliness, it will be challenged to sustain this performance. Moreover, it will be difficult to cope with future workload increases due to factors beyond its control, such as future military conflicts, court decisions, legislative mandates, and changes in the filing behavior of veterans. VA is not alone in facing these challenges; SSA is also challenged to improve its ability to provide accurate, consistent, and timely disability decisions to program applicants. For example, after failing in its attempts since 1994 to redesign a more comprehensive quality assurance system, SSA has recently begun a new quality management initiative. Also, SSA has taken steps to provide training and enhance communication to improve the consistency of decisions, but variations in allowances rates continue and a significant number of denied claims are still awarded on appeal. SSA has recently implemented several short-term initiatives not requiring statutory or regulatory changes to reduce processing times but is still evaluating strategies for longer-term solutions. More dramatic gains in timeliness and inventory reduction might require program design changes. For example, in 1996, the Veterans’ Claims Adjudication Commission noted that most disability compensation claims are repeat claims—such as claims for increased disability percentage— and most repeat claims were from veterans with less severe disabilities. The Commission questioned whether concentrating processing resources on these claims, rather than on claims by more severely disabled veterans, was consistent with program intent. Another possible program design change might involve assigning priorities to the processing of claims. For example, claims from veterans with the most severe disabilities and combat-disabled veterans could receive the highest priority attention. Program design changes, including those to address the Commission’s concerns, might require legislative actions. In addition to program design changes, outside studies of VA’s disability claims process identified potential advantages to restructuring VA’s system of 57 regional offices. In its January 1999 report, the Congressional Commission on Servicemembers and Veterans Transition Assistance stated that some regional offices might be so small that their disproportionately large supervisory overhead unnecessarily consumes personnel resources. Similarly, in its 1997 report, the National Academy of Public Administration stated VA should be able to close a large number of regional offices and achieve significant savings in administrative overhead costs. Apart from the issue of closing regional offices, the Commission highlighted a need to consolidate disability claims processing into fewer locations. VA has consolidated its education assistance and housing loan guaranty programs into fewer than 10 locations, and the Commission encouraged VA to take similar action in the disability programs. VA proposed such a consolidation in 1995 and in that proposal enumerated several potential benefits, such as allowing VA to assign the most experienced and productive adjudication officers and directors to the consolidated offices; facilitating increased specialization and as-needed expert consultation in deciding complex cases; improving the completeness of claims development, the accuracy and consistency of rating decisions, and the clarity of decision explanations; improving overall adjudication quality by increasing the pool of experience and expertise in critical technical areas; and facilitating consistency in decisionmaking through fewer consolidated claims-processing centers. VA has already consolidated some of its pension workload (specifically, income and eligibility verifications) at three regional offices. Also, VA has consolidated at its Philadelphia regional office dependency and indemnity compensation claims by survivors of servicemembers who died on active duty, including those who died during Operation Enduring Freedom and Operation Iraqi Freedom. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Committee may have. For further information, please contact me at (202) 512-7101. Individuals making key contributions to this testimony include Paul R. Reynolds, James C. Musselwhite, Jr., Irene P. Chu, Pamela A. Dooley, Cherie’ M. Starck, William R. Simerl, Richard J. Wade, Thomas A. Walke, Cheryl A. Brand, Kristin M. Wilson, Greg Whitney, and Daniel Montinez. VA Health Care: Improved Planning Needed for Management of Excess Real Property. GAO-03-326. Washington, D.C.: January 29, 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 1, 2003. High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: January 1, 2003. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 1, 2003. Veterans’ Benefits: Quality Assurance for Disability Claims and Appeals Processing Can Be Further Improved. GAO-02-806. Washington, D.C.: August 16, 2002. SSA and VA Disability Programs: Re-Examination of Disability Criteria Needed to Help Ensure Program Integrity. GAO-02-597. Washington, D.C.: August 9, 2002. VA Long-Term Care: The Availability of Noninstitutional Services Is Uneven. GAO-02-652T. Washington, D.C.: April 25, 2002. VA Long-Term Care: Implementation of Certain Millennium Act Provisions Is Incomplete, and Availability of Noninstitutional Services Is Uneven. GAO-02-510R. Washington, D.C.: March 29, 2002. VA Health Care: More National Action Needed to Reduce Waiting Times, but Some Clinics Have Made Progress. GAO-01-953. Washington, D.C.: August 31, 2001. VA Health Care: Community-Based Clinics Improve Primary Care Access. GAO-01-678T. Washington, D.C.: May 2, 2001. Inadequate Oversight of Laundry Facility at the Department of Veterans Affairs Albany, New York, Medical Center. GAO-01-207R. Washington, D.C.: November 30, 2000. VA Health Care: Expanding Food Service Initiatives Could Save Millions. GAO-01-64. Washington, D.C.: November 30, 2000. VA Laundry Service: Consolidations and Competitive Sourcing Could Save Millions. GAO-01-61. Washington, D.C.: November 30, 2000. Veterans’ Health Care: VA Needs Better Data on Extent and Causes of Waiting Times. GAO/HEHS-00-90. Washington, D.C.: May 31, 2000. VA and Defense Health Care: Evolving Health Care Systems Require Rethinking of Resource Sharing Strategies. GAO/HEHS-00-52. Washington, D.C.: May 17, 2000. VA Health Care: VA Is Struggling to Address Asset Realignment Challenges. GAO/T-HEHS-00-88. Washington, D.C.: April 5, 2000. VA Health Care: Improvements Needed in Capital Asset Planning and Budgeting. GAO/HEHS-99-145. Washington, D.C.: August 13, 1999. VA Health Care: Challenges Facing VA in Developing an Asset Realignment Process. GAO/T-HEHS-99-173. Washington, D.C.: July 22, 1999. Veterans’ Affairs: Observations on Selected Features of the Proposed Veterans’ Millennium Health Care Act. GAO/T-HEHS-99-125. Washington, D.C.: May 19, 1999. Veterans’ Affairs: Progress and Challenges in Transforming Health Care. GAO/T-HEHS-99-109. Washington, D.C.: April 15, 1999. VA Health Care: Capital Asset Planning and Budgeting Need Improvement. GAO/T-HEHS-99-83. Washington, D.C.: March 10, 1999. Veterans’ Benefits Claims: Further Improvements Needed in Claims- Processing Accuracy. GAO/HEHS-99-35. Washington, D.C.: March 1, 1999. VA Health Care: Closing a Chicago Hospital Would Save Millions and Enhance Access to Services. GAO/HEHS-98-64. Washington, D.C.: April 16, 1998. VA Hospitals: Issues and Challenges for the Future. GAO/HEHS-98-32. Washington, D.C.: April 30, 1998. VA Health Care: Status of Efforts to Improve Efficiency and Access. GAO/HEHS-98-48. Washington, D.C.: February 6, 1998. VA Disability Compensation: Disability Ratings May Not Reflect Veterans’ Economic Losses. GAO/HEHS-97-9. Washington, D.C.: January 7, 1997. VA Health Care: Issues Affecting Eligibility Reform Efforts. GAO/HEHS- 96-160. Washington, D.C.: September 11, 1996. 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 previous GAO reports and testimonies on the Department of Veterans Affairs (VA), and in its ongoing reviews, GAO identified major management challenges related to enhancing access to health care, improving the efficiency of health care delivery, and improving the effectiveness of disability programs. This testimony underscores the importance of continuing to make progress in addressing these challenges and ultimately overcoming them. VA has taken actions to address key challenges in its health care and disability programs. However, growing demand for health care and a potentially larger and more complex disability workload may make VA's challenges in these areas more complex. Enhancing access to health care: VA is challenged to deliver timely, convenient health care to its enrolled veteran population. Too many veterans continue to travel too far and wait too long for care. However, shifting care closer to where veterans live is complicated by stakeholder interests. In addition, VA's efforts to reduce waiting times may be complicated by an anticipated short-term surge in demand for specialty outpatient care. VA also faces difficult challenges in providing equitable access to nursing home care services to a growing elderly veteran population. Improving the efficiency of health care delivery: VA is challenged to find more efficient ways to meet veterans' demand for health care. VA operates a large portfolio of aged buildings that is not well aligned to efficiently meet veterans' needs. As a result, VA faces difficult realignment decisions involving capital investments, consolidations, closures, and contracting with local providers. VA also faces challenges in implementing management changes to improve the efficiency of patient support services, such as food and laundry services. Improving the effectiveness of disability programs: VA is challenged to find more effective ways to compensate veterans with disabilities. VA's outdated disability determination process does not reflect a current view of the relationship between impairments and work capacity. Advances in medicine and technology have allowed some individuals with disabilities to live more independently and work more effectively. VA also faces continuing challenges to improve the timeliness, quality and consistency of claims processing. Major improvements may require fundamental program changes. GAO designated federal real property, including VA health care infrastructure, and federal disability programs, including VA disability benefits, as high-risk areas in January 2003. GAO did this to draw attention to the need for broad-based transformation in these areas, which is critical to improving the government's performance and ensuring accountability within expected resource limits. |
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